Stan O’Neal, who took over as CEO of Merrill in 2002, saw CDOs as a source of significant fees for his firm making him the reason for the firms heavy pursuit of these securities. In 2002, Merrill Lynch & Co. was in the issuance of collateralized debt obligations (CDOs). By 2007 they were number one. O’Neal was right, in 2007 Merrill earned $395 million in fees associated with CDOs.
What O’Neal and Merrill did not see were the risks associated with bundling bonds backed by subprime mortgages into complex debt instruments. When delinquencies on these subprime mortgages began mounting in the summer of 2007, the value of CDOs plummeted.
The fees generated by the issuance of CDOs now pale in comparison to the write-offs Merrill Lynch and others are facing. According to Bloomberg’s Hamish Risk, Merrill has written down $24.5 billion in losses from CDOs and other assets to date.
In addition, Citigroup Inc. was behind only Merrill in the number of CDOs issued in 2007. The result was $347.2 million in fees for Citigroup. Like Merrill, when the bottom fell out of the market for these investments, Citigroup, and scores of individual and institutional investors who were sold these investments by Wall Street, was left holding the bag. Citigroup has announced write-downs of $22.4 billion.
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