Reply #97: Cuomo Asserts That Traders Looted Merrill

[Demeter]

http://www.nakedcapitalism.com/2009/03/cuomo-asserts-that-traders-looted.html

I must confess I skipped past the headlines on New York Attorney General Andrew Cuomo's latest salvo at Bank of America and Merrill over the Merrill bonus payments in December.

Recall that those bonuses were paid earlier than usual so as to occur before the closing of the Merrill sale. Merrill contends it informed the Charlotte bank (and payments of that sort would have to be approved, otherwise it would be a violation of the merger agreement and could have jeopardized the deal).

The latest wrinkle, which generated a flurry of press reports, was that Cuomo had taken a new tack, charging that Merrill had misled Congress as to when the payments would be made. But for my money, the juiciest bit came at the end in the New York Times story:

Mr. Cuomo claimed that Merrill traders had mismarked their books as of early December in an effort to get higher bonuses.

“It appears that some of these losses may have been booked by Merrill employees who marked down their portfolios only after their 2008 bonuses were set,” the attorney general wrote in the filing. “Despite the gargantuan unexpected losses, Merrill did not reconsider its bonus awards” and Bank of America did not request or demand that Merrill reduce its bonus pool, he wrote.


This is a particularly strong and damaging claim. I've read repeatedly of people who worked with traders saying that they would engage in strategies (not clearly described) that would lead them to show high profits though year end that they would wind up giving back (and often more) early in the next year. The idea was that they'd make so much on their trumped up performance that it didn't matter if they were fired next year. But a lot of types of behavior could produce this result, so it's hard to know what sort of trader chicanery was afoot. And without names, or descriptions of the nefarious deeds, its too vague to treat as substantiated.

But here, if Cuomo is correct, we have what amounts to fraud, and brazen to boot. And the exaggerated profits would also seem to be a books and records violation for senior management.

This could get very interesting. The investigations are finally getting to where the rubber hits the road.