July 30, 2008 / 9:49 PM / 10 years ago

Merrill Lynch 2007 CDOs under water: consultant

NEW YORK (Reuters) - Merrill Lynch & Co Inc MER.N repackaged debt deals from 2007 have all performed poorly, which the bank should have predicted based on what was going on in the mortgage market at the time, consultant Janet Tavakoli said on Wednesday.

Tavakoli said in a report to clients that of the 30 collateralized debt obligations (CDOs) Merrill sold in 2007, every one has either had its best-rated portion cut to junk, is in technical default, is being liquidated, or is in danger of being liquidated.

The poor performance suggests that Merrill was underwriting deals it knew or should have known were bad, Tavakoli said. That underwriting, combined with similar moves from other banks — has shaken investor faith in CDOs, Tavakoli wrote in the report. Her company is Tavakoli Structured Finance Inc.

Merrill Lynch spokesman Mark Herr declined comment.

“Investment banks have a huge credibility problem when trying to explain that they ‘didn’t know the gun was loaded,” Tavakoli wrote.

Additional disclosure of loan data is not enough to jump start the securitization market, Tavakoli said, adding that the risks embedded in these securities were disclosed in the prospectuses.

“It is one thing to have documents that disclose risks ... it is quite another to bring deals to market that you knew or should have known were overrated and deeply troubled the day the deal closed,” Tavakoli wrote.

ABS CDOs underwritten by Merrill Lynch in 2007

(All data is as of June 10) Estd Deal Name Manager Appx. Size Status Closing (in millions) 1/11 Lexington Cap Fundg III Harding Advisory 1,212.00 Toast** 1/24 Port Jackson CDO 2007-1 Basis Capital 350.00 Toast** 1/25 Highridge ABS CDO I ZS Structured Credit 1,500.00 Acceleration**

Capital Mgt 2/21 Maxim High Grade CDO I Maxim Capital Mgt 2,000.00 EOD** 2/27 Broderick CDO 3 SCM Advisors 1,500.00 Acceleration** 2/27 Kleros Real Estate CDO IV Strategos Capital 1,000.00 Undeclared EOD

Mgt 3/1 Norma CDO I NIR Capital Mgt 1,500.00 Acceleration** 3/8 Maxim High Grade CDO II Maxim Capital Mgmt 2,000.00 EOD** 3/8 Newbury Street CDO Ltd. Mass. Fincl Svcs. 2,000.41 EOD

Inv 3/9 South Coast Funding IX TCW Asset Mgmt 540.00 Toast** 3/27 Euler ABS CDO I Babcock and Brown 675.00 Toast** 3/27 GLACIER-V Terwin Money Mgmt 498.50 Toast** 3/29 Lexington Capital Funding V Harding Advisory 615.00 Toast** 3/29 Libertas Preferred Strategos Capital 500.00 Toast**

Funding IV Mgt 3/29 Silver Marlin Sailfish Structured 1,250.50 EOD

Inv 4/3 Kleros Preferred Funding VII Strategos Capital 1,498.00 EOD**

Mgt 4/5 NEO CDO 2007-1 Harding 300.00 Liquidation** 4/11 Forge ABS High Grade CDO I Forge ABS LLC 1,503.50 EOD** 4/12 IMAC CDO 2007-2 Ivy Asset Mgmt 500.00 Liquidation** 4/18 Mars CDO I Chotin Group 618.50 Acceleration** 4/26 Brookville CDO I Petra Capital 499.00 EOD** 4/26 Fourth Street Funding Ltd N.I.R. Capital Mgmt 500.50 Acceleration** 4/26 Western Springs CDO Deerfield Capital Mgt. 495.60 Acceleration** 5/3 Jupiter High Grade CDO VI Harding Advisory 1,501.10 Toast** 5/10 Tazlina Funding - II Winter Group 1,500.00 EOD** 5/25 West Trade Funding CDO III N.I.R. Capital Mgmt 2,500.00 Toast** 6/1 Robeco HG CDO-I Robeco Investment 1,100.55 Toast**

Mgt 6/7 Durant CDO 2007-1 SCM Advisors 400.00 Liquidation** 7/26 Biltmore CDO 2007-1 ING Clarion Capital 1,000.00 EOD** 8/28 Bernoulli High Grade CDO-II Babcock and Brown 1,500.00 Acceleration**

**means the topmost “triple A” tranche of the CDO has been downgraded to junk.

EOD, an event-of-default, means the CDO is in technical default. Investors or other parties involved in the transaction may then request ‘acceleration’, meaning the principal and interest becomes due and payable immediately, or liquidation, in which case the CDO’s collateral is sold.

Tavakoli ascribed the status ‘Toast’ to CDOs for which all the originally “triple A” tranches have been downgraded below investment grade by at least one rating agency.

Reporting by Elinor Comlay

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