Tuesday, July 29, 2008

More than a little irony

As you have no doubt heard by now, last night Merrill Lynch sold +$30 billion in mortgage backed securities for $.22 on the dollar. Personally, I think this is a big deal for several reasons. First, it forces other CDO holders to mark their securities down to $.22 on the dollar (read: More write downs to come). Second, I am guessing this is close to the floor for markdowns on CDOs, after all, how much lower can the price go after a 22% mark down?

But what I find interesting is that Merrill sold the approximate $6.7 billion in CDOs, to a buyer who paid only 25% down with Merrill financing the balance. Now admittedly this is better than the 100% home financing that got Merrill into this situation, but the 100% home financing was in a rising home price market, whereas the 75% financing of the CDO's are in a declining CDO price market (Merrill valued these CDO's at +$11 billion only 28 days ago). So will Merrill soon be foreclosing on the CDO's that it just sold, while the CDO's are foreclosing on the underlying homes?

Paul

6 comments:

sacramentia said...

I think this says a lot more about Merrill's financial situation than the CDOs.

Sold in '05 said...

Just a little calculation...

22 cents on the dollar is an 88% discount.

Maybe they will run a coupon special for 90% off next month!

Husmanen said...

Wait, isn't that a 78% discount? Still going strong...

Patient Renter said...

isn't that a 78% discount? Still going strong...

Lol. Mish astutely pointed out that while Merrill has raised $30 billion since December, their market cap is only $24 billion.

Hmmm...

Gordon Gekko said...

what we don't know is what this CDO was made up of. If they were 2nd liens in CA and FL made in '06, then they are worthless. You don't know if 22 cents is cheap unless you know what you're buying.

G Spot1 said...

A definite nightmare scenario for the banks. They can maintain the fiction that their toxic waste isn't all that bad as long as no one is actually out there buying and selling the stuff. But having market prices forces write-downs.

I assume this was all residential mortgages? With all the bankruptcies that have or will happen (Mervyns....) commercial is about to go to bad to catastrophically bad.