Merrill's CDO pain

5 October 2007 By Rob Cox Follow @rob1cox

Now it s clear why heads are rolling: $5bn of writedowns related to CDOs, subprime and LBOs more than any other Wall Street firm. Stan O Neal has replaced some of his henchmen. But the Merrill boss bears ultimate responsibility for directing a strategy that backfired.

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Merrill said on October 5 that it would take $4.5bn of writedowns, net of hedges, on CDOs and mortgages and another $463m net of fees on buyout loans. Stan O'Neal, the chief executive, said market conditions had been "unprecedented", but added that he was "disappointed". "We can do a better job in managing [structured finance and mortgage] risk, as we have done with other asset classes," he said.

Fitch put Merrill's credit ratings on negative outlook. "Fitch's rating thesis was based on a belief that the company had sufficiently robust risk management and limits around [the CDO and other] businesses to address any incremental risks. However, the size of the loss and sudden departure of key fixed income executives indicates that this may not be the case," the rating firm said.

Merrill previously sacked Osman Semerci, the head of fixed income, currencies and commodities, and Dale Lattanzio, head of structured credit products. The new head of FICC is David Sobotka, who had been running Merrill's commodities business. Merrill has been the number one issuer of mortgagebacked CDOs since 2004.

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