All the Devils Are Here [146]
Dow Kim had been one of the men who convinced O’Neal to promote Semerci. The other was Merrill’s chief administrative officer, Ahmass Fakahany. Although Fakahany had spent his career on the administrative side of Merrill, overseeing such functions as human resources and computer systems, he wielded outsized power because he was indisputably the one executive who was close to O’Neal. “Fakahany was the one guy who could go into Stan’s office, close the door, and say, ‘Can you believe... ?’” says a former executive. He had worked in the Merrill finance office when O’Neal had been CFO, and had essentially hitched his wagon to O’Neal’s pony.
By general consensus, Fakahany was deeply in over his head. He knew virtually nothing about trading—or about the complications of managing a balance sheet the size of Merrill’s. He was also in charge of Merrill’s risk management function, another subject about which he knew next to nothing. He was backing Semerci more because he knew Semerci would appeal to O’Neal than because Semerci knew how to run a mortgage desk. In fact, Semerci knew very little about the credit markets. “He didn’t understand U.S.-based risk,” says a former Merrill executive.
O’Neal would later tell friends that nobody had recommended Kronthal for a promotion, while Semerci had been recommended by two of his top guys, Fakahany and Kim. But that remark just serves to illustrate how out of touch O’Neal had become. O’Neal had never been the kind of CEO who walked the trading floor. The intricacies of the firm’s trading positions held no interest for him, except to the extent they showed profits or losses. His constant demand that his trading executives take more risk was based mainly on his annoyance that Goldman Sachs and Lehman Brothers had more profitable trading desks, rather than on a deep understanding of what those risks entailed. His feel for the firm’s risk positions came primarily from reading the daily VaR reports. Whenever he went to Washington or attended conferences, he would hear about the riskiness of, say, leveraged loans, so he kept close tabs on that part of the business. But nobody ever mentioned possible problems with mortgage bonds—so he didn’t worry about them. By 2006, O’Neal was so divorced from his own firm that he failed to appreciate the utter lunacy of Semerci’s desire to clean house. Did he really think Semerci could get rid of the firm’s most experienced mortgage traders and not harm the mortgage desk? Sadly, it seems that O’Neal didn’t think about it at all.
The arrival of Semerci should have put Dow Kim on high alert, if only because he had no way of knowing whether Semerci was up to the job. Semerci was coming into his new position with a lot of pressure on him. Though Chris Ricciardi was gone, Merrill desperately wanted to maintain its position as the number one CDO underwriter. And, says a former Merrill colleague, Semerci felt another kind of Wall Street pressure: “Osman wanted to make a lot of money in a short period of time.”
The CDO business was changing. AIG had stopped insuring super-senior tranches. The banks that had always bought the super-seniors weren’t buying them anymore. CDOs were becoming harder to sell to investors. Yet from the summer of 2006, when Kronthal and the other veteran traders were ousted, to the summer of 2007, Merrill Lynch continued to churn out CDOs. It retained its position as the number one underwriter. The mortgage desk reaped fees and posted profits. The traders themselves made big bonuses. Whenever anyone asked, Semerci would tell Merrill executives that the firm had very little exposure to subprime mortgage risk; he had made all this money for the firm, he said, while derisking the portfolio. But he told no one how, exactly, he was accomplishing this. Incredibly, no one thought to ask. Instead, from the boardroom to the trading floor, everyone simply assumed that all was well—that the business was being run the same way it had always been run.