Front-page coverage on today’s Wall Street Journal details Merrill Lynch’s effort to offload mortgage-backed assets to various hedge funds in an effort to cap its exposure to the — ahem, shall we say volatile — secondary markets. From the Journal:

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said. The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or “marking,” its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer. 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 person said.

Nobody wants to hold the hot potato right now, obviously. But if Merrill’s playing a little game of hide-n-seek with potential losses, they must not have done a very good job hiding. Either that, or there are far more ghosts in this machine than anyone thinks.