Merrill's Debt Deal Not So Cut and Dry

The bank's much-publicized deal to sell CDOs reduced its risk, but did not eliminate it.
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We have heard that Merrill Lynch (MER) 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.

Did it? Nope.

This is what

Forbes

told us: "The sale price was $6.7 billion. But that wipes away $11 billion of exposure to the toxic investments."

And, as happens when you don't let your foot get caught on the details of a deal, a false conclusion came next, set out happily in the very next line:

"John Thain, Merrill's chief executive officer, appears to be doing everything he can to wipe the slate clean for the company."

Yes, he's wiping the slate clean ... by financing the sale of the bucket of slop and keeping much of the risk.

While

Forbes

really struck out on behalf of investors, others -- like

The New York Times

-- at least touched upon the technicalities of the financing but failed to explain what it meant.

The

Times

dipped its toe on the basic fact of the financing: "Merrill provided 75 percent financing to Lone Star Funds, which means Merrill lent the private equity fund about $5 billion to complete the sale." And that was it. It still referred to the company's "purge" of "tricky mortgage-linked investments" which are even trickier when you appear to sell them but are still absorbing risk.

The

Times

, though, did not get it, instead concluding that Merrill could go on its merry way now:

"But the sale of the C.D.O.'s, to an investment fund based in Dallas, may enable Merrill to move on, investors said. "'What they sold, from a headline standpoint, is certainly constructive because they have reduced risk in a very sensitive area,' said Thomas C. Priore, chief executive of Institutional Credit Partners, a $12 billion hedge fund and C.D.O. manager in New York."

Well, yeah, business media, Merrill reduced risk. But not by much.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers and a money manager before becoming a journalist who wrote The New York Times' "County Lines" column for six years. He also did back-up beat coverage of The New York Knicks for the paper's Sports section for two seasons and covered other professional and collegiate sports. He has contributed frequently to many of the Times' other sections, including National, Metro, Escapes, Style, Real Estate, Arts & Leisure, Travel, Money & Business, Circuits and the Op-Ed Page. For his "Business Press Maven? column on how business and finance are covered by the media, Fuchs was named best business journalist critic in the nation by the Talking Biz website at The University of North Carolina School of Journalism and Mass Communication. Fuchs is a frequent speaker on the business media, in venues ranging from National Public Radio to the annual conference of the Society of American Business Editors and Writers. Fuchs appreciates your feedback;

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