Merrill Lynch Is Fined for Doing Nothing

Among connoisseurs of finance, there are those who admire Nathan Rothschild's trading on Waterloo, or George Soros's bet against the pound, or the great Piggly Wiggly corner of '23, but I grew up as a derivatives structurer, and the trades that I admire most are the ones where nothing happens.1466703398905 If you can build a big complicated derivative that shifts the risks and payoff profiles among the parties to the trade, that's fine, that's the job, good work. But if you can build a big complicated derivative that doesn't shift the risks and payoff profiles among the parties -- that leaves everything exactly where it was, but makes the parties' lives ineffably better -- well, now you are getting somewhere.

Often where you are getting is court, though. Today Merrill Lynch settled a case with the Securities and Exchange Commission, agreeing "to pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors."1466704154432 There is some boring stuff here -- Merrill Lynch put some customer securities where they weren't supposed to be, and wrote some bad nondisclosure policies -- but the fun part is that Merrill wrote some magical derivatives to reduce the amount of cash that it had to have on hand to meet customer claims. And that's all those derivatives did. There was a complicated dance that allowed the magic to happen, but at the end of the dance, everything was back where it started. Except that Merrill had somehow, through the magic of the dance, lightened its obligation to keep cash lying around for customers.1466709442887