Merril Lynch Incentivized Buying Bum Mortgage Backed Securities
According to a CBS Interactive Business Network release by Alain Sherter, Merrill Lynch offered bonuses to its own traders to invest in mortgage backed securities (MBS) as concerns were raised in 2006 about the real estate market. Apparently, they even created a unit expressly to buy the super senior tranches of the MBS that could not be shoved off on other investors. In return for having to hold their noses when purchasing the super risky securities, Merrill offered considerable bonus money sometimes dubbed “a million for a billion” meaning a million dollars in bonus money for every billion brought in on the mortgage backed securities (MBS). In essence, from the article it appears that the compensation scheme was all about the potential for short term rewards, while ignoring the long term interests of the shareholders regardless of whether the investments made or lost money.