Sale of Mortgages, Structured Products Might Kick Off This Coming Week

Merrill Lynch is planning to sell roughly $4 billion of distressed debt securities, including mortgages and complex investments, in a bid to cut its exposure to risky assets.

The financial institution joins a growing list of banks, hedge funds and large investors seeking buyers for their hard-to-sell assets as the global economic downturn threatens to further erode the value of debt investments.

The need for investors to reduce the amount of borrowed money used to fund their holdings is behind the growing number of such distressed asset sales. In the past three weeks, the total amount of debt circulated for auction in Europe and the U.S. has surpassed $12 billion.

Merrill, which is being acquired by Bank of America, is looking to sell its distressed assets by year end, according to a person familiar with the matter. Potential interested parties have already received sale documents, suggesting that the bank might start selling some of the debt this coming week.

Merrill's plans, and the auctions of debt that proceeded it, come as the U.S. Treasury is setting up its plan to buy toxic assets from qualifying banks, and possibly other institutions, under its Troubled Asset Relief Program. No start date has been confirmed, but applications for assistance are due by midmonth.

In the open market, many of the debt holders circulating their assets for sale in so-called bid lists have found buyers for a third or less of the total offered.

Merrill Lynch is expected to include mortgages and structured products, such as collateralized debt obligations, in its asset sale, according to people familiar with the matter. This type of debt has become increasingly hard to value since the market dried up more than a year ago.

In July, many had thought Merrill had put the bulk of its toxic-asset problem behind it when the bank sold CDOs originally valued at $30.6 billion for just $6.7 billion to private-equity firm Lone Star.