Wednesday, March 19, 2008


Well what a difference a day makes. It didn't take the market long to realize that yesterdays "fixes" do not solve our markets issues. I could write a book based on todays action but I will try to limit it to a few things tonight.

One of the biggest news items of the day was the Merrill Lynch suing XL. XL is one of the bond insurers that sold insurance to the banks on CDO's. Other insurers include Ambac and MBIA. You have seen these "monolines" in the news a lot recently because many contend that they should be downgraded from AAA status. If this happened the banks were going to have to writedown a significant portion of the CDO's that these monolines insured. I think the nummber was somewhere around $70 billion in writedowns.

These insurers have been able to keep their AAA ratings through raising capitol thus preventing Wall St. from having to writedown the CDO's that were insured by these companies. Well today XL tried to back out of $3 billion in CDO's they insured for Merrill and Merrill responded with a lawsuit. This news is HUGE. If the monolines start backing out of this protection then you could see a whole new set of writedowns from the banks. The monolines most likely do not have the money to payout the claims. Merrrills take on XL's move:

``Apparently in light of the current dramatic downturn and deterioration
in the credit markets, defendants are having `sellers' remorse
,' ''
Merrill said in the complaint filed today in Manhattan federal court."

Folks, this is something to keep a very close eye on. Forget the lawsuit for a second. If the banks like Merrill think that the monolines cannot afford to pay these claims they may write CDO's off anyway because they don't want the risk on their books. The capital the monolines had versus the trillions in bonds they insured was ridiculous so I expected this to end ugly in some capacity. I didn't expect the mono's to just walk away. How ironic is it that the monolines are doing the same thing homeowners are??

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