Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: ChanceIs who wrote (122760)	5/13/2008 1:44:19 PM
From: Giordano Bruno	Read Replies (1) \| Respond to of 306849

Looks like Ben will have to rummage through the closet and find those puppies.

To: ChanceIs who wrote (122760)	5/13/2008 2:42:00 PM
From: ChanceIs	Respond to of 306849

Debt Improvement Spells Trouble for Brokerages >>>Another view of the same story. This one comes with a nice table though, and man does it look bad for Merrill. This issue came up about a month ago. I wrote that it was my understanding that once these writedowns were taken, they couldn't be written back up. Guess I was wrong.<<< Edit: Can't get the table to post. Posted by David Gaffen May 13, 2008, 10:22 am This just in: Oppenheimer’s Meredith Whitney is still bearish on the brokerage sector. Her latest salvo covers an issue that will certainly come back to bite the large financial institutions — gains booked as a result of the declining value of their own debt. Companies such as Merrill Lynch & Co. and Goldman Sachs Group Inc. were able to tally revenue on the declining value of their debt. Merrill booked a gain of $2.1 billion while Citigroup Inc. posted revenue of $1.3 billion. Goldman posted revenue of $300 million. But those accounting gains may be reversed in the second quarter due to the reversal in the value of this debt, that is, the debt has increased in value, and therefore will reduce revenue due to this accounting quirk. The best way to see this is in the activity of the company’s credit-default swap spreads, which measure the cost of insurance against default. In the second quarter of 2007 — before all hell broke loose — it would cost an investor about $25,000 to insure $10 million in bonds against default for five years. That rose sharply (see table), but companies were able to book revenue on the declining value of that debt — something that’s reversed now. “Companies that adopted fair value accounting on their own company debt (FAS 159 – Fair Value Option) were able to realize gains as a result of the widening of company credit spread,” Ms. Whitney writes. Merrill Lynch booked a substantial gain in the fourth quarter of 2007 as a result of widening spreads on their own debt — $1.3 billion. In a quiet credit environment, investors would expect valuation adjustments of this type to be small. But for the second quarter, Ms. Whitney expects a $1.75 billion loss as a result of the debt adjustment for Merrill, and smaller, though still sizeable, losses for the likes of Morgan Stanley and Lehman Brothers Holdings Inc. “Based upon the action in CDS spreads so far this quarter, we believe the brokers earnings will face sizable headwinds from the reversal of revenues resulting from the spread narrowing of firms’ CDS spreads,” she writes.