Merrill Lynch, still reeling from an $8.4 billion write-down on mortgage-related losses last month, has been making deals with hedge funds that may have been calculated to keep further losses out of investors' view, the Wall Street Journal reports. The move has attracted the attention of the SEC, which is looking into whether the deals were made to move risky securities off Merrill's balance sheet temporarily.
Merrill has struggled in recent weeks to offload as much as $5 billion in risky securities to hedge funds, sources tell the Journal, in what they call a "mitigation strategy." But the risk is merely postponed in deals where Merrill agrees to buy the securities back in a year, at a fixed rate, if there is no other buyer. At issue is "whether the benefits and risks of ownership were transferred,” says a former SEC enforcer.