The question is, whether XL’s termination of 7 Merrill CDS will accelerate the big derivative unwind by bringing the problem to light and triggering a run for the exits. http://business.smh.com.au/merrill-in-fresh-debt-tangle/20080320-20ll.html
→Here’s the Complaint: xl_complaint.pdf
NEW YORK (Dow Jones)–A Merrill Lynch & Co. (MER) unit sued a unit of bond
insurer Security Capital Assurance (SCA) on Wednesday, alleging the company is
attempting to avoid its financial obligations of up to $3.1 billion under seven
credit default swaps.
The lawsuit, filed in U.S. District Court in Manhattan, alleges that SCA unit XL
Capital Assurance Inc. improperly issued notices purporting to terminate the
seven credit default swaps “without any basis and under a pretext based entirely
on rank speculation” after entering into the binding contracts.
“Apparently in light of the current dramatic downturn and deterioration in the
credit markets, defendants are having ’sellers’ remorse’ and are seeking to avoid
their potential obligations of up to approximately $3.1 billion under the credit
default swaps at issue,” the lawsuit said.
The lawsuit comes less than a week after SCA said it will write no new business
while trying to raise capital as it faces potential large losses in financial
guarantees written on mortgage securities backed by subprime loans. The company
also has said it will try to terminate some of its contracts to reduce its
Michael Gormley, an SCA spokesman, said SCA hasn’t yet seen Merrill Lynch’s
complaint, but the investment bank is the counterparty to seven CDS contracts it
announced last week it had terminated. “We continue to believe that the terminations were appropriate and effective,”
Gormley said. <snip>
“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 with Merrill
Lynch,” Mark Herr, a Merrill Lynch spokesman, said in a prepared statement.
“Merrill Lynch is confident that the credit default swaps are fully enforceable.
The complaint seeks a court order that each of the credit default swaps remains
in full force and effect.