Headline risk is something that is difficult to quantify! I appears that Merrill was attempting to smooth earnings and/or create a buffer zone for mortgage-related losses. They moved these losses off balance sheet via repo (repurchase) transactions with some hedge funds, thus avoiding dreaded "mark to market" losses.
Deals With Hedge Funds
May Be Helping Merrill
Delay Mortgage Losses
By SUSAN PULLIAM
November 2, 2007; Page A1
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.
The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer...
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