Jeff Kronthal, who oversaw Merrill's growth into a trading and underwriting powerhouse for collateralized debt obligations, is rejoining the financial giant as a consultant to fixed-income chief David Sobotka.
The former principal finance chief's advice is being sought as Merrill ponders an additional $5 billion to $6 billion write-down in its $21 billion CDO book.
In July 2006, O'Neal pushed out Kronthal and five other veteran bond executives as part of a broader shake-up that was ostensibly designed to bring more international orientation to the firm's bond division.
In reality, according to current and former Merrill executives, Kronthal was let go because he expressed concern to the firm's management that Merrill's CDO business model was broken.
O'Neal himself was pushed out in late October after Merrill booked $8.4 billion in write-downs due to bad mortgage-related investments. That figure has since ballooned as Merrill has learned more about the scope of the losses.
In the early summer of last year, according to current and former Merrill executives, Merrill hit a major stumbling block in its quest to churn out more CDOs.
A number of insurance underwriters, in particular AIG, refused to continue guaranteeing the triple-A rating of key slices of Merrill CDO deals known as triple-A rated "super-senior" pieces.
With AIG's appetite waning, Kronthal warned Merrill executives that to continue completing these deals would require that the firm assume billions of dollars of credit risk.
According to a former executive, at one point in discussions Kronthal told management that it was "writing calls," or otherwise having the firm's balance sheet assume an open-ended risk if these highly illiquid bonds ran into credit trouble.
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