Merrill CDO sale not as good as it looks: analyst

NEW YORK (Reuters) - Merrill Lynch's agreement to sell $30.6 billion of toxic securities gives away the bank's potential profits on the securities and leaves it on the hook for most of the risk, strategists at Bank of America wrote on Wednesday.

Merrill Lynch & Co Inc MER.N has financed 75 percent of the sale of the securities, meaning it is on the hook if the assets decline by more than 5 cents on the dollar, Bank of America strategist Jeffrey Rosenberg wrote.

Merrill agreed earlier this week to sell the $30.6 billion portfolio of collateralized debt obligations to private equity firm Lone Star Funds for 22 cents on the dollar, or $6.7 billion.

Analysts, including Rosenberg, initially reacted positively to the deal, and Merrill's shares rose nearly 8 percent on Tuesday, even though the investment bank sold $8.55 billion of new shares to raise capital after selling the assets at a loss.

Citigroup analysts called the asset sale a "watershed event."

But Rosenberg wrote Wednesday that "perhaps the initial euphoria over Merrill's asset sale and capital raise ... overstates the positive implications."

In a report entitled "On Second Thought ... " Rosenberg wrote, "Merrill now finds itself effectively in the position of having sold off its upside but retaining its downside."

Because Merrill is still exposed to losses, the asset sale can't be seen as a sign the financial sector has finally touched bottom as some analysts have suggested, Rosenberg wrote.

Merrill shares rose 63 cents, or 2.4 percent, to $26.84 on the New York Stock Exchange on Wednesday.

(Reporting by Elinor Comlay; editing by Jeffrey Benkoe)