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Merrill Making a Big Bet on Mortgages

Despite the seized secondary market and the firm's apparent move away from mortgage-related securities with its Lone Star deal in July, two recent hire suggests it sees money to be made.
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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


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



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) - Get Free Report

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


to buy up troubled asset-backed securities.

Merrill also in July


$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


, 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.

"They probably have two of the best rolodexes on Wall Street in credit markets trading," Callahan says.

Nierenberg and De Mare declined to comment, and Thomas Montag, who heads Merrill's trading business and is possibly its second most-important executive after CEO John Thain, did not respond to a request for comment.

Whether there will be an appetite for the type of hedges Callahan describes remains to be seen.

Because the securities require so much work to understand, hedges are not easy to find or create, says Janet Tavakoli, another fixed-income consultant. The most effective hedge involved shorting the ABX index, which tracks mortgage securities, but it has fallen so far it is not clear that shorting it is a wise strategy anymore, she says.

"Traders moving around? You're really just rearranging deck chairs," she says. "Those are the same traders who didn't have a clue in the first place, they don't have more of a clue now, I assure you."