Saturday, November 3, 2007

All that glitters is not Gold-man!

Level 3 storm about to hit Wall Street

There's a mystery on Wall Street. Merrill Lynch wrote off $8.4 billion in its subprime mortgage business, a figure revised up from $4.9 billion, yet Goldman Sachs reported an excellent quarter and didn't feel the need for any write-offs. The real secret of the difference is likely to be in the details of their accounting, and in particular in the murky world, shortly to be revealed, of their "Level 3 Asset Portfolios"

Posted by alan @ 10:51 PM (605 views)
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4 thoughts on “All that glitters is not Gold-man!

  • this is a great post. Thankyou alan.

    .. and also a great article that at least goes someway towards considering the possibility that

    1. same size bank
    2. running same competitive products.
    3. declaring same outsized profits

    will unsuprisingly have generated them in the same or a very similar way. So same size hole. (or in proportion) , and just hasn’t told me about it yet.

    Let me also state my personal opinion once more – because yet again we will hear arguments that “this is justified” or “that is justified”.

    The system is currently an out and out bust. The credit system is just wrong – as will be proved. ie. it just uses entirely the wrong criteria and assessment factors.

    The pressures on the system will be increasing, not decreasing or staying the same .. as the ripple effects, knock on effects and feedback effects work their way through the system.

    On the subject of human psychology there will simply be a lot of entities at this point hoping , expecting , anticipating for the market to come back in their direction. Hopefully they are not doubling down . The famous Texas Hedge.

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  • Seems the cgnao/goldfiger moment has been set- Feb 2008

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  • Can a bank that is in such a situation actually pay bonuses?

    The strangest thing is to try and see all the pay consultants (paid on %) try to fix that bonuses will fall 15% this year .. but hang on a minute.

    Surely this is even worse if the entity in question has drawn upon facility essentially guaranteed by the tax payer.

    Then the tax payer, in his ignorance obviously, might believe that he was subsidising a bankers Christmas bonus.

    Do we get to find out as per that BBC article the other day – how much of that money is going towards purchasing said bankers a new ferrari?

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  • this is a worst case scenario. dont be that pessimistic with Level 3 stuff.

    UNFORTUNATELY for you,
    some banks are not totally stupid… you may have engined a complex asset (often toxic). you sell 90% of it to some (foolish) investors
    who are holding the REAL risk…
    the other 10% you keep in your balance sheet and HEDGE it (with interest or credit derivatives).
    if the HEDGE has been properly designed, then the bank will do ok (and would even profit in a crisis if risk management was properly done)…
    in accounting, the asset would be level 3, but the hedge level 2 or 3, and they would OFFSET each other.
    in this presentation, it would count as DOUBLE exposure

    so id be very worried for all pension plans, institutional investors, smaller regional banks etc… which today are holding a WHOLE BUNCH of JUNK,
    dont even know about it… theyre not into the LIMELIGHT, but we will soon here about it…

    look at all the writedowns in the MAJOR Japanese banks.. and how surprisingly high were their exposure… there must be other victims.
    id advise anyone to check his 401k, pension money, bond funds, money market fund, to see what they REALLY own, and in any doubt, would put my money AWAY from it.

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