Deals With Hedge Funds May Be Helping Merrill Delay Mortgage Losses

Wall Street Journal ^ | November 2, 2007 | Susan Pulliam

[khnyny]

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.

[the invisib1e hand]

softening a blow is one thing. hiding a loss is another.

[ExSES]

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

THEY WERE CERTAINLY RIGHT!!!

That day of reckoning is at hand! Even the highly acclaimed John Thain's reputation will not save them from the public's realization that they have held on to TRASH instruments without recognizing the true worth of those assets!

Our "Financial Pillars" cannot be saved by "buying" the reputations of (formally???) respected "Financial Titans"!