The Wall Street Journal reported late Tuesday that Merrill Lynch will go ahead with collateral liquidation and dump a troubled Bear Stearns hedge fund tied to subprime mortgages — an ominous sign to say the least.

An auction Wednesday could come as a blow to the fund, known as the High-Grade Structured Credit Strategies Enhanced Leverage Fund, because it could spur additional sales of collateral assets from other worried dealers. A string of asset seizures would likely force the dissolution of the fund, and could effectively drag down the prices of similar securities in the market, creating losses at other Wall Street firms. On the other hand, a handful of successful trades might still pull the troubled fund out of harm’s way, and Merrill could yet change its plans, as it has done once before.

Various news agencies had reported earlier that private equity giant and active restructuring consultant Blackstone Group spent today meeting with Bear Stearns and various Wall Street creditors involved in the Fund, trying to find a solution. It now looks like that solution might at best be one to help save the troubled fund from a complete collapse. Update: It looks like major media has caught onto something I noticed late last week — and that would be the latest free fall of various ABX indices, particularly in subordinate tranches from the 2006-2 and 2007-1 series. Click here to see the various indices for yourself. The continued drop suggests most insiders are betting on the troubled Fund’s outright collapse. If that happens, IMHO, an unprecedented ABS bond market crunch might be in the offing — sort of like day follows night, subprime losses are going to have to leave someone holding the bag.