Using a sample of 14 mezzanine structured finance CDOs issued between the second half of last year and the first quarter of this year, Merrill Lynch found the investment vehicles generally carried lower risk residential mortgage collateral when benchmarked against the home equity ABS sector.

"We were pleasantly surprised that the CDO managers were buying less of the risk that the media has given a lot of attention to recently. Basically on all counts they had less risk in the market, and we think that is important because investors at the CDO level don't necessarily understand how the agencies size credit enhancement for this extra risk," said Lang Gibson, head of CDO research at Merrill. "It requires a lot of trust on behalf of the investor."

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