Merrill Lynch Smokes its Own Belly Button Lint

Just before the crash of 1929 huge trusts operated by the largest banks on Wall Street were buying each other's stock to try and delay the inevitable. It's like the passengers of the Titanic trying to drink all the water in the ocean to avoid sinking. Just before the dot-com crash we saw similar banking desperation; banks were lending to zero-revenue and zero business plan start-ups to spend the loans as fast as they could to make it look like they were 'growing' and therefore worthy of an IPO. Before the recent mortgage meltdown and real estate crash, home builders were lending to buyers to buy already inflated (read: fraudulent) appraised houses with zero chance of getting repaid, but 100% chance of cashing out inflated stock options.

In the clearest sign yet that the lending insanity has not gone away and the full impact of the Greenspan drunken credit bacchanalia has not nearly been fully 'discounted.' Take a look at this story on Bloomberg;

By Bradley Keoun June 2 (Bloomberg) -- Leave it to Wall Street to profit from its own distress. Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the ``mark-to- market'' accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall. ``They can post substantial gains as a result of a decline in their own creditworthiness,'' said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. ``It's completely legitimate, but it doesn't make sense by any way we currently have of thinking of net income.''

If a tree falls in the woods and nobody hears it fall, does that stop Goldman, or Merrill, or some other investment bank from collateralizing the perceived sound and selling it as a hedge against some statistical probability worked out by an autistic 'quant' on loan from Bellevue working on the proprietary trading desk?

Is that the sound of one hand clapping, or is that the sound I make when I learn these mirror images of nothing-backed-bonds are in my pension account courtesy of non-falling trees sold by Merrill to boost their stock option related bonuses?

The Bloomberg story goes on to say;

So far, most banks' writedowns are ``unrealized,'' meaning they've been unwilling or unable to liquidate distressed assets. If prices reversed, the banks would record mark-to-market profits. The same is true for the liabilities. Companies can't ``realize'' the mark-to-market gains on their debt unless they buy it back at the discounted price. They're unlikely to do so, because the deterioration in creditworthiness means they'd have to replace the debt with higher-cost borrowings, Willens said. ``No one's going out in the market and actually retiring this debt,'' Willens said. ``It's a shell game.''

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Comments

[Halsey]

I work for one of those slate of hand companies, Wachovia...oh man...just wait til next quarters earnings and WE have to go to another country's sovereign fund for money.. I'm not an MBA...(wharton. hA!..like lehman)...­yet...duh!­..KNEW these cmo's cdo's siv's were "air"...i.e., no there there.

Investors need to be "not" greedy..don't expect 12% return...8% will beat inflation..and if started early enough..get you where you need to go.

I still wish these investment banker would not only have to pay back their millions of dollars in bonuses for selling snake oil..but need and deserve jail time. JPMorgan kept most of the Bear Stearns MBA's..but laid off salaried staff to cut overhead...same old same old..now I read in the WSJ that Wachovia is a possible takeover candidate by none other than....JP Morgan...

life..ain't it grand

[maxkeiser]

yeah, i don't think people understand that there is still 5,000 billion (5 trillion) in unaccounted for bond fraud that has yet to hit the balance sheets of the US banking system and that this will more or less obliterate the book value of most US banks and probably force a currency davaluation of the US dollar... oh well, we tried...

[RedWhiteandBlueState]

"If a tree falls in the woods and nobody hears it fall, does that stop Goldman, or Merrill, or some other investment bank from collateralizing the perceived sound and selling it as a hedge against some statistical probability worked out by an autistic 'quant' on loan from Bellevue working on the proprietary trading desk?"

Incredible question. We have gone from an agriculture based economy to a financial services economy to a Houdini economy. I can see the smoke from the printing presses on Capitol Hill.

How do we stop this trend? How can we reign in this corporate profit driven madness. Since when did profit at all costs, the public good be damned become the cornerstone of American Capitalism? Where has the soul and decency gone?

The permanent campaign strategy of our politicians has bled into the financial sector. Let's rape and pillage and lie and cheat and steal, build a big enough off-shore account to not feel any ramification and to Hell with our country that allowed it to happen.

[biwee]

Correct....but, what can the individual of modest means do to hedge, or indemnify, their position in life??? There is no asset class today that allows one of modest, but stable, means to try to protect their position in life. Fixed income????....take a look at CD rates.......less than half of inflation and taxes. Stocks????......S&P 500 well below where it was 8 years ago, without even counting the affects of inflation. Real estate.....forget it. Housing prices are in decline in most markets. Precious metals????­.....well, most are unwilling/unable to put a sufficiently high portion of their liquid net worth in an asset that provides no income stream, and is only a capital gains play. (Gold would have to be trading over $2000/oz to compensate one for buying and holding an ounce of gold in the early 80s.) So, the thrifty "SAVER" (yes, there are still some in America) is the big loser as the crooks on Wall St are continually bailed out by the scam called the FED.

[maxkeiser]

That's the point... The system has been systematically undermined in ways that make it virtually impossible for anyone who is not an insider (and according to the FT this morning insider trading is reaching an all time high) to make any money.

There needs to be a wholesale re-engineering of basic market-making functionality at the core of capitalist system in the US. But this will never happen until after this crash/depression that is developing now, and probably the talent needed to reconstruct the markets - in a more democratic form - will be living somewhere else other than the US.

There is no incentive for fair markets in the US right now. Democracy is trading at an all time low.

[in10se]

This is where my retirement savings have been invested for the past 15 +
years....http://www.americanfunds.com/funds/details/results-graph.htm?fundGroupNumber=12

Not getting rich but comfortable.

[GJMandinka]

Ahhh, just another way to fool more investors into expanding the depth of the pit we are sliding into. And, of course, another great way to prolong the avoidance of any kind of accountability for the dangerously stupid games they've been playing with their companies and our investments.
Thanks for bringing this to our attention, Mr. Keiser!