MBIA sues Merrill Lynch over CDOs

I hate to sound like a lawyer but this lawsuit is scurrilous, without merit and complete joke. Merrill may or may not be wrong here but MBIA is guilty of incredibly bad judgement.

A more interesting claim against arrangers could arise from those debt tranche investors below the AAA tranches wrapped by monolines/AIGFP or retained by dealer arrangers for their principal books. It was not at all uncommon for the monolines/AIGFP and principal investors to require document changes after the lower tranches were priced ("circled") but prior to closing; and for arrangers to neglect to disclose these changes the subordinated investors prior to closing.

MBIA mismanaged its risks in the same way AIG did. They were happy to be part of the CDO machine, taking on huge amounts of concentrated "tail" risk. All "representation" these investors aver asked for was for the triple-A rating of their tranches and some self-destructive provisions in the documents (EOD triggers are an infamous example.)

History repeates itself. Even though we are not talking of a small naive regional bank, but of MBIA, and those guys were supposed to be true professional. But then again, if you have to sue someone these days, you sue one of the bailed-out banks, don't you? And who is more bailed-out than ML?

Where there is smoke ... poor disclosure, conflicts of interest in the new issue CDO market during the boom years - no surprise. MBIA's suit may have validity. And, not likely be limited only to Merrill.

It has, however, taken MBIA quite a long time to take this action...I'd have expected it sooner.