Notwithstanding most Wall Street traders, it turns out that followers of National Australia Bank’s results last Friday might also have seen the writedowns at Merrill coming.
Notable back then was NABs big $830m writedown on CDOs. NAB, it turns out, was a co-investor with Merrill in a number of deals.
As Crikey reports (HT Yves Smith):
The National Australia Bank’s shock write-down of $830 million worth of collaterallised debt obligations (CDOs) can now be explained.
It was triggered by a move from struggling US investment bank Merrill Lynch to get rid of billions worth of CDOs in which the NAB was a co-investor.
Merrill’s took a decision to sell the CDOs at a written-down value and the NAB had no option but to follow suit. Its larger write-down than Merrill Lynch (90% vs. 78%) reflects its lower ranking of security.
The burning question is who moved first.
Crikey asserts it was Merrill that made the first move: NAB, it explains, was a senior investor whereas ML held the super-senior position. Merrill’s writedown precipitated the other.
Assuming Crikey has got this right - and we have a couple of niggling doubts - a troubling question is then raised.
Merrill’s official line is that agreement on the sale of its position was only made yesterday.
On July 28, 2008, Merrill Lynch agreed to sell…
Yada yada. Barry Ritholtz at the Big Picture recounts a conversation he had with several Merrill traders. That line again:
The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week.
NAB though, of course, wrote down its CDO position last week.
So either Merrill has known for quite a while what its writedown would be (enough time for NAB to calculate its own hit and factor it into its quarterly result announcement) or NAB was the first mover, and cost ML billions.
