Merrill Lynch Trying to Hide Problems?
According to the Wall Street Journal, Merrill Lunch has been off-loading some of its mortgage-relate assets, engaging in deals with hedge funds, in an effort to cap its exposure to risky mortgage-backed securities. Their efforts to payoff mortgage debt are attracting attention. An excerpt from the article explains why this maybe be an issue:
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.
At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan’s financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.
In addition, Merrill Lynch recently suffered one of the largest known Wall Street losses in history: a $7.9 billion write-down, fueled by mortgage-related problems. If the company has suffered that much of a loss despite its dealings with hedge-funds to postpone other losses, can we really be sure about its stability? Is its final demise looming in the near future? Is Merrill Lynch really trying to hide problems, or is it all just a coincidence? It will be interesting to see.
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