Wednesday, June 11, 2008

The monolines next shoe drops

Merrill Lynch won a $3.1 billion dollar judgement against XL Capital:

US District Court judge ruled on Tuesday that Security Capital Assurance Ltd’s XL Capital Assurance unit will have to stand by $3.1bn of guarantees on collateralized debt obligations, in dispute with Merrill Lynch.

Judge Jed Rakoff in a summary judgment ruled that Merrill Lynch International had not repudiated its obligations under seven credit default swaps it entered with XCLA, and that XLCA’s attempt to terminate those swaps was invalid.

Anyone want to bet that Merrill Lynch will put XL Capital debt into Level 3? The banks have further exposure to these monolines; here it's estimated to be $10 billion.

Meredith Whitney, analyst at Oppenheimer, said in a report this week that UBS had the largest exposure to monolines of $6.3bn, Citigroup came second with $4.8bn and Merrill Lynch followed with $3bn.,dwp_uuid=b6abe56e-d0c2-11dc-953a-0000779fd2ac.html

Meredith is speaking today. Watch for more bearish news:

Here's the problem. Everyone knows these CDO's are junk. So the firms mark down the CDO's, but they mark up their hedge against them because of the AAA rating of the monolines.

But that's just Wall Street's scam. If the rating was worth anything, why are the CDO's trading as if they don't have a rating? So mark up your hedge to offset the loss.

As Merrill, found out, these guarantees from companies with hat size stocks prices aren't worth much.

Now we saw headlines that the banks overseas were going to have to take tens of billions of more write downs.

And just coincidentally, these banks across the pond were big buyers of this insured paper.

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