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Monday, November 26, 2007

WSJ on Merrill: How Did This Happen?

by Tanta on 11/26/2007 12:00:00 PM

While we're on the subject of subprime reporting . . .

This is what the Wall Street Journal reported on page one on November 2:

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 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. . . .

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. . . .

"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."
So, basically, this article is almost exclusively stenographic reproduction of what one person who is not named said. The Tavakoli quote certainly hints that the person is either a hedgie or is just repeating what some hedgie claimed.

Today, reporteth the WSJ:
ON NOV. 2, the Journal published a page-one article on Merrill Lynch & Co. that was based on incorrect information that the firm had engaged in off-balance-sheet deals with hedge funds in a possible bid to delay the recognition of losses connected to the firm's mortgage-securities exposure. In fact, Merrill proposed a deal with a hedge fund involving $1 billion in commercial paper issued by a Merrill-related entity containing mortgage securities. In exchange, the hedge fund would have had the right to sell the mortgage securities back to Merrill after one year for a guaranteed minimum return. However, Merrill didn't complete the deal after the firm's finance department determined it didn't meet proper accounting criteria. In addition, Merrill says it has accounted properly for all its transactions with hedge funds.
An anonymous blogger would like to know the following:

1. Why does "the person" still get anonymity? "The person" either lied or passed on unverified rumors as if they were facts. Why don't we need to know who "the person" is?

2. Did "the person" call the reporter with the tip on the original story? Why don't we need to know this?

3. Is "the person" in a position to profit from a fall in MER's share price? Why don't we need to know this?

4. What's with so-called "journalism" that merely repeats uncorroborated rumors planted by interested sources who get grants of anonymity?

5. Don't believe anything you read on some anonymous blog, for heaven's sake.

(thanks, commenter!)