Thain Says CDO Market Is Not Coming Back

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Bearish skeptics of the CDO write-downs have raised concerns that Wall Street banks may still be too confident that the market for CDOs will recover soon. They've accused banks of holding CDOs at above market value based on a belief that the market is facing a temporary, unprecedented "squeeze" rather than a fundamental shift in the risk outlook for these assets.
On today's call, John Thain made it clear that Merrill Lynch is taking the opposite position. When asked by an analyst at CItigroup about the deeper than expected write-downs, Thain replied that in Merrill's view it is unlikely that the market for CDOs is going to recover. He said that the "fundamental assumptions" related to home prices and mortgage defaults had changed. In short, the problem is not a short-term liquidity squeeze but a new view of underlying value. Forget the credit crunch. This is a real shift of economic reality.
Thain also displayed a very detailed understanding of the loss assumptions that underlie Merrill's write downs, noting that the firm is using cumulative loss assumptions on the mortgages underlying asset backed securities of between 16 and 21 percent. This is not quite a "sky is falling" assumption but it is relatively conservative and shows that Merrill is certainly not, to mix metaphors, following the pie-in-the-sky, temporary squeeze assumptions that informed, for instance, Stan O'Neal's comments on last quarter's earnings call.

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