updated 11/11/2010 3:09:09 PM ET 2010-11-11T20:09:09

Stan O’Neal wanted to see him. How strange. It was September 2007. The two men hadn’t talked in years, certainly not since O’Neal had become CEO of Merrill Lynch in 2002. Back then, John Breit had been one of the company’s most powerful risk managers. A former physicist, Breit had been the head of market risk. He reported directly to Merrill’s chief financial officer and had access to the board of directors. He specialized in evaluating complex derivatives trades. Everybody knew that John Breit was one of the best risk managers on Wall Street.

But slowly, over the years, Breit had been stripped of his authority—and, more important, his ability to manage Merrill Lynch’s risk. First O’Neal had tapped one of his closest allies to head up risk management, but the man didn’t seem to know anything about risk. Then many of the risk managers were removed from the trading floor. Within the span of one year, Breit had lost his access to the directors and was told to report to a newly promoted risk chief, who, alone, would deal with O’Neal’s ally. Breit quit in protest, but returned a few months later when Merrill’s head of trading pleaded with him to come back to manage risk for some of the trading desks.

In July 2006, however, a core group of Merrill traders had been abruptly fired. Most of the replacements refused to speak to Breit, or provide him the information he needed to do his job. They got abusive when he asked about risky trades. Eventually, he was exiled to a small office on a different floor, far away from the trading desks.

Did Stan O’Neal know any of this history? Breit had no way of knowing. What he did know, however, was that Merrill Lynch was in an awful lot of trouble—and that the company was still in denial about it. He had begun to hear rumblings that something wasn’t right on the mortgage desk, especially its trading of complex securities backed by subprime mortgages—that is, mortgages made to people wuth substandard credit. For years, Wall Street had been churning out these securities. Many of them had triple-A ratings, meaning they were considered almost as safe as Treasury bonds. No firm had done more of these deals than Merrill Lynch.

Calling in a favor from a friend in the finance department, Breit got ahold of a spreadsheet that listed the underlying collateral for one security on Mer­rill’s Merrill’s books, something called a synthetic collateralized debt obligation squared, or synthetic CDO squared. As soon as he looked at it, Breit realized that the collateral—bits and pieces of mortgage loans that had been made by subprime companies—was awful. Many of the mortgages either had already defaulted or would soon default, which meant the security itself was going to tumble in value. The triple-A rating was in jeopardy. Merrill was likely to lose tens of millions of dollars on just this one synthetic CDO squared.

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Breit started calling in more favors. How much of this stuff did Merrill Lynch have on its books? How bad was the rest of the collateral? And when in the world had all this happened? Pretty soon he had the answers. They were worse than he could possibly have imagined. Merrill Lynch had a staggering $55 billion worth of these securities on its books. They were all backed by subprime mortgages made to a population of Americans who, in all likelihood, would never be able to pay those loans back. More than $40 billion of that exposure had been added in the previous year, after he had been banished from the trading floor. The reckless behavior this implied was just incredible.

A few months earlier, two Bear Stearns hedge funds—funds that contained the exact same kind of subprime securities as the ones on Merrill’s books— had collapsed. Inside Merrill, there was a growing nervousness, but the leaders of the mortgage desk kept insisting that its losses would be contained— they were going to be less than $100 million, they said. The top brass, including O’Neal, accepted their judgment. Breit knew better. The losses were going to be huge—there was no getting around it. He began to tell everybody he bumped into at Merrill Lynch that the company was going to have to write down billions upon billions of dollars in its subprime-backed securities. When the head of the fixed-income desk found out what Breit was saying, he called Breit and screamed at him.

Stan O’Neal had also heard that Breit had a higher estimate for Merrill Lynch’s potential losses. That is why he summoned Breit to his office.

“I hear you have a model,” O’Neal said.

“Not a model,” Breit replied. “Just a back-of-the-envelope calculation.” The third quarter would end in a few weeks, and Merrill would have to report the write-downs in its earnings release. How bad did he think it would be? O’Neal asked. “Six billion,” said Breit. But he added, “It could be a lot worse.” Breit had focused only on a small portion of Merrill’s exposure, he explained; he hadn’t been able to examine the entire portfolio.

Breit would never forget how O’Neal looked at that moment. He looked like he had just been kicked in the stomach and was about to throw up. Over and over again, he kept asking Breit how it could have happened. Hadn’t Merrill Lynch bought credit default swaps to protect itself against defaults? Why hadn’t the risk been reflected in the risk models? Why hadn’t the risk managers caught the problem and stopped the trades? Why hadn’t Breit done anything to stop it? Listening to him, Breit realized that O’Neal seemed to have no idea that Merrill’s risk management function had been sidelined.

