Posted on 03/20/2008 9:13:39 AM PDT by TigerLikesRooster
Merrill Lynch sues bond insurer over deal terminations
Stephanie Baum
20 Mar 2008
Merrill Lynch has filed a lawsuit over a bond insurer in the latest sign of tensions in the structured credit markets.
Merrill contends that XL Capital Assurance, a monoline insurer owned by Security Capital Assurance, improperly terminated seven credit default swap contracts insuring collateralized debt obligations, according to its suit filed in the US District Court in the Southern District of Manhattan.
Credit default swaps are contracts that offer insurance against default.
Collateralized debt obligations pool together bonds or asset-backed securities and slice them up into tranches with varying levels of risk.
The seven credit default swap contracts carry an aggregate value of $3.1bn (€1.9bn) and were executed between January and August of last year.
A spokesman for XL Capital confirmed the company canceled six credit default contracts on February 22 and one on March 6.
The spokesman said: “We believe that the terminations were appropriate and effective.”
Merrill said in a separate statement that it seeks a a court order that each of the credit default swaps remains in full force. The brokerage alleges in its suit that XL Capital is trying to avoid its financial obligation based entirely on “rank speculation.”
The Merrill Lynch statement said: "Apparently, in light of the current dramatic downturn and deterioration in the credit markets, defendants are having 'sellers' remorse' and are seeking to avoid their potential obligations of up to approximately $3.1bn under the credit default swaps at issue."
Merrill Lynch was forced to make an $11.5bn writedown on CDOs for 2007 and could make more writedowns this year.
Standard & Poor's Ratings Services has estimated that writedowns of mortgage backed securities could reach $285bn globally.
Ping!
fyi,
Fannie Mae and Freddie Mac were both upgraded today.
lmao.
Anyone know where a sample copy of a derivatives contract can be found?
Are you suggesting they were not AAA?
Or did some tout sheet declare them a buy?
This coulkd pose a bad situation if XL was to win. Why because Citigroup has alot of CDO’s they have not written off insured, if this was to take place it would put alot of pressure on Citi, because of its capital requirements. Merrill on the other hand has written most of this off, and if all of its agreements with issurers failed it would only be out another 3.5 billion.
Yes, but it would be hard for a non institutional investor to get one. Plus they are very complicated, one must understand the repo agreements within them, the collateralized debt, and the means on leverage
I’m suggesting that the outperform rating is absolutely crazy in this financial environment.
WASHINGTON (MarketWatch) — Fannie Mae (FNM:Fannie Mae
News, chart, profile, more
Last: 34.05+3.35+10.91%
12:43pm 03/20/2008
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
FNM 34.05, +3.35, +10.9%) and Freddie Mac (FRE:Freddie Mac
News, chart, profile, more
Last: 32.35+2.46+8.23%
12:43pm 03/20/2008
Delayed quote dataAdd to portfolio
Analyst
Create alertInsider
Discuss
Financials
Sponsored by:
FRE 32.35, +2.46, +8.2%) were upgraded to outperform by Keefe, Bruyette & Woods on Thursday, a day after the companies’ regulator said it was reducing their capital surpluses. Analyst Fred Cannon also predicted both stocks could jump 50% from their current levels over the next year. Shares of both companies were recently trading about 8% higher.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.