Friday, November 02, 2007

Uh Oh

Business Week (11.02.07):
"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."

SEC reportedly launches Merrill probe

Here's how it worked. Merrill would sweet talk some hedge fund into loaning a "'Merrill-related entity'" a bunch of money. Normally this would mean the "'Merrill-related entity'" would be liable if the money wasn't repaid.

However!! What actually was happening was Merrill would guarantee it would buy back the loan after a year. And what this meant was that even though Merrill was ultimately on the hook, it didn't have report the debt as a liability because one of its entities was providing cover! Clever, eh?

Should have checked with Enron about how that kind of stuff can work out.

We're innocent, damn you! Dow Jones (11.02.07):

"Merrill Lynch & Co. doesn't think it engaged in any inappropriate transactions designed to avoid taking writedowns, thea bank said Friday in a press release.

'We have no reason to believe that any such inappropriate transactions occurred,' Merrill said in the release. 'Such transactions would clearly violate Merrill Lynch policy.'"

Merrill:'No Reason To Believe Inappropriate Transactions Occurred'



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