Merrill vs Bear: Two Contestants, No Winners

You may have overlooked this short but fascinating column in Bloomberg yesterday:

"Merrill Lynch, founded in 1914, sold hundreds of millions of dollars worth of collateralized debt obligations to hedge funds run by Bear Stearns, started in 1923.

Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds’ CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what’s known in the debt markets as a margin call.

Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.

In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices."

Now, that’s a pretty straight forward tale of a creditor pressing a debtor for additional (contractually required) collateral. The sale actually caused a "Mark-to-market" event that forced actual (versus modeled) pricing to occur.

But what makes this tale so unusual is the sprawling nature of the big Wall Street supermarkets investment banks: It turns out that of the many companies affected by this market pricing, one of them turns out to be Merrill:

"Among those that lost value: $23 billion of CDOs Merrill held on its own books. In October, Merrill wrote down the value of all of its mortgage-backed holdings, including CDOs, by $7.9 billion and declared a loss for the third quarter."


But it was inevitable: The more diversified each firm becomes as they expand, the more the entire financial ecosystem looks like one giant iBank.

Expect to see more of this sort of thing in the future . . .


In Unforgiven Margin Call, Bear Funds Failed on Merrill CDOs 
Yalman Onaran
Bloomberg, Jan. 3 2008

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