US banks, financial system (worrying)

grantx said:
Check out these (very long) articles:

First (brilliant article),The Bear’s Lair: Level 3 Decimation?:

http://www.prudentbear.com/index.php?option=com_content&view=category&layout=blog&id=33&Itemid=61

Then, under sections headed Credit Market Dislocation Watch and Road To Ruin:

http://www.prudentbear.com/index.php?option=com_content&view=category&layout=blog&id=35&Itemid=63

Grant.
Click to expand...


Very interesting article Grantx, thanks for that. Level 3 - I'll watch out for it.

Sounds like 'good will' accounting. I could never get my head round that term either. Accountants pulling numbers out of thin air imo.

Citigroup bank boss 'steps down'

Foreclosure wave sweeps America

On a personal level I am very worried about all this. Very ... :eek:
 
Sorry to disagree but . . .

From the first para of the Level 3 decimation artical

"There’s a mystery on Wall Street. Merrill Lynch last week 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."

The real secret of the difference is likely to be that one is a retail bank, and one is an investment bank. :rolleyes:

Sorry, don't have to read any further if that's the leval of the writers financial knowledge.
 
A Dashing Blade said:
leval
Click to expand...

Have to admit: I'm a member of Levals Anonymous. They 're great stuff, a most amazing invention, would have had to invent them myself if they wouldn't have been around already, actually to be brutally honest here, couldn't be without my daily dosage of levals any more these days, must really rethink my LA membership ...
 
Sorry to have been an ass ;-)

To be honest, I believe that Funnymentals are just as irrelevant as the solid and earnest analyst advice of every bank and their well meaning offspring that sold a gullible and grateful public a case for firms not needing to make profits any longer and still be valued at gazillion times revenues in the new paradigm of affairs in the web 1 bubble.

But even if Funnymental opinions, and that's all that Funnymentals will ever be, of which every soul on this planet has at least one cherished version which by no means is better or worse than any others, are to be seen mainly from the entertainment level that they provide, your lackadaisical dismissal of prudentbears articles, who've been around since yonks, and most particularly on your stated grounds wasn't quite, ahem, cricket, was it.

Btw, does one only read the last in books, or does anyone actually say that.
 
A Dashing Blade said:
Sorry to disagree but . . .

From the first para of the Level 3 decimation artical

"There’s a mystery on Wall Street. Merrill Lynch last week 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."

The real secret of the difference is likely to be that one is a retail bank, and one is an investment bank. :rolleyes:

Sorry, don't have to read any further if that's the leval of the writers financial knowledge.
Click to expand...

I'm certain I read somewhere that Goldman had , back in June, hedged most of their sub-prime exposure - hence their more robust trading position. This in turn probably lead to further woes to those that were on the other side of the hedge?
 
I'm really most impressed by the financial acumen and just plain old killer instincts of banks and their most amazingly qualified fundamental business analysis.

I mean, everybody and their uncle would readily believe that it's a great and, above all, most sustainable business model to energetically sell credit to people who can't afford it, and then re-sell said bad credits to other banks who feel equally enthusiastic about this grand new business innovation ?

Ponzi schemes always have been and always will be great business, what ?

Anybody who to this day is still nurturing the cherished albeit severely erroneous notion that a bank or anybody trying to sell you something on the banks behalf even have an inkling of a clue as to what's what need to immediately drop everything they're doing and go out and buy a personal copy of Liar's Poker: Rising Through the Wreckage on Wall Street
 
Rumour has it that a number of UK banks have gone cap in hand to the ECB (via their continental subsidiares). Dynamite if true !
 
Could Goldman Sachs Explode?

...By writing off $610 million (73 billion yen), and recording a third-quarter loss, Nomura put its U.S. mortgage woes behind it, and can now focus on its very attractive core business of being the largest investment bank in the world’s second-largest market - the rapidly expanding economy of Japan.

For larger players, the solution isn’t quite so clear. For one thing, they can’t maneuver as quickly as Nomura because the Big Boys still have large holdings of financial rubbish on their balance sheets. That’s not easy to purge.Starting Nov. 15, we will have a new arrow in our quiver to help us divine just how financial toxic waste a company is holding. The new accounting rule, Financial Accounting Statement 159 (SFAS 159), requires banks to divide their tradable assets into three "levels," according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme are Level 3 assets, which have only unobservable inputs to measure value, meaning they must be valued by the bank’s own proprietary models.

The problem with Level 3 asset pricing is quite obvious. Who writes the models that are used to value the assets: Bank employees, of course, the same bozos that get paid huge profits if the bank’s quarterly profits rise. In the old days, assets were recorded on the books at historical cost, and their value was only changed if something bad happened, in which case the values were either written down or written off.

In today’s fine world, the values can actually be written up if their "market value" increases, even though that market value is determined only from a model that bonus-receiving employees have designed. In a bull market, of course, when assets generally go up in value, and there’s lots of money sloshing around, optimism naturally takes over and reported book values soar. In a down market, however, a bank with lots of Level 3 assets will give its shareholders a series of nasty surprises, or - in extreme cases - go bust.

Goldman’s Conundrum

I hate to depress you further about our finest financial brains, but this isn’t a small problem. Wall Street doesn’t have to report these numbers until its fiscal years starting after Nov. 15; so few banks have yet disclosed the amount of Level 3 assets in their balance sheet.

I would think they would be forced to do so in their first quarter results, typically the period that ends either Feb. 28 or March 31. However, Goldman Sachs, in the midst of preening itself about its remarkable write-off-free third quarter, disclosed its Level 3 assets: $72 billion. True that’s only 8% of Goldman’s assets. But it is twice the investment bank’s total capital of $36 billion.

Do you see where I’m headed with this? Not all Goldman Sachs’ Level 3 assets are subprime mortgages, of course. But not all Nomura’s mortgage assets were subprime mortgages, either. In fact, it was only 27%. Yet Nomura, to exit the business, wrote off 28% of mortgage assets, more than its entire subprime exposure. If Goldman Sachs is forced into pessimism, it too may have to write off 28% of the value of Level 3 assets, or even more. That would give Goldman a write-off of slightly more than $20 billion - or more than half its capital. Of course the Fed and all the other big banks would rally ‘round - to avoid a banking-system collapse - meaning Goldman would probably survive. But you wouldn’t want to be a shareholder.

...
 
DB,

“one is a retail bank, and one is an investment bank”. Why is this significant?

Grant.
 
grantx said:
DB,

“one is a retail bank, and one is an investment bank”. Why is this significant?

Grant.
Click to expand...

Merrills, Goldmans and all the rest all look like nothing more than gigantic hedge funds to me.

And goldmans most probably did all right out of this mess because they've got the best information in the market, some would say that their information is 'too good' and as it's America we're talking about where everyone is available for a price then I'd agree.
 
DB,

You've lost me.

Does valuation/status of identical assets via standard accountancy principles for a merchant bank differ from those of a retail bank?

Grant.
 
Nope, but the point is that their revenue streams come from totally different types of business
 
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