Merrill Lynch & Co. rebuffed a request by executives at Ownit Holdings LLC for a capital infusion that would have kept the subprime lender afloat, people close to both companies said.
The investment bank had helped finance Ownit's rapid expansion. With Merrill's help, Ownit became one of the fastest-growing subprime lenders last year, and was on pace to originate $10 billion to $12 billion this year, up from $800 million in 2003.
Ownit's sudden closure on Dec. 5 surprised industry observers and underscored the pain subprime lenders are feeling as a result of forced loan buybacks related to early payment defaults. Details of Merrill's role in the shutdown have trickled out in the aftermath.
Merrill, which held a 20% stake in Ownit, opted not to rescue the Agoura Hills, Calif., lender after hitting the firm with a Dec. 1 margin call that required it to pay $25 million in cash, the sources said. The margin call was necessitated by Merrill's markdown to face value of about $1 billion of loans on Ownit's warehouse line.
Exactly why Merrill chose the course it did is unclear.
Bill Haldin, a Merrill Lynch spokesman, said: "We had a small minority stake in Ownit and, while it is unfortunate that Ownit closed its doors, we met every contractual obligation we had to them." He would not say how much Merrill paid when it bought its stake in 2005.
Ownit aside, Merrill Lynch continues actively to increase its bet in the subprime space. It agreed in September to buy First Franklin Financial Corp. and two other units of the Cleveland banking company National City Corp. for $1.3 billion.
At the time it shut down, Ownit had been in technical default for several weeks on its covenants with JPMorgan Chase & Co., the disbursement agent for Ownit's "wet line." (This was a small warehouse line Ownit used to finance loans temporarily before transferring them to its main warehouser, Merrill.) JPMorgan had requested that Ownit raise the additional capital to cover losses on repurchased loans.
Ownit had also explored a sale as a solution to its predicament. But its potential losses from repurchase requests on defaulted loans were too high for any buyers to be interested.
After the margin call, William Dallas, Ownit's founder and chief executive, continued to have discussions with Michael Blum, a managing director at Merrill Lynch and the firm's head of global structured finance, who also was a director on Ownit's board. Merrill also negotiated with JPMorgan about taking over as the disbursement agent, people familiar with the discussions said.
But on Dec. 5, Mr. Blum faxed a letter to Mr. Dallas that said he was resigning from Ownit's board, sources said. The lender told its employees the same day that it had no choice but to shut its doors and close its 15 branches.