The meeting finally came to an end; Breit shook O’Neal’s hand and wished him luck. “I hope we talk again,” he said.

“I don’t know,” replied O’Neal. “I’m not sure how much longer I’ll be around.”

O’Neal went back to his desk to contemplate the disaster he now knew was unavoidable—not just for Merrill Lynch but for all of Wall Street. John Breit walked back to his office with the strange realization that he—a midlevel employee utterly out of the loop—had just informed one of the most powerful men on Wall Street that the party was over.

Excerpted from "ALL THE DEVILS ARE HERE: THE HIDDEN HISTORY OF THE FINANCIAL CRISIS" by Bethany McLean and Joe Nocera by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Bethany McLean and Joe Nocera, 2010.

Photos: 64 years of ‘Meet the Press’

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  1. First ‘Meet the Press’ photo

    December 4, 1947: The earliest photograph in existence of the longest running television program in history. Sen. Robert Taft was the guest on "Meet the Press" that day, less than a month after the program debuted on NBC television at 8 p.m., November 6, 1947. James A. Farley, the former postmaster general and former Democratic National Committee chairman, was the guest on the first broadcast. (Meet the Press) Back to slideshow navigation
  2. All women

    December 10, 1949: With Washington's leading male reporters otherwise occupied at the men-only Gridiron Dinner, "Meet the Press" presented its first all-female program. Moderator (and program co-founder) Martha Rountree, panelists Doris Fleeson, May Craig, Judy Spivak and Ruth Montgomery question the guest, Democratic politician India Edwards. (Meet the Press) Back to slideshow navigation
  3. Billy Graham

    March 6, 1955: Rev. Billy Graham’s first "Meet the Press" appearance. He tells panelist (and program co-founder) Lawrence Spivak "anything that makes any race feel inferior ... is not only un-American but un-Christian." (Meet the Press) Back to slideshow navigation
  4. Jackie Robinson

    April 14, 1957: Jackie Robinson, the first man to break the racial barrier in Major League Baseball, also becomes the first athlete to appear on "Meet the Press." Robinson joins moderator Lawrence Spivak in a discussion about civil rights and Robinson’s work with the NAACP. (Meet the Press) Back to slideshow navigation
  5. Eleanor Roosevelt

    October 20, 1957: Former First Lady Eleanor Roosevelt in one of her six "Meet the Press" appearances. Here she talks about her trip to the Soviet Union. (Meet the Press) Back to slideshow navigation
  6. Robert Frost

    December 28, 1958: Poet Robert Frost was introduced by moderator Ned Brooks as "the poet of all America. Indeed, it can be said that he is the poet of all mankind." Two years later, Congress awarded Robert Frost a gold medal in recognition of his poetry, saying it enriched the culture of the United States and the philosophy of the world. (Meet the Press) Back to slideshow navigation
  7. Fidel Castro

    April 19, 1959: Cuban Prime Minister Fidel Castro appears on "Meet the Press" during his first visit to the United States since the revolution. Castro was annoyed that permanent panelist and producer Lawrence Spivak would not allow him to smoke cigars in the studio. (Meet the Press) Back to slideshow navigation
  8. Martin Luthur King Jr.

    April 17, 1960: Civil Rights leader Dr. Martin Luther King Jr., pictured here in one of his five "Meet the Press" appearances. (Meet the Press) Back to slideshow navigation
  9. John F. Kennedy

    October 16, 1960: After this interview, then-Senator John F. Kennedy calls Meet the Press the nation's "fifty-first state." (Meet the Press) Back to slideshow navigation
  10. Jimmy Hoffa

    July 9, 1961:This first "Meet the Press" appearance by Teamster president Jimmy Hoffa had to be rescheduled several times due to Hoffa’s string of indictments. After the interview, Hoffa was furious about being asked whether his insistence on dealing only in cash and keeping few records gave the appearance of impropriety. (Meet the Press) Back to slideshow navigation
  11. Edward Kennedy

    March 11, 1962: Edward Kennedy’s first appearance on the program. The potential Senate candidate was coached by his older brother, President John F. Kennedy. President Kennedy and his aide Theodore Sorensen prepared "Teddy" for his “Meet the Press” debut by staging a run through of questions and answers in the Oval Office. On the day of the program, President Kennedy delayed his departure from Palm Beach in order to watch the show, but later told his brother that he was almost too nervous to watch. (Meet the Press) Back to slideshow navigation
  12. Bob Dole

