“Merrill has been making the rounds asking hedge funds to engage in one year off balance sheet credit facilities. One fund claimed that Merrill was offering a floor return (set buy back price).”
– Janet Tavakoli (subscription required), Derivatives Consultant, Client Note
In order to reduce the mortgage backed security exposure it reports to investors, Merrill has apparently been trying to get hedge funds to lend some of its off balance sheet vehicles holding mortgage backed securities money, while guaranteeing these hedge fund a fixed return, in order to avoid having to take these securities onto it’s own balance sheet and mark them down, according to a front page Wall Street Journal article today (“Deals With Hedge Funds May Be Helping Merrill Delay Mortgage Losses”, (subscription required)).
Bear Stearns has engaged in similar dealings.
Let’s just say this kind of thing doesn’t engender trust that the investment banks are coming clean about their actual exposure to these risky investments.
Merrill’s (MER) shares are down 8.63% on the story and other investment bank shares are down as well.
Because of this, markets are off to a shaky start on what otherwise would have been a strong open on the strength of the October Jobs Report which showed an increase of 166,000 jobs in October.
I give about as much credence to these government reports as I do to clouds that supposedly take the shape of Jesus Christ, but according to the report Construction Jobs fell by only 5 million in October (maybe because 50% of the workers in this industry are illegal immigrants!) and Real Estate Jobs increased by 2.8 million.
Some of the strongest areas were Temp Jobs, up 20 million, Health Care Jobs, up 34 million, and Food Service and Drinking Places Jobs, up 37 million. Now there’s a booming job market for you!