Hedge Funds to Clean Up Sub-Prime Mess

Oct 27, 2007

Hedge funds to clean up subprime mess: Merrill exec

WASHINGTON - THE valuation uncertainty plaguing United States capital markets will be resolved by hedge funds as they pick through the wreckage of subprime-linked investments over the next couple years, a senior Merrill Lynch executive said.

Vice-Chairman Richard McCormack said on Friday the subprime mortgage fallout hit hard when the banking industry realised it could not accurately value complex derivatives tied to the mortgages, which created enormous uncertainty.

'This uncertainty problem is going to be resolved over time when you're dealing with these derivatives,' Mr McCormack told a Council on Competitiveness meeting.

'It's going to be resolved by people at 8,000 hedge funds combing over the wreckage of the subprime ... That process will occur over a two-year period and then we'll have a clearer picture on prices.'

Merrill Lynch, whose shares are down 31 per cent this year, reported on Wednesday the biggest quarterly loss in its history after writing down US$8.4 billion (S$12.2 billion), mostly from bad investments related to risky subprime mortgages.

More write-downs could be coming at Merrill if it further cuts the value of its remaining US$20.9 billion exposure to collateralised loan obligations and subprime mortgages.
Merrill's board is considering replacing embattled Chief Executive Stan O'Neal, who has been blamed for misjudging Merrill's risk exposure, according to media reports on Friday.

A sharp rise in US subprime mortgage delinquencies has rocked financial markets in recent months, tightening credit availability and forcing Wall Street firms to absorb enormous losses on bad investments tied to subprime loans.

Mr McCormack said during the meeting that his industry is not as concerned about subprime problems because 'we can absorb the subprime issue'.

He said large banking firms are now looking at the global economy and potential liquidity problems in other countries that could affect the United States through higher unemployment rates and default rates.

'The key issue that our industry is concerned about at this point is going beyond the subprime issue and making sure we don't have a series of other problems that will be hitting the economy later,' he said. -- REUTERS