We’ve already described how Merrill (MER) sold $30.6 billion of mortgage CDOs to Lone Star for about 22 cents on the dollar–with another 16.5 cents paid for by a loan tied to the value of the CDOs. So it really sold them for about a nickel, with the rest to come if the value of the securities doesn’t collapse.
But now Floyd Norris tells us that the deal is even worse: Lone Star has the right to put the securities back to Merrill. This means that, not only is the firm still exposed to further losses on the CDOs, it might actually have to take them back. Anyone have the details?
Here’s Floyd in the IHT:
We know that Lone Star, the fund buying the CDOs, has the right to send them back to Merrill, which would keep only the down payment. But we don’t know how long the fund can delay making that decision, or how much interest it might be able to earn before sending the CDOs back. So it is hard to judge the extent of Lone Star’s risk.