Saturday, Jan 26, 2008
The subpoenas start flying
CNN Money: Wall Street's money machine breaks down
By the end of June, Merrill held $41 billion in subprime CDO and subprime mortgage bonds. Since the average deal is between $1 billion and $1.5 billion, and the AAA debt is around 80% of each deal, Merrill must have been buying nearly all the top-rated debt from dozens of CDOs.
The question is why Merrill would purchase bonds its customers were rejecting. Merrill hasn't given a detailed explanation of how it came to own such a large volume of subprime bonds. At first, Merrill made money on the bonds because it was able to benefit from the "carry trade" - borrowing money at low rates and using it to buy CDO bonds paying higher rates.
Also, Merrill execs apparently believed that the credit market turmoil would ease and the bonds would once again be easy to sell.
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