Merrill Lynch Talked Down From The Ledge

Merrill Lynch smartly decided to hold on to the securities that it seized as collateral for loans from two busted Bear Stearns hedge funds. No sense in dumping these CDOs on the market, but I think what was really at work here is that the industry at large helpfully suggested to Merrill that the current political environment is not an auspicious time to showcase more negative fallout from the subprime lending crisis. The Sausage Factory is currently debating the "Blackstone Tax" in addition to substantially higher and punitive tax increases on private equity and hedge fund compensation, protectionist measures against global trade, higher taxes on energy producers, a 4.3% surtax on high income earners to provide AMT relief, and countless other anti-business, anti-growth policies. Now is hardly the time to draw negative attention to these derivatives markets and investment vehicles. The political risk to economic growth and the investment climate is too great. Whether or not these CDOs are toxic or not, best to take one for the team and lay low. Don't give farm country populist goofballs like Grassley and Baucus any more ammunition to crusade against what they don't understand.

UPDATE: There is alot to this story. One interesting twist is that Bear Stearns's rival banks were probably happy to let Bear twist alone in the wind as comeuppance for its crappy move over the LTCM affair years ago.