Merrill’s CDO’s Actually Sell for 5.47 Cents on the Dollar!

Posted on July 29th, 2008 in Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research

Thank goodness for Ritholtz.  He makes my job easy sometimes.  This is a direct re-post for Barry’s ‘Big Picture’  blog.

Actual Merrill CDO Sale: 5.47% on the Dollar

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.

Now go to The Big Picture site to see how this story ends since I do not have permission to re-post.

11 Responses to “Merrill’s CDO’s Actually Sell for 5.47 Cents on the Dollar!”

  1. Merrill Lynch is a DOG.

  2. Wow!!!

    I guess the NAB was right…

    Can it get worse? You betcha! Massive resets are about to start taking place very shortly and the best part of the RE selling season just went bye-bye in our rear view mirror with barely a whisper…

    Most of the mark to fantasy paper is worthless… go figure!!!

  3. Well the dog is going up strongly today, as all the bunch. Nothing to figure. It’s the too big to fail syndrome and the no more Bear Stearns strategy. Finance is a lot about an illusion. Amortize all the mess on 30 years, print full throttle, and the crisis vanishes. See. Market to fantasy works when you are a bank.

    These people have special privileges. Regrettable.When I screw up with my investment, I can’t say. Ah well ! Go and get some more cash, or a little whore in Washington or Bejing or Dubai, and everything will be fixed up. From now on it’s up up up up and away for the banks. You will see.

  4. So…WTF effect does all this have on real estate prices when the storm settles?

  5. Well not on real estate directly, not for the moment anyways, but on the taxpayer. Absolutely.

    There is good chance that real estate will go even further down. We were talking abour how the financials will be bailed out, while their borrowers and the country’s citizens get schafted by an incredible deficit and fantastic taxes. That the relation WTF.

  6. And it’s not even a real sale. A sale financed by Merrill themselves. What a bunch of jokers !

  7. […] Merrill’s CDO’s Actually Sell for 5.47 Cents on the Dollar! […]

  8. Please tell me how you figure this is 5.47 cents on the dollar. I get about 22 cents. 6.7/30.6 = 21.89%.

  9. 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

    However:

    • 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 !

  10. […] Everyone already knows about the Merrill 5.47 cents on the dollar CDO deal that just went down. In case you missed it her e is the link. […]

  11. […] Barry Ritholtz is under the impression Merrill actually sold at 5.47 cents on the dollar when you factor in the […]

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