Skip to main content

Second Thoughts On Merrill's CDO Sale

  • Author:
  • Updated:

The euphoria in financial stocks yesterday seems to have been largely built on the idea of that "cathartic vomit." The idea was that by writing down assets once again and selling off CDOs to Lone Star for 22 percent of their original value, Merrill Lynch had finally purged itself of the junk on its books. Never mind that we've heard that particular tune three times before. Everyone wanted to dance to it again.
But the morning after lots of people are having second thoughts. For starters, Merrill Lynch's financing for the deal is troubling. They put up 75% of the money used to buy the assets, and the loan is apparently non-recourse. This means that if the CDOs drop too much in value, Lone Star can basically put them back to Merrill rather than pay off the financing.
In a report entitled "On Second Thought ... " Bank of America analyst Jeffrey Rosenberg explained that "Merrill now finds itself effectively in the position of having sold off its upside but retaining its downside."
In other words, this alleged sale seems like yet another sleight of hand by Merrill's management, a way to move the CDOs from one column on the balance sheet to another while no one is looking.

Merrill CDO sale not as good as it looks: analyst