Merrill: The Latest Victim of a WSJ Attack

There's definitely a sensationalist edge to the WSJ these days. It's banging the Jimmy Cayne drum for the second day running, with a story misleadingly headlined "CEO of Crisis-Hit Bear Denies He Used Marijuana": for one thing, the Bear Stearns crisis has passed, and for another thing its CEO said nothing about marijuana use specifically.

Meanwhile, the paper is also setting its sights on Merrill Lynch, with a lead story by Susan Pulliam on deals that Merrill Lynch is doing with hedge funds. It kicks off like this:

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

Pulliam spends a lot of time explaining that the deals – where Merrill promises to buy back mortgage-backed securities at prices higher than it paid for them – do not reduce the bank's exposure to those securities. So why on earth does she say at the very beginning of the article that the move is "a bid to slash its exposure to risky mortgage-backed securities" when it clearly isn't?

These deals are clearly about liquidity, not solvency. If I sell $1 billion of mortgage-backed bonds today, and promise to buy them back at a slightly higher price in a year's time, I haven't reduced my exposure to those bonds. But I have got myself $1 billion of cash to play with for the next 365 days, which is a hell of a lot more useful than a billionish of illiquid RMBS.

If you haven't read it yet, do go check out Eric Dash's piece on The Entity which appeared in the NYT yesterday. It's a "stopgap", he explains:

The fund is not a rescue plan. Rather, it is intended to give the SIVs breathing room so they can avoid selling their assets all at once, and perhaps enable a few of them, largely those sponsored by big banks, to work out a survival strategy.
“People get the idea that this is a total solution or a complete rescue,” a person involved in the plan said. “But the goal is actually much less ambitious: it is really to provide an orderly unwind or promote a restructuring.”

If you look at the Merrill deals in this light, they're unexceptionable. But the WSJ seems to be hell-bent on putting anything that a bank does into the worst possible light.

Update: Murray has more detail in the comments, saying that these deals don't improve the liquidity of the bank, since they're confined to off-balance-sheet entities.

Update 2: Merrill has released a formal response to the WSJ article.

This morning, an article in the Wall Street Journal about Merrill Lynch & Co., Inc., relying on unidentified sources, speculated about inappropriate transactions that “may have been designed” to avoid write-downs that “might have been” required earlier in the year. The story is non-specific and relies on unidentified sources. We have no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy.

Update 3: The WSJ belatedly corrects its article.