I Think I Found the Inspiration For the Merrill-Lone Star CDO Trade!

We've all been thinking a lot about Merrill's recent sale of $30.6 billion CDO to the private equity firm Lone Star.  Merrill sold the CDOs for approximately $6.7 billion to Lone Star and financed $5 billion of the purchase price.  The only recourse Merrill has with regard to the loan is to take back the CDOs should Lone Star fail to pay.  Lone Star probably won't put up anymore capital if the CDOs drop $1.7 billion, thus flooring out their risk.  Merrill, on the other hand, looks to be on the hook for the last $5 billion.

However, on Monday John Thain told Maria "The Money Honey" Bartiromo that the way the deal is structured, Merrill cannot lose anymore on the CDOs.  He really didn't explain how that was possible and it threw me for a bit of a loop.  It also made me wonder if there was some Enron like "monkey business" in the transaction. 

Today, while I was searching "Beavis and Butthead" Youtube clips, originally because I was listening to the Freddie Mac call and realized that Dick Syron sounds exactly like the principal at Beavis and Butthead's school, I found what must have been the inspiration for the Merrill trade.  It's a little on the long side, but worth a serious watch.  You'll learn how "high" finance really works!