By writing down the value of $30 billion in CDOs to the tune of 22 cents on the dollar, Merrill Lynch may have positioned itself to begin moving beyond the subprime mortgage crisis. The action, which some believe may set-off a chain of similar discounts, can’t be easy for Merrill’s shareholders, but it does, at least, put a price on some of the previously impossible-to-value debt obligations.
Now we’ve got to watch and see if Citi, UBS, Lehman, and whoever else, follows suit. There are buyers out there willing to take this kind of debt off the banks’ hands at that price. It ain’t pretty, but it may mean a fresh start. And right now, the banks desperately need to get out from under it.
It is a tough but good move by Merrill.
Update (7/30/08): This deal is looking less good. Merrill has apparently given up all profits, but remains on the hook for potential losses because they lent most of the purchase price to the private equity firm (Lone Star Funds) that bought the CDOs. D’oh! Read about it here.