All the Devils Are Here [194]
This seems unlikely. Semerci would later insist that he had shown Kim his risk positions, according to several former executives. But people who have seen the e-mail traffic say that that doesn’t appear to be the case. One day, several months after he had left the firm, Kim returned to Merrill’s headquarters, trying to rustle up a Merrill Lynch investment for his hedge fund. He ran into John Breit in the hallway. “It’s a debacle,” Breit told him, relating the enormous subprime exposure. Kim was stunned. “We don’t have all that stuff!” he replied. Truly, he hadn’t known.
For that New Yorker article, O’Neal’s predecessor, David Komansky, told the writer John Cassidy that he simply didn’t believe O’Neal was unaware of the firm’s CDO exposure. Hard though it may be to believe, that does appear to be the case. “Stan was no longer dug in,” says a former executive. At the same time Goldman executives were canceling vacations to deal with the burgeoning subprime crisis, O’Neal was often on the golf course, playing round after round by himself. He had little or no direct contact with any of the firm’s operations—he had delegated that to Fleming, Fakahany, and others. Always a loner, he had become isolated from his own firm. He had no idea that key risk managers had been pushed aside, or that the people he had put in important positions were out of their depths. Amazing as it sounds, the CEO of Merrill Lynch really didn’t have a clue.
In August, O’Neal went to Martha’s Vineyard for vacation. By then, the market was signaling that the end was near; on the ABX, even the triple As were starting to drop in value. In late July, the Dow had its worst week in more than four years. The CDO market continued to contract. Day after day, the decline continued. Somehow, the combination of the ongoing turmoil in the market and his ability to step back and see things more clearly while he was far away from Wall Street had the effect of finally rousing O’Neal. By the time he returned to work at the beginning of September, he was no longer in denial. O’Neal finally understood that the triple-A securities on Merrill’s book posed a huge threat to the firm. At a minimum, the securities were going to have to be marked down, and there would have to be write-downs that would damage Merrill’s earnings. The firm’s third-quarter earnings report was due in October; he had a month to come to terms with the problem. As he thought about it, O’Neal wasn’t just worried. The memory of the LTCM disaster was flooding back. He was scared.
John Breit understood the problem by then as well. In July, Lattanzio had commandeered two junior quants and told them to sign off on a new valuation method the mortgage desk wanted to use for CDOs squared. The quants, feeling they were being asked to ratify something that had not been vetted through proper channels, complained to their manager. The manager happened to tell Breit the story. Breit’s curiosity was sparked. Calling in a favor from someone in the finance department, he got ahold of a spreadsheet with the collateral in the CDOs squared. He quickly saw how bad it was. He keep digging, quietly; before long he had discovered the $55 billion exposure.
But Breit was still persona non grata on the trading floor. He had no access to top management. He had long since been tossed off the risk management committee. Thus he resorted to the only action he could think to take: he began buttonholing people he bumped into at Merrill, telling them the