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When Merrill Lynch put bad mortgages in hedge funds than sold them for a year with the promise of a return, the logic was the investors knew the risk. Lita Epstein (2007) explains:
Merrill investors had no idea how bad its situation was until it finally came clean about its losses and took a $7.9 billion write-down on these risky securities, one of Wall Streets largest write-downs ever, plus another $463 million write-down of deal-related lending commitments for a total of $8.4 billion. (Epstein 2007).
The result of Merrill Lynch and other hedge fund managers was Congress stepping in with new legislation. This means stricter laws and taxes in the United States and Europe. Merrill Lynch did not learn from their mistakes. Instead of operating in the United States and Europe,
“Bank of America Merrill Lynch is helping to establish more than a dozen hedge funds in Asia as industry regulation grows tougher in America and Europe” (Cooper 2010). Clearly this suggests that Merrill Lynch cares more about a profit than the investor.
The ground rules that manifested this situation were greed, deception, irresponsible borrowing, and portfolio importance. The hedge funds were there to make money by taking risks. The deception of transferring bad mortgages to the hedge fund created the situation. Irresponsible borrowing, a hedge fund can borrow up to thirty percent over their assets, led to defaulted mortgages. Finally the annual financial report had to meet certain goals to be acceptable to stockholders. The truth never had a chance.
Merrill Lynch was guilty of defrauding their stockholders. Although after taking the write down no penalties were given, Merrill Lynch should have learned about the right way to run a hedge fund. The fact that Merrill Lynch wants to operate in Asia should make investors run. This company puts money and success over ethics and investors. This case scenario is not a good example of ethics. Investor should not trust their pennies, much
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