Still no mark to market

Mortgage-backed assets with face value of $30.6B were just sold by Merrill for $6.7B.

1) obviously, this reflects huge losses and perhaps forward looking expectations of a very high default rate on the underlying mortgages (can't tell unless I know what CDO tranches are in the pool they are selling).

2) but, amazingly, this 80% loss on the securities only gives a kind of upper bound on their value: Merrill had to provide 75% of the financing to the buyer! Even with an 80% haircut Merrill might not have found a real buyer for the assets at this price.

In the final days of the technology bubble we saw the same thing: vendor financing, in which sellers would loan customers the money to buy the product, just to make their quarterly numbers.

WSJ: ...Much of what Merrill is sitting on is known as collateralized debt obligations on Merrill's books. CDOs are securities backed by pools of mortgages or other assets, which have plummeted in value during the credit crunch. In all, Merrill has written down more than $46.7 billion in exposure to such mortgage-related assets since mid-2007.

The biggest single action Merrill took Monday was the sale of mortgage assets to an affiliate of Lone Star Funds with a face value $30.6 billion which it was carrying on its books at $11.1 billion as of the end of June. The sale, at a purchase price of just $6.7 billion, which represented just 22 cents on the dollar, reduced Merrill's holding of such assets by more than half, from $19.9 billion to $8.8 billion.

Merrill said it would finance about 75% of the value of the deal, a similar action to other banks that loaned money to firms willing to take assets off its hands.

News that Merrill was able to sell these assets, even at a steep discount, bodes well for other firms on Wall Street like Lehman Brothers Holdings Inc., which are also sitting on hard to sell assets.