Merrill Lynch Slammed by Report It Delayed Mortgage Losses
Posted by admin under: Main Nov 02
A Wall Street Journal report that claims Merrill Lynch used hedge fund dealings to delay subprime losses has hit the brokerage hard.
The story claims Merrill Lynch has been trying to sell off as much as $5 billion in mortgage-related securities to hedge funds in recent weeks as a means to postpone write-downs.
The story cites one particular deal in which the Wall Street firm sold $1 billion in commercial paper containing mortgages to a hedge fund, promising a minimum return and the right to sell it back after just one year.
By shifting the securities, Merrill was essentially able to delay a possible write-down until next year, minimizing the perceived loss in the near-term.
In regard to that deal, a Merrill spokeswoman said, “We don’t comment on specific transactions and we are confident in the appropriateness of our marks.”
“Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities,” Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note.
“One fund claimed that Merrill was offering a floor return (set buy-back price),” she said in the note, “so this risk would return to Merrill.”
Tavakoli noted that such dealings could explain why the brokerage’s mortgage-related exposure dropped in the third quarter.
Merrill Lynch & Co. denied the allegations in a press release issued Friday saying, “We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy.”
The brokerage also said the story lacked specificity and relied upon unidentified sources, but the report has led to many questions about how these firms gauge their exposure to bad debt.
The Securities and Exchange Commission is currently looking into the way Merrill has been “marking”, or valuing its mortgage securities, and how they have been disclosed to investors.
Last week, Merrill Lynch announced its worst quarter in its 93-year history, a $2.24 billion loss, including a $7.9 billion write-down spurred by mortgage-related activity, leading to the exit of its CEO Stan O’Neal.
Shares of Merrill Lynch were down a hefty $5.24, or 8.43%, falling to $56.95 in late trading Friday on Wall Street, marking the brokerage’s lowest share price since 2005.
Source: Merrill Lynch Slammed by Report It Delayed Mortgage Losses
Friday, November 2nd, 2007 at 11:38 pm and is filed under Main. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.