Merrill Sues XL Capital to Maintain CDO Insurance (Update2)
By Jody Shenn
March 19 (Bloomberg) -- Merrill Lynch & Co. sued XL Capital Assurance Inc. to force the bond insurer to honor $3.1 billion of guarantees on collateralized debt obligations as the securities firm attempts to avoid more writedowns of mortgage-backed debt.
``We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations,'' Mark Herr, a spokesman for New York-based Merrill, said in an e-mailed statement today.
CDOs, which repackage mortgage bonds and other debt into new securities, were the biggest source of the more than $195 billion of mortgage-related writedowns and losses at the world's largest banks and securities firm since the beginning of last year. Merrill's $24.5 billion in writedowns top the list. Banks had tried to limit such losses by taking out insurance from companies such as XL, a unit of Security Capital Assurance Ltd.
Other bond insurers including MBIA Inc. and Ambac Financial Group Inc. may also seek to cancel $100 billion of contracts on CDOs tied to subprime mortgages that they wrote if they're unable to shore up capital through other means, according to Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance.
``Apparently in light of the current dramatic downturn and deterioration in the credit markets, defendants are having `sellers' remorse,''' Merrill said in the complaint filed today in Manhattan federal court.
The above is from Bloomberg.
It appears that the above references a Swap agreement that the counterparty can't pay off. Buffet calls swaps the WMD of the financial world. Considering there are over $45 Trillion dollars of such relationships, one can see why.
Many bond and equity investments are preceived to be insured by swaps. What if the insurance is not good?
Mommy, why are all those men sweating?