Merrill Carves Out Distressed Asset Task Force

Mirroring a similar move this week by UBS AG (UBS: 21.38 +2.79%), Wall Street firm Merrill Lynch & Co. (MER: 27.41 +2.54%) is carving out a team of top sales executives to purge distressed mortgage-related assets from the company’s books. The new division, called FICC Asset Management, includes some of the company’s top fixed-income sales leaders and will be headed up by Doug Mallach, the company’s top fixed income sales exec, according to a report Thursday by Bloomberg News.

The new team will look to unload collateralized debt obligations backed by subprime mortgage bonds, as well as ostensibly subprime RMBS and other assets that are now trading for pennies on the dollar thanks to continued mortgage and credit woes in the primary housing market.

Via Bloomberg (which gets Merrill stories early and often, given that the i-banking giant owns a 20 percent stake in the news platform):

Mallach’s appointment is “part of our ongoing effort to optimize our asset and risk profile,” David Sobotka, who oversees Merrill’s Fixed Income, Currencies and Commodities division, wrote in a May 21 memo that was confirmed by spokeswoman Danielle Robinson.

Merrill, the third-largest U.S. securities firm, had about $26 billion of senior collateralized debt obligations — securities formed by pooling mortgage bonds and other forms of debt — as of March 28. Investors are wary of assets linked to mortgages because of the U.S. housing market’s decline, and Merrill has had to write down its CDOs to about 32 percent of their original value, based on an April 17 estimate by Oppenheimer & Co. analyst Meredith Whitney.

CEO John Thain has been on a mission to eradicate bad MBS bets from the Wall Street giant’s balance sheet since taking the helm from ousted CEO Stan O’Neal. While the move isn’t as radical as UBS’ strategy of selling the assets off of its balance sheet to a third party and then looking for market vultures to buy, it’s a clear signal that many of Wall Street’s larger players are now looking to trade some of the more illiquid bonds on their books in an effort to clear the playing field.

Thain had originally begun talking up CDOs as a “good value” during January’s earning call in the hopes hedge funds and other investors might bite, but few funds had jumped into the mortgage-ridden junk bond market until recently.

Even those that are now looking to buy, are doing so “very selectively,” one fund manager told Housing Wire on Thursday.

Disclosure: The author held no positions in UBS or MER when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.