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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
results were announced during a conference call with analysts—an event that in-
vestors and analysts rely on to obtain important information about the company and
that, like other public statements, is subject to federal securities laws.
Merrill’s then-CFO Jeffrey Edwards indicated that the company’s results would
not be hurt by the dislocation in the subprime market, because “revenues from sub-
prime mortgage-related activities comprise[d] less than of our net revenues” over
the past five quarters, and because Merrill’s “risk management capabilities are better
than ever, and crucial to our success in navigating turbulent markets.” Providing fur-
ther assurances, he stated, “We believe the issues in this narrow slice of the market re-
main contained and have not negatively impacted other sectors.”
However, Edwards did not disclose the large increase in retained super-senior
CDO tranches or the difficulty of selling those tranches, even at a loss—though spe-
cific questions on the subject were raised.
In July, Merrill followed its strong first-quarter report with another for the second
quarter that “enabled the company to achieve record net revenues, net earnings and
net earnings per diluted share for the first half of .” During the conference call
announcing the results, the analyst Glenn Schorr of UBS, a large Swiss bank, asked
the CFO to provide some “color around myth versus reality” on Merrill’s exposure to
retained CDO positions. As he had three months earlier, Edwards stressed Merrill’s
risk management and the fact that the CDO business was a small part of Merrill’s
overall business. He said that there had been significant reductions in Merrill’s re-
tained exposures to lower-rated segments of the market, although he did not disclose
that the total amount of Merrill’s retained CDOs had reached . billion by June.
Edwards declined to provide details about the company’s exposure to subprime
mortgage CDOs and any inventory of mortgage-backed securities to be packaged
into CDOs. “We don’t disclose our capital allocations against any specific or even
broader group,” Edwards said.
On July , after the super-senior tranches had been accumulating for many
months, Merrill executives first officially informed its board about the buildup. At a
presentation to the board’s Finance Committee, Dale Lattanzio, co-head of the Amer-
ican branch of the Fixed Income, Currencies and Commodities business, reported a
“net” exposure of billion in CDO-related assets, essentially all of them rated triple-
A, with exposure to the lower-rated asset class significantly reduced. This net
exposure was the amount of CDO positions left after the subtraction of the hedges—
guarantees in one form or another—that Merrill had purchased to pass along its ulti-
mate risk to third parties willing to provide that protection and take that risk for a fee.
AIG and the small club of monoline insurers were significant suppliers of these guar-
antees, commonly done as credit default swaps. In July , Merrill had begun to
increase the amount of CDS protection to offset the retained CDO positions.
Lattanzio told the committee, “[Management] decided in the beginning of this
year to significantly reduce exposure to lower-rated assets in the sub-prime asset
class and instead migrate exposure to senior and super senior tranches.” Edwards
did not see any problems. As Kim insisted, “Everyone at the firm and most people in
the industry felt that super-senior was super safe.” 
