Merrill's Debt Deal Not So Cut and Dry

We have heard that Merrill Lynch (MER Quote) is better off after having sold a bucket of mortgage debt. And we have heard that they are worse off. But how -- I repeat how -- can we hear about Mother Merrill's sale of this debt without a mention of the peculiar nature of the financing and its meaning?

Take Forbes, for example. In a favorable article that ran yesterday called "Merrill Turns Its Luck Around," Forbes referred to the announced deal to sell billions in collateralized debt obligations to an investment fund based in Texas as a plan that "would reduce its exposure to collateralized debt obligations by $11.1 billion."

The next line reads "but that's not all," so The Business Press Maven naturally assumed Forbes would describe the specifics of the sale, which makes it way less than meets the eye.

These securities, after all, were valued at $11.1 billion a few weeks ago when Merrill reported its quarter results and are now being sold for $6.7 billion -- but that's not even the troubling part. See, the buyer would take the bucket of slop only if Merrill financed most of it. The company did -- 75% worth -- with debt whose only collateral are the assets that Merrill is selling. What does this mean in plain English?

Merrill is still open to tons of risk.

The company really only took out 25% of $6.7 billion, or $1.675 billion of risk, off the balance sheet.

In fairness, the Forbes article did refer to a previous piece that sported a headline about Merrill's changed fortunes. That one, which published the previous day, was called "Merrill Moves To Shore Up Books," and so The Business Press Maven naturally assumed that Forbes had at least laid out the gory details of the transaction in that article.