Merrill Lynch & Co. backed away from a threat to dump about $850 million of securities it seized from Bear Stearns Cos. hedge funds, according to a person with knowledge of the firm's plans.
Merrill sold a small portion of the collateralized debt obligations through an auction, said the person, who declined to be identified because the decision hasn't been announced. The firm plans to hold onto the remaining securities for now, the person said, without being more specific.
The decision removes the risk that a large amount of securities would be liquidated immediately. Merrill set the sale in motion to reclaim its loans to the two hedge funds, which had posted losses of as much as 20 percent by betting on CDOs. The plan may have confirmed that other funds were overvaluing their holdings of similar securities, potentially causing a chain reaction of writedowns causing billions in losses.
If this story is true and Merrill backs away from selling these securities, the market can breath a huge, collective sigh of relief. In short, Merrill blinked. They knew what would happen if the sale went through and the prices they received were really low. They didn't want to be responsible for that carnage in the market. They will simply hold onto their losses for now.
However, the problem is still out there. There are a ton of CDOs and other risk management tools out there is various portfolios that are probably mispriced. I doubt this is the last time we're going to have a story like this is the financial press.
2 comments:
I don't really get why this would be a relief to the market. Isn't this like closing your eyes and pretending the rabid wolverine in the room doesn't exist?
well, it's really more akin to finding extra security hardware for the door to the next room with the rabid wolverine.
Lots of little guys , hedge funds and the like, are subscribers on a large scale to the other side of these Merrill DBOs via one side or another used in their own derivative trades.
This reminds me of the ghost institutions-Japanese banks propped up by their own version of the FED. They were technically insolvent, but as long as they didn't call the nonperforming assets in their portrfolio, on paper they were whole. Pray that this is most of the iceberg here , and not just the tip.
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