Merrill Sues XL Capital to Maintain CDO Insurance

Merrill Sues XL Capital to Maintain CDO Insurance

March 19 (Bloomberg) -- Merrill Lynch & Co., having taken $24.5 billion in writedowns on mortgage-related debt, sued XL Capital Assurance Inc. to stop the bond insurer from canceling $3.1 billion of contracts on collateralized debt obligations.

``We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations for credit default swaps it agreed to,'' Mark Herr, a spokesman for New York-based Merrill, said in a statement sent by e-mail today.

CDOs, used to repackage mortgage-backed debt into new securities, were the largest source of more than $195 billion of mortgage-related losses at the world's largest banks and securities firm since the beginning of last year. Merrill's writedowns top the list. Before the collapse, banks tried to limit losses by taking out insurance from companies such as XL, a unit of Security Capital Assurance Ltd. of Hamilton, Bermuda.

``Apparently in light of the current dramatic downturn and deterioration in the credit markets, defendants are having `sellers' remorse,''' according to the complaint filed today in Manhattan federal court.

SCA, stripped of its AAA ratings, said last week it was seeking to void the contracts, responsible for $427.4 million of the new reserves for losses the company set aside last quarter. SCA declined to name the counterparty, which Chief Executive Officer Paul Giordano said on a March 14 conference call failed to meet requirements ``in a fundamental way.''

Merrill fell $3.97, or 8.5 percent, as of 2:30 p.m. in New York Stock Exchange composite trading. SCA rose 6 cents to 78 cents in over-the-counter trading.

Frank Constantinople, a spokesman for SCA in New York, didn't immediately return a telephone message. Yesterday, he declined to say if Merrill was the counterparty on the contracts or comment on what the dispute is about.

BLOOMBERG