How the thundering herd faltered and fell

By Gretchen Morgenson

Sunday, November 9, 2008

"We've got the right people in place as well as good risk management and controls." — E. Stanley O'Neal, 2005

There were high-fives all around Merrill Lynch headquarters in new York as 2006 drew to a close. The firm's performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year.

And Merrill's decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages.

The deal would provide Merrill with even more loans for one of its lucrative assembly lines, an operation that bundled and repackaged mortgages so they could be resold to other investors.