Let’s face the facts. When you file a $3.1 billion lawsuit against someone who is insolvent, you can all but kiss $3.1 billion goodbye.

With that in mind, Merrill Lynch just kissed $3.1 billion goodbye. Here is the headline: Merrill Sues SCA’S XL Unit to Maintain CDO Insurance.

Merrill Lynch & Co. sued XL Capital Assurance Inc. to force the bond insurer to honor $3.1 billion of guarantees on collateralized debt obligations as the securities firm attempts to avoid more writedowns of mortgage-backed debt.

“We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations,” Mark Herr, a spokesman for New York-based Merrill, said in an e-mailed statement today.

The article goes on an on about lawsuits and contingencies and all of it amounts to nonsense and a waste of money. Merrill Lynch is not going to collect a dime from this lawsuit for the simple reason the guarantee of XL Capital Assurance Inc. is likely worthless.

The guarantee of Ambac (ABK) and MBIA (MBI) is likely worthless as well. I expect that Moody’s and the S&P; will downgrade both of the above when their stocks are trading at $2 or lower and the entire world knows what a farce ratings from the rating agencies are.

Here is my opinion here (and I stress this is an opinion only): Analysis from Moody’s and the S&P; is not worth a plug nickel, and Merrill Lynch is or soon will be out $3.1 billion.

Mike “Mish” Shedlock
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