Thursday, March 20, 2008

Merrill's $3.1 billion dollar loss

Merrill Lynch sued XL Capital for $3.1 billion today. Here's the Bloomberg story:

Merrill Lynch & Co. sued XL Capital Assurance Inc. to force the bond insurer to honor $3.1 billion of guarantees on collateralized debt obligations as the securities firm attempts to avoid more writedowns of mortgage-backed debt.

"We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations," Mark Herr, a spokesman for New York-based Merrill, said in an e-mailed statement today.

Why didn't Merrill just sue the neighboring homeless man? Anyone check the price of XL Capital's parent, SCA? It's at .79. With a $50 million market cap.

And they're going to collect $3.1 billion? Anyone think the rating agencies are going to pay the bill for XLCA?

Or you can just read the SEC filings. Here it is on page 46:

While XLCA was solvent as of December 31, 2007, it would be an event of default under certain of the CDS contracts insured by XLCA, if XLCA should become insolvent or placed into rehabilitation, receivership, liquidation or other similar proceeding by a regulator. If there were an event of default under these CDS contracts insured by XLCA, as a result of XLCA’s insolvency or otherwise, while the event of default continued the holders of these CDS contracts would have the right to terminate the CDS contracts and to obtain a termination payment from the trust, guaranteed by XLCA, based on the market value of the CDS contracts at the time of termination. Under current market conditions this would result in a substantial liability to XLCA which would be in excess of its ability to pay.

Now the pretending is over. XLCA's guarantee, on their contracts will be worth nothing. And Merrill will have to have another capital raise, at a discounted price to the common stock.

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