Friday, November 02, 2007

Merrill Fun



The Securities and Exchange Commission has launched an investigation into deals Merrill Lynch & Co. undertook to allegedly cloak its vulnerability to risky mortgage debt, the Wall Street Journal reported Friday.

The Journal reported Merrill Lynch struck deals with hedge funds to take certain positions that did not transfer risk, but merely delayed when Merrill Lynch would have to disclose its exposure to that risk.

For example, the Journal said, Merrill engaged a hedge fund to lend a "Merrill-related entity" $1 billion. This normally means the hedge fund would assume the risk of the Merrill-related entity failing to repay debt. However, Merrill guaranteed it would buy the loan a year later. Thus, Merrill assumed the risk without reporting the company's exposure on its own books.

The Journal reported Merrill has been seeking help from hedge funds in shifting as much as $5 billion in bonds backed by mortgages under a "mitigation strategy."