    July 16, 1972: Bob Dole and "Meet the Press" moderator Lawrence Spivak prepare to discuss the break-in and bugging of the Democratic National Committee headquarters at the Watergate. Former Senator Dole holds the record for the most appearances on “Meet the Press” in a career that included service as a Congressman, Senator, RNC Chairman, vice presidential candidate, Senate Majority Leader and finally, Republican presidential nominee. (Meet the Press) Back to slideshow navigation
  13. Prime Minister Wilson

    September 19, 1965: "Meet the Press" conducts television’s very first live satellite interview. The guest is British Prime Minister Harold Wilson. (Meet the Press) Back to slideshow navigation
  14. Ronald Reagan

    September 11, 1966: Ronald Reagan, making his first bid for public office, appears on "Meet the Press" with his Democratic opponent for the governorship of California, the incumbent Gov. Edmund G. Brown. Reagan appeared on "Meet the Press" seven times -- all before he was elected president. (Meet the Press) Back to slideshow navigation
  15. Robert Kennedy

    March 17, 1968: Senator Robert F. Kennedy makes his ninth -- and final -- appearance on "Meet the Press" with Lawrence E. Spivak. Kennedy was assassinated in California less than 3 months later -- shortly after claiming victory in that state's Democratic presidential primary. He was 42 years old. (Meet the Press) Back to slideshow navigation
  16. John Kerry

    April 18, 1971: John Kerry, then a former Navy Lieutenant, makes his first "Meet the Press" appearance as a spokesman for Vietnam Veterans Against the War. He has since appeared on the program as a U.S. Senator from Massachusetts 21 times. (Meet the Press) Back to slideshow navigation
  17. Golda Meir

    December 5, 1971: Golda Meir, prime minister of Israel, appears on “Meet the Press” with moderator Bill Monroe to discuss the continuing instability in the Middle East and the prospect of meeting and negotiating with Egypt’s leaders. (Meet the Press) Back to slideshow navigation
  18. Prime Minister Gandhi

    August 24, 1975: Indian Prime Minister Indira Gandhi in one of her seven appearances on "Meet the Press" before her assassination in October 1984. After she was elected Prime Minister in 1966, Gandhi grew more concerned about her television image and contacted "Meet the Press" to request makeup samples used during her appearance on the program. The program’s makeup artist consulted her notes and sent Mrs. Gandhi a complete makeup set -- including sponges and instructions for application. (Meet the Press) Back to slideshow navigation
  19. Gerald Ford

    November 9, 1975: President Gerald Ford becomes the first sitting American president to appear on the program. President Ford accepted the invitation as a tribute to "Meet the Press" co-founder Lawrence Spivak, who was making his farewell appearance as moderator of the program. (Meet the Press) Back to slideshow navigation
  20. Jimmy Carter

    January 20, 1980: In one of the most dramatic newsbreaks in the history of "Meet the Press" President Jimmy Carter announces that the U.S. would boycott the Moscow Summer Olympics because of the presence of Soviet troops in Afghanistan. Despite initial outrage over Carter’s proposal, 60 nations eventually joined the boycott. (Meet the Press) Back to slideshow navigation
  21. Richard Nixon

    April 10, 1988: In his first Sunday interview in 20 years, Former President Richard Nixon reacts to a comment on "Meet the Press. (Meet the Press) Back to slideshow navigation
  22. Tim Russert's first show

    December 8, 1991: Tim Russert makes his debut as moderator of "Meet the Press." He has since become the longest-serving moderator in "Meet the Press" history. In the center of this photo is then-intern Betsy Fischer, who is now Executive Producer of the program. (Meet the Press) Back to slideshow navigation
  23. Dan Quayle

    September 20, 1992: "Meet the Press" permanently expands from a half-hour to a one hour program. Vice President Dan Quayle is the guest. (Meet the Press) Back to slideshow navigation
  24. Shaheen and Whitman

    February 2, 1997: The broadcast breaks television history as "Meet the Press" becomes the first network television program ever to broadcast live in digital high definition. Governors Jeanne Shaheen and Christie Todd Whitman share a light moment on the set that day. (Charles Rex Arbogast / AP) Back to slideshow navigation
  25. Bill Clinton

