Trading Dead Horses for Dead Cows
One thing regulators discovered during the S&L investigations was that rogue S&L operators were selling their bad loans to each other, magically making them good again because, well, there was a buyer on the other side of the transaction. These crooked thrift chiefs called the practice, “Trading dead horses for dead cows.” On Friday, we learned from published reports, that Merrill Lynch - the Wall Street poster child for this crisis - did something that may not have passed the smell test. According to The Wall Street Journal: “In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return.” This transaction allowed Merrill to book a profit on paper and temporarily off-load a major liability. Andy Fastow would be proud of these guys!
O. Max Gardner III