After the binge comes the purge. Merrill Lynch (MER) announced after the close of trading on July 28 that it had sold $11.1 billion in collateralized debt obligations (CDOs), or nearly 60% of its exposure to mortgage-related securities, to private equity firm Lone Star Capital Management for $6.7 billion as part of its latest effort to repair its tattered balance sheet.

At the same time, Merrill reduced its exposure to troubled XL Capital (XL) and other bond insurers, who provided insurance on Merrill’s CDOs. This “purging of assets,” as Oppenheimer (OPY) analyst Meredith Whitney described the sale in a July 29 research note, places the Wall Street stalwart closer to the end of its mortgage related troubles.

NOw, The Prez and McCain have flatly stated that speculation would not be rewarded.  Does that mean, if things turn south will the company that bought the troubled loans be part of the bailout?  The buyer is gambling that things will get better–that is speculation in my book.