Merrill Lynch's lawsuit against XLCA over the termination of certain CDS contracts highlights the legal technicalities that analysts say will drive the recovery process in ABS CDOs going forward. But it also indicates how fragile monoline guarantees could turn out to be in times of economic stress.
"The broader issue here is the willingness of monolines to attempt to renege their 'irrevocable and unconditional' guarantees once their capital base comes under severe pressure," says one lawyer away from the situation.
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