The situation is looking even more grave for Merrill Lynch. The WSJ (subscription) is reporting:
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 transactions are among the issues likely to be examined by the Securities and Exchange Commission. 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. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.
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.
What makes this all the more amazing is that Merrill Lynch appears to have participated in a similar scheme (in reverse) with Enron where Enron sold barges in Nigeria to Merrill Lynch and agreed to repurchase those barges at a later date for a fixed price that guaranteed a return. Merrill paid substantial fines in connection with the barge transaction. In that case Enron was trying to inflate earnings. In this case, if the article is accurate, Merrill was trying to hide losses. Several Merrill bankers were convicted over the barge deal though those convictions are under appeal.