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Thursday, January 17, 2008

Merrill: $16.7 Billion in Write-Downs

by Calculated Risk on 1/17/2008 09:32:00 AM

From the WSJ: Merrill Lynch Swings to Loss Amid Deep Write-Downs

Lynch & Co. matched Citigroup Inc.'s massive fourth-quarter net loss, as the company recorded a total of $16.7 billion in losses related to subprime mortgages and complex debt instruments ...

The losses include, among others, a $9.9 billion write-down on collateralized debt obligations, or CDOs, a $1.6 billion write-down in subprime, and a $3.1 billion write-down related to exposure to shaky bond insurers.
From the conference call (Brian's notes):
$11.5B write down related to ABS CDOs and sub-prime residential mortgage mortgages

$3.1B credit valuation adjustments related to hedges with financial guarantors (only ACA – 100% reserved vs ACA exposure)

Net exposure to US ABS CDO totaled $4.8B, down from $15.8B q/q reflecting $9.9B of writedowns and $1.1B of other changes – majority of writedowns were related to high-grade, super senior ABS exposures primarily with 2006 collateral. They are assuming 16-21% cumulative loss assumptions on the underlying loans. Made a comment that a number of the CDOs values were approaching IO value. On average mezz CDOs valued in the mid 20 cents on the dollar vs low 60s at 9/30.

Remaining US ABS CDO Net Exposure:

Super Senior:

High Grade $4.4B

Mezz $2.2B

CDO^2 $271MM

Less:

Secondary Mkt Hedges $(2.0)

Total Net exposure $4.8B

Their gross supersenior long exposure to CDOs (ex hedges) is $30B

They have $13B of notional credit default swaps with AAA (for now) rated Financial Guarantors – there is a chart which lays out adjustments that I don’t understand. There is a foot not that says they have bought $2B of CDS on the Financial Guarantors themselves.

Residential mortgage exposures (excluding securities):

Subprime $2.7B

Alt –A $2.7B after $400M write downs vs 9/30 value of $3.0B – a 13% haircut on the mortgages themselves!

Prime $28B

Int’l $9.6B after $500M write down vs 11.8B value at 9/30

Mortgage Securities Portfolio (including assets in conduits that are not on balance sheet – so these will not foot with totals)

Subprime MBS $4.1B

Alt-A MBS $7.1B

CMBS $5.8B

Prime MBS $4.2B

$18B CRE net exposures, $230MM writedowns this quarter – Thain said they were “very comfortable” with the portfolio

$18B leveraged finance commitments vs $31B at 9/30. Writedowns of $126MM this Q. Thain said the leveraged loan portfolio was one of the positive surprises since he came on board.

Thain says it is “not likely” that ABS CDO values are likely to recover.