“Lone Star owns Accredited Home Lending, which was formerly the 10th-largest subprime issuer, so it has some assumptions and some knowledge. It certainly wasn’t pantsed. That means we now have a legit benchmark that could get this stuff off the sheets of all of these firms. “

First: since this paper is valued at 22c on the dollar, presumably at least some pieces are paying interest. I would bet big money that Lone Star is receiving (unless and until more pieces of the paper default) more money on the debt it purchased, than it is paying Merrill to own it through the seller financing, month by month. Merrill is paying Lone Star to take the debt off its hands and Lone Star is benefitting from positive carry.

2. As I read the press release, it only mentioned super-senior debt. Does MER hold any junior debt of RMBS or equity tranches still? If the super-senior debt is valued at 22c on the dollar, how do they value EQUITY tranches for crying out loud?

3. On the other hand MER does mention credit enhancements by monolines and “highly rated entities.” Perhaps MER is calling this paper “super-senior” by virtue of credit “enhancement,” while it might actually hold junior rank within its respective capital structures? Then it’s possible that what we are really seeing, is MER scrambling to get the debt off its books before the unmentioned monolines finally get their inevitable downgrades and are forced into runoff mode.

I think the math is wrong on this blog post.

The difference between $48/share and $23/share is $25/share. So under the previous agreement MER should be paying Temasek $25/share for 150million shares right?

And yes, Fannie’s and Freddie’s limits were raised to allow them to buy jumbo mortgages. It is really like a fun-house.

Can someone explain who thinks it is a good idea to prolong the misery this way? I feel as though Cox must be interviewing his way through the big three (Goldman, Morgan Stanley, JPM) and then when he lands a job for 2009, will maybe focus on the markets again. Alas.

That $17.73 tangible book value per share is under the somewhat absurd assumption that the remaining assets are valued properly (which they’re undoubtedly not). For example, one could make the argument (as others already have) that the write-down of the sold CDOs isn’t done because of the manner of the sale. Also, I don’t know how big of a deferred tax asset MER has booked (under the assumption that the company will earn enough to utilize it). So, aside from the remaining Level III assets, there’s a lot of potential monkey business in the tangible equity calculation.

At 6/30 MER had $16.1 bil in tangible equity, $16.34 in tangible equity per share, and a 1.55% ratio of tangible equity to tangible assets. (Yowsa!!)

So, pro-forma tangible equity (post-offering and write-downs) should approximate (in billions):

$16.1 + 8.5 (stock offering) + 3.5 (sale of Financial Data Services) + 4.43 (sale of Bloomberg stake) – 5.7 (new write downs) – 2.5 (payment to Temasek) = $24.33 billion

(I didn’t apply taxes to the asset sales because MER has plenty of NOLs to use up at this point.)

Shares outstanding, assuming a $22 offer price, are 985.4 mil + 386.5 mil = 1.372 bil shares

So, after the dust settles, tangible equity per share actually increases to $17.73/share, and tangible equity to tangible assets increases to between 2.5%-3.0% (depending on how much balance sheet shrinkage takes place), so leverage declines materially.

So, MER is clearly better off after all of these machinations, BUT… the biggest issue is the pricing of the equity offering. Are people willing to pay $22/share after this write-down debacle and what should be a pretty substantial loss of trust (both in MER and the financial group in general)? We’ll see. But I can see a bullish case being spun here (not that I’m buying it, of course.)

Satyajit Das saw it coming why no one else?

"An absolute disaster for MER (and other financials) on a few fronts:

1) The vintages inside these "sold" CDOs are 2005 and earlier. These are performing on orders of magnitude better than the 2006 & 2007 vintages. I can assure you that CDOs with 06 & 07 vintages are uniformly zeros if they are RMBS laden.

2) The "sale" is nothing of the sort. MER basically sold a call to Lone Star on the CDO. The recourse of the loan is limited to the CDOs only… in other words, Lone Star can "walk away" from the deal if losses in the CDO ramp up another $1.5 billion or so from current projections. In this event, MER would take back the CDO for what must be booked as a total loss (an additional $4 + writedown).

3) It's getting mighty tough to insist that these CDOs be marked to model when sales are taking place.

4) Investors can begin to look at the CDO inventory, broadly subtract out 80%+ haircuts and do their own valuations. The conclusion you reach is that the brokers are all insolvent as are a good many of the major money center banks. This could well start a run that will ruin many big names.
"

There’s nothing there, only negative value. Pull out the calculators, it all adds up to less than nothing.

Econolicious