Just came across a passage in Michael Lewis’ “The Big Short” that offers a clue.
Michael Eisman — the Steve Carell character in the movie — is explaining to an analyst from Bernstein why, in addition to betting against the doomed subprime mortgage market, he’d also shorted Merrill Lynch. Says Eisman:
We have a simple thesis. There is going to be a calamity, and whenever there is a calamity Merrill is there.
When it came time to bankrupt Orange County with bad advice, Merrill was there.
When the internet went bust, Merrill was there.
Way back in the 1980s when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit.
That was Eisman’s logic: The logic of Wall Street’s pecking order.
Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things.
The game, as Eisman saw it, was crack the whip. He assumed Merrill had taken its assigned place at the end of the chain.
My take: This was a few years ago, around 2007. The pecking order probably got shuffled after the 2008 financial crisis, but some things don’t change. And if the big kid who runs the games in the neighborhood has been telling everybody to sell a stock, I’m inclined to suspect — halfway through The Big Short — that he’s been snapping it up.