Merrill sold their CDOs for 6% not 22% of notional value

Discussion in 'Wall St. News' started by W4rl0ck, Jul 30, 2008.

  1. W4rl0ck


    Someone pointed this out to Barry Ritholtz. More write downs to come -
    An active trader pointed us to this very familiar looking off-balance sheet shenanigan found in the following paragraph regarding Merrill's CDO Sale.

    Direct from yesterday's press release:

    "On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

    On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. . .

    Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days."

    Let's take this apart:

    • Merrill appears to be moving $30.6 billion dollars of bad paper off of their books.

    • This paper was carried at a value of $11.1, meaning there was almost $20B in prior related write downs.

    • After this transaction, Merrill’s ABS CDO exposure in theory drops from $19.9 billion to $8.8 billion (hence, the $11.1B number).

    • The $6.7B purchase price relative to the $30.6B notational value is 21.8% on the dollar


    • Merrill is providing 75% of the financing –- and MER’s only recourse in the event of default is to retake the CDO paper back from the buyer.

    • While Merrill hopes to be made whole, the reality is they still have potential exposure to these ABS CDOs via the financing;

    • Actual sale price = 5.47% on the dollar

    Less than five and half cents on the dollar? That's an even cheaper sale than originally advertised.

    What this transaction actually accomplishes is getting the paper -- but not the full liability -- off of Merrill's books.

    How very Enron-like !
  2. Man, what kind of scum did they lend money to?

    All this rancor for the banks, and not a word about the lowlife trailer trash that won't pay their bills.

    This is what's wrong with America.
  3. <i> All this rancor for the banks, and not a word about the lowlife trailer trash that won't pay their bills.</i>

    The "lowlife trailer trash" are exercising their contractual rights to walk away from the loan. To try to take away that right ex post facto is anticapitalist and un-American.

    Mortgage loans are non-recourse in most states. In essence that is precisely the same way this Merrill deal is structured. Merrill has no recourse on their loan other than the underlying CDO assets, just as mortgage lenders have no recourse other than the underlying real estate.

    If Lone Star Funds defaults these CDOs back to Merrill, that's just business. But if a debt stricken homeowner defaults his subprime mortgage back to the lender, they are lowlife? Talk about double standard.

  4. That kind of thinking is what got us into this mess.

    Trailer trash that figured they could walk away if the house didnt double.

    I say, you bought it, you own it.

    Your reliance on a technicality for your argument emphasizes its feebleness.

    I guess its ok to buy a stock on margin, and when it goes to zero overnight, stiff the broker for the other half.

    Bring back public hanging.
  5. Close, but no cigar.

    The thinking that got us into this mess was the lenders who forgot that housing prices can go down as well as up, and recklessly abandoned the proven underwriting standards that would have protected their investment.

    The fact that mortgages are collateralized only by the value of the house isn't a technicality, it's the bedrock principle underlying mortgage underwriting.

  6. They didn't forget a damn thing and you should know it.

    They knew only one thing, they got their money up front. Look at that pimp Mozillo. He got a billion + out before it imploded.

    You fall for the 'we didn't know' act too easily.

    They knew full well it was a scam.

    Now even you know.

    There's no FEAR of reprisal.

    Bring back public hangings.