The New York Times has a fascinating article detailing how Merrill Lynch was able to hide $31 billion in toxic CDO assets off balance sheet beginning in early 2006. During the housing bubble of 2002-2007 Merrill made big money packaging mortgages and selling CDO's to investors. If the firm was unable to sell certain tranches of a CDO they would normally go to AIG to buy some credit protection, but in early 2006 AIG stopped selling credit protection on risky assets backed by mortgages. This left Merrill with a serious problem and left them exposed to billions in possible losses. To solve the problem, Merrill created a special purpose vehicle called Pyxis, which issued short term debt backed by the cash flow from the CDO's. But as the New York Times points out there was a catch:
