This article is from the archive of our partner .

Behold a new reason to get mad at bankers. Two years before it was sold to Bank of America in the throes of the financial crisis, Merrill Lynch executives--finding no buyers for their mortgage-backed securities--established an internal group to absorb the unprofitable assets, Jake Bernstein and Jesse Eisinger report in their just-released ProPublica investigation. It's a pretty complicated situation, but the idea is that this was just another example of bankers mismanaging risk.

The Merrill bankers who created and sold the Triple A-rated securities (known as collateralized debt obligations, or CDOs) funneled a portion of their bonuses to the new group's members to compensate them for "buying" the unwanted assets, in a set-up that Bernstein and Eisinger say "played a crucial role in keeping the money machine moving long after it should have ground to a halt." The group took on tens of billions of dollars in mortgage securities only to see the value of the assets plummet to pennies on the dollar, contributing to the firm's downfall. The authors continue:

What became of the bankers who created this arrangement and the traders who took the now-toxic assets? They walked away with millions. Some still hold senior positions at prominent financial firms.

Washington is now grappling with new rules about how to limit Wall Street bonuses in order to better align bankers' behavior with the long-term health of their bank. Merrill's arrangement, known only to a small number of executives at the firm, shows just how damaging the misaligned incentives could be.

Explain Bernstein and Eisinger: "The mortgage securities business was supposed to have a firewall against this sort of conflict of interest." Instead, "by creating more CDOs, banks prolonged the boom. Ultimately the global banking system was saddled with hundreds of billions of dollars worth of toxic assets, triggering the 2008 implosion and throwing millions of people out of work and sending the global economy into a tailspin from which it has not yet recovered."

The reporters note that some Merrill executives contest elements of their account. Commentators are beginning to respond as well:

  • Risk Management Is Probably No Better Now, states Felix Salmon at Reuters:

Merrill’s antics are the reductio ad absurdum of bonus culture, and show why it’s so silly for investment banks to pay multi-million-dollar bonuses and reckon that they’re protecting their long-term franchise at the same time. Not everybody was as egregious as this. But the differences between Merrill and other investment banks were only of degree, not of kind.

  • This Represents New Depths of Greed and Criminality, charges John Cole at Balloon Juice: "In the United States, we have multiple wingnut welfare Republican and glibertarian publications singing [Wall Street's] praises while an entire party and half of another is devoted to making sure we don’t dare regulate the 'producers' in society."
  • And Nobody At Merrill Felt Pain! adds HuffPost Hill, "thanks to the socialized bonus program."

This article is from the archive of our partner The Wire.

We want to hear what you think about this article. Submit a letter to the editor or write to letters@theatlantic.com.