In The Smartest Guys in the Room, the documentary about Enron, the narrator explains that the use of what Enron called market-to-market accounting (although it really wasn't market-to-market -- more like market-to-whatever the hell we feel like) allowed the company to report pretty much whatever earnings it wanted.
It appears that the investment banks are in the same position with their loan portfolios.
According to BreakingViews, "More worrying for Merrill's investors, it reeks of dilettantish risk management. There have been more than enough signs this year that mortgage markets were cratering. And Merrill was arguably in a better position than most of its peers to judge the extent of the wreckage.
So are the banks not taking big enough write-downs to avoid having to report huge losses? Or, are they taking larger than necessary write-downs to establish cookie jar reserves to harvest in future quarters? Or, are some banks doing one and the others doing the other, with a few actually trying to do the right thing, just to mix it up a little?
The fact is that we have no idea. And anyone investing in the banks right now is doing so on great faith because it's impossible to assess the quality of their earnings.
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Reader Comments (Page 1 of 1)
10-25-2007 @ 12:09PM
Rick S said...
Amen.
10-25-2007 @ 4:54PM
Max said...
It still amazes me that a company with that much financial experience could make such huge risk management mistakes http://www.newsvisual.com/newsvisual/2007/10/experience-on-m.html . Some shakeups seem in order.
10-25-2007 @ 7:18PM
Rapier572 said...
This is simply the tip of the iceberg of Merrill Lynch's
institutional arrogance/paranoia. Earlier this year They inadvertantly blocked a 500 billon Euro BG
from being deposited into Client's account. Once the mistake was realized, an attorney was dispatched to rectify the problem but it was too late. Now they're about to blow a low income housing project in Ghana due to an almost predatory attitude and loan structure. Don't get me wrong, they do what they do better than anyone else in the world, but the ML world is insular and does not allow a whole lot of sunlight to filter through. Even so, they're handeling my money.