WSWS : News & Analysis : North America
Wall Street hides impact of sub-prime mortgage meltdown
By Cesar Uco
4 September 2007
The August 3 edition of Asset Back Alert
(www.ABAlert.com) (a weekly report that goes
out to major finances houses and investors
willing to pay nearly $2,500 for an annual
subscription) carries an article titled
“Merrill Ducks Asset Markdowns, But How?” The
article raises serious questions about the
dubious accounting measures taken by Wall
Street giant Merrill Lynch to avoid writing
down billions of dollars in losses resulting
from the sub-prime mortgage meltdown.
While according to ABAlert, what Merrill did
with investments in the sub-prime market
estimated at $15 billion is not yet known.
“One often-cited theory is that the bank
transferred the banged-up investments from an
available for sale account within its
brokerage unit to a hold to maturity portfolio
at affiliate Merrill Lynch Bank in late June.
“Such a move,” the article continues, “would
have enabled the company to follow friendlier
accounting procedures, since the contents of
the for-sale portfolio must be marked to
market [assigned a value based on what they
would fetch at current market rates] on a
routine basis and the values of assets in the
hold book don’t have to be updated until they
come due or are sold.”
“Thanks to this accounting maneuver, Merrill
posted second quarter earnings that were
stronger than expected,” according to ABAlert.
Moreover, “The institution reported last month
that its profits surged by 31%, to $2.1
billion, during the April-June stretch.”...
wsws.org
...Merrill is by no means the only firm
resorting to accounting ploys to hide losses.
ABAlert reports that “Citigroup has been
making moves resembling Merrill’s. The same
goes for Lehman Brothers and Morgan Stanley,”
who are also hunting “for internal accounting
maneuvers that can lessen the impact of the
market dislocation.”
The monies correspond to multi-billion dollar
mark-to-market accounts opened by the major
investment banks in their role as “warehouse
lenders for unaffiliated CDO issuers. The plan
was for the issuers to utilize the temporary
lines of funding to build up inventories of
subprime-mortgage securities that could serve
as collateral for future CDOs, and then use
the proceeds from those offerings to repay the
banks. But as the subprime-mortgage business
headed south in recent months, so did the
issuers’ ability to complete new CDOs,”
ABAlert said.
The move raised questions about the legitimacy
of Merrill’s accounting procedures and
“outsiders have been plumbing into the
financial statements of those institutions,
among others that somehow managed to avoid
reporting losses, for clues about where
they’re stashing the assets and what the true
effect on their financial health might be.”
Furthermore, the ABAlert report sounds an
alarming note regarding the “growing urgency
by investment banks... to minimize the impact
on their businesses or at least dress up their
books.”... |
