When Merrill Lynch announced Monday that it was offloading a significant portion of its CDO portfolio to a unit of private equity firm Lone Star at 22 cents on the dollar, there was a sense that, bad as this news was, Merrill had bitten the bullet and that things could only look up. After a couple of days reflection, however, not everyone is so sure that this is the case.

More details have now emerged about the Lone Star deal, and it seems that if the portfolio deteriorates below its current $6.7bn valuation, Lone Star would lose the first $1.7bn, but Merrill would be on the hook for the rest (although the firm may have hedged this exposure). Reuters quotes Nouriel Roubini, Professor of economics at New York University's Stern School of Business, who pointed out that as Merrill actually financed 75% of the purchase price of the CDO sale, the true value of the securities are probably worth a lot less than 22 cents on the dollar. Roubini said: 'That (the financing of the deal) implies that these CDOs are worth much less....The true market value of this garbage is closer to zero'.

And Bank of America analysts, led by Jeffrey Rosenberg, have now issued a research note titled On Second Thought, which points out that a drop in the value of the CDOs by a further 5 cents would wipe out the equity from the deal and 'leave Merrill back on the hook for the exposure'. Rosenberg wrote that 'Merrill now finds itself effectively in the position of having sold off its upside, but retaining its downside'.

The New York Times quotes Fox-Pitt Kelton analyst David Trone, who said: 'It's not truly unloading the risk. I mean from an accounting standpoint it's gone, but from a real risk standpoint, it's still there'. And Sanford C. Bernstein analyst Brad Hintz said that 'essentially what you have done is you've taken a writedown, and you've put it back on your balance sheet as a loan'.

And those who thought that Monday's announcement would be the last from Merrill on the subject of asset writedowns, should probably think again. The firm still has $8.8bn in exposure to CDOs (although most is thought to be hedged), $17.5bn of commercial real estate assets and $7.5bn in leveraged loans. Reuters quotes Charles Peabody, co-founder of quant research firm Portales Partners, who said: 'we know this is not the last of the hits Merrill will take when you look at all their exposure'. And Thomas Nyheim, VP and portfolio manager at Christiana Bank & Trust, said: 'This is going to continue. This is (just) setting a lower bar'.

Finally, Reuters quotes Janet Tavakoli, the founder and president of structured finance consulting firm Tavakoli Structured Finance, who has said in a report to clients that every one of the 30 CDOs Merrill Lynch sold in 2007 has either had 'its best-rated portion cut to junk, is in technical default, is being liquidated, or is in danger of being liquidated'. Ms Tavakoli writes that 'investment banks have a huge credibility problem when trying to explain that they didn't know that the gun was loaded'.

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