Merrill said to hide losses behind hedges

Merrill Lynch & Co. has been hiding its mortgage losses through deals with hedge funds, sources told The Wall Street Journal. In recent weeks, Merrill Lynch has been asking the hedge funds to take on mortgage-related securities, which would keep losses temporarily out of sight, insiders said to the Journal. This may have caught the Securities and Exchange Commission’s eye: The report said that the regulatory body is inspecting the firm to see how it has been valuing its mortgage securities and whether it knew that its mortgage problem was larger than it had let on this summer. A spokesman for the SEC would neither confirm nor deny the existence of an investigation. In one deal, a Merrill Lynch entity sold off $1 billion in commercial paper to a hedge fund, a source told the Journal. The hedge fund can sell the assets back to Merrill Lynch after one year for a guaranteed minimum return, an insider said to the Journal. If the Merrill entity were unable to sell the commercial paper to investors and incurred a loss, Merrill Lynch may have had to take a writedown on its own balance sheet, but such a deal would postpone that risk for a year, the insider said. Merrill Lynch responded to the story by releasing a statement that reads, in part: "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. "