Buried amid a rather dismal set of numbers from Merrill Lynch on Thursday, proof positive that the ailing monoline bond insurers have the potential to inflict further pain on the Wall Street banks.
The headline writedown taken by the bank, at $14.1bn, came in (just) shy of the worst of the predictions made earlier this week, though it takes the total value written down last year to about $23bn.
But if Merrill’s troubles were simply what has become standard fare, charges related to ABS CDOs and subprime mortgages, the figures would have been $11.5bn.
But the bank also took “credit valuation adjustments of $2.6bn related to hedges with financial guarantors on US ABS CDOs.”
These amounts reflect the write down of the firm’s current exposure to a non-investment grade counterparty from which the firm had purchased hedges covering a range of asset classes including U.S. super senior ABS CDOs.
What remains unspoken is the identity of said counterparty - but look no further than ACA, downgraded by S&P from A to CCC last month.
The details of the Merrill write-down are in this appendix - which puts the bank’s total exposure via credit default swaps purchased from the monolines as protection for super senior CDOs at $19.9bn, of which $6.7bn is now with a counterparty deemed non-investment grade: ACA.
The other writedowns break down into $9.9bn on ABS CDOs, taking Merrill’s total exposure to $4.8bn, and $1.6bn on subprime residential mortgages, taking the bank’s exposure to $2.7bn.
