Merrill and National Australia Bank CDO Writedowns Linked, and Not the Way You’d Expect, Either

Many readers over the weekend commented on National Australia Bank’s stunning writedown of A$830 in “super senior” CDOs, which resulting in a valuation of ten cents on the dollar, and speculated that this move had implications for US banks. Then Merrill announces a surprise writedown, out of sync with its reporting cycle.

Could the two events be related? It turns out that they are, according to Australia’s Crikey (hat tip CrocodileChuck) but not the way you’d expect. The Merrill writedown triggered the NAB action.

From Crikey:

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 NAB was involved in a parcel of what’s called “super-senior” CDOs with a face value of $19.9 billion.

NAB and the Australian stockmarkets were directly affected by the Merrills move, which reflects the US banker’s desperate desire to quit as much of its toxic subprime mortgage related investments as it can, without regard to the flow on impact to other banks and markets.

In effect Merrill’s move to sell these holdings of CDOs to a distressed debt fund investor, forced the NAB to write-down the value of its holding in the CDOs, a move which triggered a huge sell-off of Australian bank shares Friday and yesterday. Yesterday the ANZ revealed a completely unrelated set of write-offs and provisions, butr these had more to do with the slowing Australian economy.

At the same time, I understand that APRA, the Australian Prudential Regulation Authority, has been talking to the NAB and ANZ and were liaising with them on these moves and had a full understanding of both banks’ actions. APRA has been actively talking to banks and other financial groups it regulates about their exposures to the US and to Australian corporate basket cases, such as Allco and Opes Prime.

As we and others noted, Merrill’s 22 cents on the dollar price bears examination, since it was 75% financed on rather favorable terms. So a true sale price would be at even more distressed levels.

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  1. Ginger Yellow

    Um, is there any evidence these are the same CDOs? Crikey doesn’t provide any. Moreover, the real question is why NAB didn’t write down the positions earlier – as far as I know this is the first time they’ve even acknowledged they existed, despite taking the conduits in which they were held on balance sheet many months ago.

    Also, this CDO sale is dodgy in a way very reminiscent of Lehman’s R3 deal. Merrill’s is providing 75% finance for the sale on a non-recourse basis, meaning of course that it is still exposed to 75% of the sale value. Yet they’re not counting that as part of their ABS CDO exposure. Presumably it shows up somewhere else on the balance sheet, and they will no longer have to mark it to market, but it’s still ABS CDO exposure.

  2. Anonymous

    this should give hank paulson some idea of how well that covered bond market is going to trade. when you’re trying to get others to put your cr@p on their books, you’ll pay a price.

    aside from that. i don’t follow the chain of events cited above. didn’t NAB’s writedowns come first, before the surprising to only some(those who didn’t hammer the stock on monday) writedown/capital raising announcement after the close? above makes it sound like merrills announced a writedown first.

  3. Ginger Yellow

    The Crikey article bases its arugment (mainly) on the fact that the sale was executed (though not completed) before NAB’s writedown. It claims that NAB, Merrill and APRA were in communication over the deal before the announcement, although it provides no source or evidence for the claim. I’m very skeptical, personally, but I’m doing some digging anyway.

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