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securities; while still in his twenties, he had run the mortgage desk for Lew Ranieri at Salomon Brothers. Kronthal had joined Merrill in the late 1980s, just a few years after O’Neal, overseeing its trading desks until the mid-1990s, when he took over its derivatives business. Although he spent much of the 1990s pushing a reluctant Merrill to take more trading risk—he thought its tepid risk limits constrained its ability to make sizable profits—he also had a healthy fear of mortgage-backed securities. He had watched them get increasingly risky over the years. His essential view was that Merrill’s role should be to create structures that allowed investors to gain the exposure to risk they wanted to take. But Merrill itself should never assume those risks. “They are things you want to sell, not hold,” he used to tell the traders who worked for him.

In O’Neal’s push to have the firm take on more risk, Kronthal found himself in a tricky position. He had had a few run-ins with O’Neal over the years, but Patrick and Zakaria, both good friends of his, had persuaded him to stay. Once they were gone, Kronthal didn’t have any protectors in the executive suite.

More important, everyone around him was creating CDOs as fast as they could. Kronthal’s boss, Dow Kim, headed all of fixed income. “Stan was constantly pounding on him about why we weren’t making as much in fixed income as Lehman or Goldman,” says a former Merrill executive. As O’Neal pushed Kim, Kim pushed Kronthal.

From below, meanwhile, Kronthal was trying to keep the CDO team under control. That was no small task, either. The team was headed by Chris Ricciardi, an aggressive thirty-four-year-old trader. A decade before, while at Prudential Securities, Ricciardi had been part of a group that had first come up with the idea of bundling mortgages into a CDO. After successful stints at Prudential and then at Credit Suisse, Ricciardi and most of his team joined Merrill Lynch in July 2003, where he quickly ramped up the firm’s CDO business. Kronthal and his crew of veteran traders viewed Ricciardi warily. “He was dangerous,” says one former Merrill trader. “He didn’t care about rules. If one of his managers didn’t give him the answer he wanted, he sought out another manager. All he cared about was himself and his team. He was always threatening to leave and take his team with him.” Kronthal’s belief was: let him go. But Dow Kim thought Merrill needed ten more salesmen just like him. He was exactly the kind of aggressive risk taker that O’Neal wanted at Merrill.

According to someone who did business with him, Ricciardi was surprisingly mild mannered for someone with such an outsized reputation. “He didn’t have a lot of flash,” this person says. But he was a natural leader, the kind of person who, as a college student, had put together groups that made money painting houses. And, this same person says, “he was very smart and he could articulate a case.” One investor recalls looking at an early Ricciardi deal that included credit card receivables as well as mortgage-backed securities. It had a very limited default history. The investor asked what would happen to the security if the credit card defaults started to rise. Ricciardi had no good answer, and the investor walked away from the deal. But Ricciardi still managed to maneuver the rating agencies into giving most of the deal a triple-A rating.

Ricciardi knew exactly what he’d been hired to do. “The strategy has been to be a high-volume underwriter, with a focus on areas that are very popular,” he told a trade publication in early 2005. What was popular, of course, was subprime mortgages. To ensure that it had a steady source of subprime mortgages to securitize and then bundle into CDOs, Merrill took a 20 percent stake in Ownit, a mortgage originator founded by Bill Dallas. A Merrill executive joined the Ownit board. By 2006, says Dallas, Merrill was pushing him to make loans that would generate more yield for Merrill’s CDOs.

“They never told us to make bad loans,” Dallas says now. “They would say, ‘You need to increase