Ashish S

Why Merrill's CDO Sale Doesn't Mean Big Writeoffs Elsewhere

Absolutely agreed Tom. Saying every CDO needs to be written down to 22c (or 5c depending on how you view it) is like saying every stock needs to be marked down to $2 (or $10) because that's where BSC went. Ok, not the same .. but u get the idea ..

Merrill CDO Deal: How Can It Book a 'Sale'?

The option analysis is an interesting angle.

For Lone Star, this deal is oddly similar to the deal the Fed gave to JPM for Bear Sterns .. The Fed took all the downside risk after a small sliver of risk taken by JPM and JPM retained all the upside equity.

Additionally, a little noted consideration is that Lone Star is identified in ML's press release as an "affiliate", which usually means that ML has more than a 20% but less than a 50% stake in Lone Star. So a) this means it certainly wasn't an "arms length" price and b) ML may retain a small portion of the equity.

The Mystery of Merrill's Asset Reduction

Felix -- my best guess is that the $29bio number comes from the following ..

CDO notional: $30.6bio
CDO sale amount: $6.7bio
ML's funding commitment on sale: 75%
ML's funding commitment notional: $6.7bio x 75% = $5.025bio
Lone Star's effective equity investment = $6.7bio - $5.025bio = $1.675bio

ML's total loss if CDOs are marked to 0: $30.6bio - 1.675bio = approx. $29bio

The Merrill Shell Game

Hmm .. ML sells $6.7bio worth of super senior ABS CDOs to itself at 20c on the dollar. What on earth is anyone supposed to make out of this?