Merrill Making a Big Bet on Mortgages

Editor's note: Our new "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short sellers in the market.

Merrill Lynch (MER) looks to be making a significant bet that there is substantial money to be made in the secondary market for mortgages, the eye of the storm in the credit crisis.

Merrill earlier this week -- as TheStreet.com and Bloomberg reported last month -- said it had hired Michael Nierenberg to head global mortgages and securitized products, and James De Mare to oversee mortgage trading.

The two high-profile traders likely do not come cheaply. A recruiter and a trader estimate Nierenberg, who was the last key member of Bear Stearns' fabled bond franchise left at JPMorgan Chase (JPM) following the bank's historic takeover of the failing investment bank, will be paid at least $10 million -- and perhaps twice that.

That is a staggering sum for a trader in a market that largely has been seized up for much of the past year. Hedge funds, seeking to leverage widening spreads on mortgage-related paper, seem a more natural place to be hiring mortgage traders -- witness D.E. Shaw's Tuesday announcement that it poached Richard McKinney from Lehman Brothers (LEH) to buy up troubled asset-backed securities.

Merrill also in July unloaded $30.6 billion of U.S. super senior asset-backed securities collateralized-debt obligations to an affiliate of Lone Star Funds for $6.7 billion -- just 22 cents on the dollar. But an executive close to De Mare and Nierenberg says they will primarily be brokering trades between clients and earning money on commissions.

James Callahan, head of PentAlpha, a consulting firm specializing in mortgage securities, believes there is substantial money to be made in finding owners of distressed mortgage securities and selling them hedging instruments to help them mitigate further potential losses. Nierenberg and De Mare are well suited for that task, he says.