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So, how did the CDOs that Merrill Lynch brought to market in 2007 perform? All of the deals I captured are in serious trouble at the “triple-A” level. [The deal names are: Lexington Cap Fundg III; Port Jackson CDO 2007-1; Highridge ABS CDO I; Maxim High Grade CDO I; Broderick CDO 3; Kleros Real Estate CDO IV; Norma CDO I; Maxim High Grade CDO II; Newbury Street CDO Ltd.; South Coast Funding IX; Euler ABS CDO I; Glacier V; Lexington Capital Funding V; Libertas Preferred Funding IV; Silver Marlin; Kleros Preferred Funding VII; NEO CDO 2007-1; Forge ABS High Grade CDO I; IMAC CDO 2007-2; Mars CDO I; Brookville CDO I; Fourth Street Funding Ltd.;Wester Springs CDO; Jupiter High Grade CDO VI; Tazlina Funding II; West Trade Funding CDO III; Robeco HG CDO I; Durant CDO 2007-1; Biltmore CDO 2007-1; Bernoulli High Grade CDO II].All have one or more originally “triple-A” rated tranches downgraded below investment grade (junk) by one or more rating agencies. Of the 30 CDOs, 27 have even the topmost original “triple-A” tranche now ranked as junk by one or more rating agencies.

As of June 10, 2008, of 30 CDOs totaling more than $32 billion in notional amount, 19 have declared an event of default, are in acceleration, or have been liquidated. Ten others are “toast,” as evidenced by downgrades of their “triple A” tranches to junk status, yet I could find no record of a declared event of default (EOD).The remaining CDO has “triple-A” tranches downgraded to junk, but the two topmost tranches are still rated investment grade (the topmost is Aa1 neg/ AAA neg and the formerly “triple-A” tranche below that is Baa2 neg/ BBB+ neg). The EOD may be undeclared due to documents that avoid that declaration so that investors cannot trigger acceleration or liquidation (or the declaration may be pending).

Merrill had pieces of other investment banks’ deals embedded in many of the CDOs, and likewise other investment banks had pieces of Merrill’s CDOs in their deals. And, of course, their credit derivatives desks bought and sold protection on each others CDOs.

As far as I can tell, disclosing loan data is not the problem. The problem is that investment banks knew or should have known they packaged damaged product to sell to unwary investors.

Granted, some of these investors were sophisticated and should have known better; investment banks and “sophisticated” investors, like the bond insurers can slug it out with each other. But there is a difference between an account with a lot of money and a “sophisticated” investor. Many smaller municipalities and other retail-like accounts may have been saddled with dodgy products.

Investment banks and the rings of highly paid managers, securitization professionals, and lax CDO managers have an enormous amount of responsibility for the collateral damage done to the U.S. housing market and “insured” bond markets.

One can argue that the bond insurers were willing victims, but municipalities paying higher funding costs were not. One can argue that some homeowners knowingly overextended themselves, but many others were victims of predatory lending practices. U.S. taxpayers are unwilling victims, paying either directly or indirectly for housing market assistance, turmoil in municipal bond markets, frozen auction rate securities, and bailouts of errant mortgage lenders and investment banks.

The Federal Reserve Bank is now providing liquidity for many investment banks either directly or indirectly. Investment banks may not be “borrowing,” but the Fed’s willingness to accept “AAA” assets in exchange for treasuries is a back-door bailout.

14 Elinor Comlay, “Merrill Lynch 2007 CDOs under water-consultant,” Reuters, 31 July 2008.

15 Greg Newton,“Thos 2007 Merrill CDOs in Foole,” Seeking Alpha, 31 July 2008.

16 Yalman Onaran, “Banks Hide $35 Billion in Writedowns From Income, Filings Show,” Bloomberg News, 19 May 2008.

17 Yalman Onaran, “Subprime Losses Top $396 Billion on Brokers’Writedowns: Table,” Bloomberg News, 18 June 2008.

18 Yalman Onaran and Dave Pierson, “Banks’ Subprime Market-Related