Merrill announced that it would sell CDOs with a nominal value of $30.6bn to Lone Star Funds, the distressed-debt investor.

The securities will be sold for just $6.7 bn, or about 22 cents on the dollar. At the end of the second quarter, the bank had estimated the value of the CDOs at $11.1bn.

Merrill also agreed to cancel CDO hedges with XL Capital Assurance, the bond insurance group, and said it had entered into settlement negotiations with other bond insurers. The bank will write down $500m related to the cancellation of hedges with XL and a further $800m related to potential settlements with other bond insurers. With the $4.4bn loss on the CDOs, Merrill expects a third-quarter writedown of $5.7bn.

Rating agencies have warned Merrill that it risks being downgraded to junk status if it sells any of its valuable stake in money manager BlackRock.