The Game of High Finance and Merrill Lynch

Often times the plight of Merrill Lynch or Citigroup or any of the large institutions that have been in the news recently are seen in black and white terms. Don’t confuse moral judgements (or moral indignation) with money where the games of high finance are played with 10,000 shades of gray. Text in bold is my emphasis. From Reuters:

In a bid to cut its exposure to mortgage-backed securities, Merrill Lynch & Co engaged in deals with hedge funds possibly designed to delay its heavy losses, the Wall Street Journal reported Friday in its online edition, citing sources close to the matter.

The deals are likely to be examined by the U.S. Securities and Exchange Commission, which is investigating how the firm has been valuing mortgage securities and how it discloses its positions to investors, a source familiar with the matter told the Journal.

A source told the newspaper that in one such deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages. According to the Journal, the source said the hedge fund had the right to sell back the commercial paper to Merrill after a year for a guaranteed minimum.

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 source told the Journal, adding the deal delayed that risk for a year.

Representatives from Merrill Lynch were not immediately available for comment.

Earlier this week, an investor filed a lawsuit against the company alleging Merrill issued false and misleading statements about its exposure to risky mortgage investments.

Merrill earlier this month reported its first loss in six years as the company was burned by lax risk management and bad bets on mortgages and leveraged loans for corporate takeovers.