    November 9, 1997: President Bill Clinton appears in studio on "Meet the Press" to mark the program’s 50th anniversary. (Meet the Press) Back to slideshow navigation
  26. Al Gore

    December 19, 1999: In a live Democratic presidential debate, Vice President Al Gore challenges former Sen. Bill Bradley to a "Meet the Press agreement" to have weekly debates in place of running political advertisements. (Meet the Press) Back to slideshow navigation
  27. Dick Cheney

    September 16, 2001: Five days after the September 11th attacks, Vice President Dick Cheney joins moderator Tim Russert in the first live television interview ever broadcast from Camp David. (Getty Images) Back to slideshow navigation
  28. Senate Debate Series

    September 22, 2002: "Meet the Press" kicks off its "Senate Debate Series" with the Colorado Senate race: Republican Incumbent Sen. Wayne Allard vs. Democratic Challenger Tom Strickland. At the end of the election cycle, the series of three senate debates was awarded the prestigious "USC Walter Cronkite Journalism Award" for "Excellence in Broadcast TV Political Journalism." The debate series continued in 2004 and 2006. (Alex Wong / Getty Images for Meet the Press) Back to slideshow navigation
  29. George W. Bush

    February 8, 2004: President George W. Bush kicks off his re-election campaign in an Oval Office interview with Tim Russert on "Meet the Press." Robert Novak went on to write about the interview, "no president ever before had been subjected to such tough questioning in the Oval Office." (Getty Images for Meet the Press) Back to slideshow navigation
  30. James Carville

    November 14, 2004: In another "Meet the Press" first, Democratic strategist James Carville cracks an egg on his forehead to demonstrate he's got "egg on his face" after his projected outcome of the U.S. presidential election was wrong. Carville predicted 52 percent of the vote for U.S. Sen. John Kerry (D-Mass.), 47 percent for President George W. Bush and 1 percent for Ralph Nader. (Getty Images for Meet the Press) Back to slideshow navigation
  31. Jim Webb

    November 19, 2006: The first edition of "Meet the Press" to be available via video netcast on the show’s Web site. U.S. Senator-elect Jim Webb (D-Va.) joins moderator Tim Russert on that program. (Alex Wong / Getty Images for Meet the Press) Back to slideshow navigation
  32. Barack Obama

    November 11, 2007: "Meet the Press"celebrates its 60th anniversary live from Des Moines, Iowa with Democratic Presidential hopeful Senator Barack Obama (D-Illinois) for the full hour. (Eric Thayer / Getty Images) Back to slideshow navigation
  33. June 15, 2008: The chair of late moderator Tim Russert sits empty on the set during the first MTP taping following Russert's death. He died June 13, 2008 of a heart attack while at the NBC News bureau in Washington. He was 58 years old. (Alex Wong / Getty Images for Meet the Press) Back to slideshow navigation
  34. Colin Powell

    October 19, 2008: A record-breaking 9 million viewers tune in to see Gen. Colin Powell, a Republican, announce his endorsement of Democratic Presidential Nominee Barack Obama. (Brendan Smialowski / Getty Images) Back to slideshow navigation
  35. President-elect Obama

    December 7, 2008: President-elect Barack Obama makes his first Sunday morning television appearance since winning the election to discuss the challenges facing this country and the upcoming transition of power. (Scott Olson / Getty Images for Meet the Press) Back to slideshow navigation
  36. David Gregory

    December 7, 2008: Interim moderator Tom Brokaw announces that David Gregory has been chosen as the new moderator of the show. (Alex Wong / Getty Images for Meet the Press) Back to slideshow navigation
  37. Rendell, Schwarzenegger & Bloomberg

    March 22, 2009: Gov. Ed Rendell (D-Penn.), Gov. Arnold Schwarzenegger (R-Calif.) and NYC Mayor Michael Bloomberg appeared exclusively on Meet the Press one day after meeting with President Obama to discuss the economy. (Brendan Smialowski / Getty Images for Meet the Press) Back to slideshow navigation
  38. Hillary Clinton

    July 26, 2009: Secretary of State Hillary Clinton appears for a full-hour on Meet the Press. It's her first appearance on the program since joining the Obama administration. (William B. Plowman / NBC Universal) Back to slideshow navigation
  39. President Obama

    September 20, 2009: President Barack Obama sits down with David Gregory at the White House for Obama's first MTP appearance since taking office. (Pete Souza / The White House) Back to slideshow navigation
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