Patrick Harden

Merrill CDO Deal: How Can It Book a 'Sale'?

Just balance sheet sleight of hand at this point. Merrill gets to record a $6.7 billion loan receivable from Lone Star, which requires no reserve until the underlying assets fail to perform and the loan to Lone Star goes delinquent. It's basically a refinancing of troubled debt structured to achieve the best possible accounting treatment.

It is certainly ridiculous to allow Merrill to remove $6.7 billion in toxic assets yet simultaneously provide non-recourse funding to the purchaser. Certainly the $5.025 billion seems to be a contingent asset, but GAAP is awfully flexible at times.