Merrill prevails in $3.1B bond fight
A federal judge has ruled in favor of Merrill Lynch in a dispute with a bond insurer over $3.1 billion in credit default swaps.
In a one-page order issued Tuesday, U.S. District Judge Jed Rakoff ruled that XL Capital Assurance Inc. of New York, a unit of bond insurer Security Capital Assurance Inc. of Hamilton, Bermuda, must honor the default protection it wrote on collateralized debt obligations to Merrill.
The judge, who sits in the Southern District of New York in Manhattan, also dismissed three of four counterclaims by the SCA unit, Bloomberg reported.
Merrill of New York had accused the bond insurer of improperly trying to end seven credit default swaps “without any basis and under a pretext based entirely on rank speculation” after entering into the binding contracts, The Wall Street Journal reported.
The contracts provided insurance against losses on up to $3.1 billion in CDOs.
Major banks and financial services institutions have been taking large write-downs on CDOs since last fall amid the subprime meltdown and credit crisis.
In a statement, XL Capital Ltd. of Hamilton, Bermuda emphasized that it’s not a party to the suit.
Although XL Capital Ltd. owns a 46% stake in Security Capital Assurance, its reinsurance guarantees do not apply to SCA unit transactions made after SCA’s IPO in August 1996.
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