Monday, October 29, 2007

MetroPCS files $134 million suit against Merrill for CDO losses

Merrill Lynch & Co. is being sued by Metro PCS in Dallas County, Texas, over a $134 million investment made this spring in CDOs that Merrill underwrote between 2003 and 2006. This according to a WSJ artcile written last week in the wake of Merrill's giant write-down of $8.4 Billion of CDOs. Click here for the full artcile. The article profiles Christopher Ricciardi, a former Merrill hand who pioneered the firm’s entrance into the CDO market. It describes how Merrill's sales people "scoured the globe for buyers of CDOs" and
distributed some of its riskiest CDO slices through its global network of wealthy clients. One former Merrill executive recalled attending an event at New York's Harvard Club in 2004 at which salesmen described the merits of CDO investing to doctors, hedge fund managers and businessmen. The WSJ writes that "Mr. Ricardi coached salespeple he worked with to stress that mortgage CDOs offered better interest rates than corporate bonds with similar ratings."

MetroPCS is suing over particluar investments known as auction-rate securities. They were marketed as short-term investments that buyers could resell, if they wanted to, in auctions run by Merrill. But this summer, as nervous investors began to shun almost anything connected to subprime mortgages, MetroPCS found it couldn't sell the CDOs it had bought, and it now expects to incur losses.

For its part Merrill says it believes it acted appropriately with MetroPCS and made all of "the appropriate disclosures..."

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