Product details

Since late 2003, Merrill Lynch & Company, Incorporated had become the world's largest underwriter of collateralised debt obligations (CDOs). The assets of CDOs comprised some of the riskiest tranches of mortgage-backed securities mostly tied to sub-prime mortgages. In the Summer of 2007, with the collapse of the sub-prime mortgage market and declining liquidity, Merrill Lynch was caught with a substantial number of CDOs that had diminished sharply in value. Disillusioned with Chief Executive Stanley O'Neal's leadership, the management of Merrill Lynch called for a series of meetings to assess the firm's exposure to sub-prime backed CDOs and redefine its risk-management strategy. To the management, an embarrassing write-down seemed inevitable for the third quarter of 2007, but how much of such assets should be written down and how quickly? What would be the implications for the firm in making such an announcement?