Fleming’s first instinct was to try to get the decision reversed. He asked O’Neal to move Kronthal and his team to Fleming’s jurisdiction and let them continue to run the credit desks. After thinking it over, O’Neal said no; Fleming recalls an early-morning phone call in which O’Neal told him he needed to “play ball.” When Fleming asked why Kronthal had to be fired, O’Neal replied, “You don’t understand. Dysfunction is good on Wall Street.”

By the middle of July 2006, Kronthal began to hear rumors that he was going to be fired. He, too, couldn’t believe it. He called Fleming, who was in London, vacationing with his wife. At first, Fleming ducked the calls, but when he told his wife why Kronthal was calling, she insisted he speak to his old friend. When Kronthal asked if he was going to be fired, Fleming hemmed and hawed. But by the end of their long, anguished conversation, Kronthal knew the truth. The next day, Dow Kim called him into his office and gave him his walking papers. The deed was done.

O’Neal would later tell friends that nobody had recommended Kronthal for a promotion, while Semerci had been supported by two of his top guys, Fakahany and Kim. But that remark just serves to illustrate how out of touch O’Neal had become. He had never been the kind of C.E.O. who walked the trading floor. By 2006, he was so divorced from his own firm that he failed to appreciate the utter lunacy of Semerci’s desire to clean house. Did he really think Semerci could get rid of Merrill’s most experienced mortgage traders and not harm the mortgage desk? Sadly, it seems that O’Neal didn’t think about it at all.

To Fleming, that day in July 2006 was the day Merrill Lynch’s fate was sealed. Yes, Fleming knew he was biased, but given how events played out, it seemed irrefutable. Prior to that day, Merrill may well have avoided the subprime problems that would soon bring Wall Street to its knees. After that date, Merrill was doomed to make the same mistakes as its competitors. “[Firing Kronthal] was one of the dumbest, most vindictive decisions I have ever seen,” Fleming would later say.

Not that anyone else at Merrill realized it at the time. Sure enough, with Semerci running the show, Merrill Lynch continued to crank out C.D.O.’s as if off an assembly line and retained its position as Wall Street’s No. 1 underwriter of them. It did so even though the business had begun to change dramatically. For one thing, the insurance giant A.I.G. had stopped writing credit-default swaps (a form of insurance) on the triple-A tranches, which had been an important reason that banks and other institutions had been willing to buy them. For another, investors were becoming harder and harder to find. Some of them had had their fill of triple-A tranches of C.D.O.’s. Others were becoming leery of the risk. Yet no one in a position of authority—not Dow Kim, not Ahmass Fakahany, and not Stan O’Neal—ever seemed alarmed that Osman Semerci could keep the machine going under these circumstances.

Instead, the mortgage desk continued to reap fees and post profits. The traders themselves made big bonuses. Whenever anyone asked, Semerci would tell Merrill executives that the firm had very little exposure to subprime-mortgage risk. From the boardroom to the trading floor, everyone simply assumed that all was well and that the business was being run the same way it had always been run. But it wasn’t.

There was one person at Merrill Lynch who might have asked the right questions, had he been in a position to do so. His name was John Breit, and he was a risk manager. A calm, soft-spoken former physicist, Breit had joined the long march from academia to Wall Street, coming to Merrill in 1990. He was not the kind of risk manager who feared all risk. On the contrary, he was one of the people who believed that Merrill had shot itself in the foot by being too risk-averse in years gone by.