Remember the Quote of the Month? Year? Decade?
Emerging markets are being favored in part because "financial innovations are less common in developing countries," said Heidemarie Wieczorek-Zeul, German economics minister, in remarks to the IMF/World Bank Development Committee.
Deals with Hedge Funds May Be Helping Merrill Delay Mortgage Loses
- 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.
- 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.
- In a statement, a Merrill Lynch spokeswoman said, "We don't comment on specific transactions and we are confident in the appropriateness of our marks." (oh yeh?) Merrill said: "We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy."
- At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan's financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.
- "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." Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter.
- Jay Gould, a securities lawyer at Pillsbury Winthrop Shaw Pittman LLP, says if a firm is unloading securities from its books "without a real commercial purpose other than to create a value for pricing purposes, that can be a problem."
- Other big securities firms with mortgage-related losses have arranged similar deals with hedge funds. As disclosed in a recent page-one article in The Wall Street Journal, Bear Stearns Cos. sold $1 billion of risky mortgage loans to a hedge fund under a one-year pact known as a "mandatory auction call." Bear Stearns agreed to participate in an auction for the loans that provided the hedge fund with a guaranteed minimum return.
- Three big U.S. banks are assembling a group of financial institutions to create an investment pool to buy some mortgage-related securities from "structured investment vehicles" that are being forced to sell. That effort, which is backed by the Treasury Department, has also led some investors to question whether the goal is to delay the point at which banks recognize losses on troubled assets. The banks say their aim is to forestall forced selling of the assets.
What a joke it all is. Opaque institutions hiding stuff and telling politicos leave us alone, we can regulate ourselves. And oh yeh, can the Treasury secretary come in here and pressure other financial firms to create a fake customer to take away our off balance sheet (hidden) crap, since no hegde fund will buy it. Well maybe a few hedge funds, but that only covers a small portion of the problem.
As I have been saying, this is a cockroach situation. We have seen only the beginning. Remember, when Wall Street was cheering the kitchen sink quarters? Told us everything was ok. It was contained. What a line of BS. And the market traded up happy that this was all just a bad memory and 1 quarter of write offs solved everything. Even the golden child is playing games. If this was some obscure part of our economic system it would be one thing, but this is the basis for our whole economy. Shameful.
I love the shameful analysts as well "I can't trust a word out of Merrill Lynch, gosh darnit I am going to have to reduce this stock from a strong buy to only a buy!" A buy?? A buy?? Yes folks, only on Wall Street where sell ratings are as rare as (insert your own pun here) - but you get it, 90% of ratings are buy or strong buys because NO one wants to lose investment banking business by saying something truly negative about another company.
"We have increasingly lost confidence in the financials of Merrill, especially after the sudden increase in (collateralized debt obligation) write-downs," Deutsche Bank analyst Mike Mayo said. He cut his rating on Merrill shares to "buy" and said the company might need to find a partner to restore credibility and financial strength.
