Huge writedowns forecast for banks after Merrill Lynch’s cut-price sale of debt

Mike Mayo, an analyst for Deutsche Bank, said that Citigroup would need to write down the value of its CDO portfolio by $8 billion in the third quarter, based on the Merrill sale price. At present Citigroup values the securities at 53 cents in the dollar, more than twice the Merrill sale price.

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Sean Egan, of Egan Jones, called the sale a watershed moment, with implications that would trigger huge additional writedowns on CDOs and related assets worldwide. “This sends a loud and clear signal that the issue with CDOs is not liquidity in the market but problems with the value of their underlying assets,” he said.

The extra losses that Mr Egan forecasts could double writedowns that financial institutions have taken so far in relation to the credit crisis, which stand at $400 billion.