Unrealized Level 3 Gains

If it weren’t for the large non- cash profits on "hard-to-value" holdings, Goldman Sachs (GS) wouldn’t have had much profit last quarter. Lehman Brothers (LEH) would have had significantly less. And Morgan Stanley (MS) wouldn’t have had any.

That’s according to Bloomberg’s Jonathan Weil:

"Here’s Rule No. 1 from Wall Street’s public-relations playbook: If the company you run has big losses on hard-to-value assets, scream your head off about the accounting rules.

And what if the squishy values result in huge gains instead, as they have in the not-so-distant past? Rule No. 2: Stay mum about it for as long as the rules allow.

For months, we’ve seen a growing parade of executives and politicians complain that fair-value accounting rules are to blame for financial institutions’ imploding balance sheets. Even the International Monetary Fund got in on the act in an April 8 report, suggesting the need for "some latitude in the strict application of fair value accounting during stressful events.”

There has been no commensurate outrage about fuzzy mark-to-market accounting that lets companies post unrealized gains on illiquid balance-sheet items."

Go read the full article . . .


Goldman, Morgan Stanley Hit `Level 3′ Jackpot
Jonathan Weil
Bloomberg, April 23 2008

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What's been said:

Discussions found on the web:
  1. TomD commented on Apr 24

    As usual, the Boyz have it their way. No longer any need to wonder why financial stocks have held up so well.

  2. Rich Shinnick commented on Apr 24

    “There has been no commensurate outrage about fuzzy mark-to-market accounting that lets companies post unrealized gains on illiquid balance-sheet items.”

    Barry, that outrage comes much later, in the class action law suits that are settled 7 years down the road a-la-Enron.

    The outrage never comes when the fuse is lit, it comes later when the MF explodes.

    Proactive regulation is never good politics.

  3. ynotgoal commented on Apr 24

    I agree the rules should apply when they work for you as well as when they work against. That said, should all of the mortgage securities be marked down all the way to 0 just because there aren’t buyers right now? Its not like all mortgage holders are going to default but buyers and sellers aren’t going to be able to agree on a price until they have a better idea how many will. Certainly, many aren’t worth full value but aren’t also worth 0.

  4. Owner Earnings commented on Apr 24

    “History doesn’t repeat itself, but it rhymes.” Mark Twain

    “If past history was all there was to the game, the richest people would be librarians.” Warren Buffett

    With that said:

    S&P 500 Close April 4th 2001: 1,103
    S&P 500 Close May 21st 2001: 1,312
    S&P 500 Close September 5th, 2001: 1,131

    Patience short sellers, patience.

  5. AGG commented on Apr 24

    Ah, Latitude. Don’t you just love that word? Aren’t these the huff and puff types who lecture us about personal responsibility?
    Here’a some “latitude” advice for the top 1%: Liquidate 75% of everything you have and donate it to an inflation fighting fund for Social Security recipients. When you give people some latitude, then maybe you’ll deserve some.

  6. John Borchers commented on Apr 24

    The banks were told to do this by the SEC. Remember many weeks ago when they highlighted a certain rule.

    Basically, the banks were telling the SEC they were in trouble and the SEC found a loop hole in the accounting you could drive a bus through.

    The trouble is, clearly they can only use this emergency write up once.

    Hope the banks aren’t heavily invested in China. Whoever is is more than likely screwed. I don’t think China going to double this year BR.

  7. Marcus Aurelius commented on Apr 24

    Oh, hell. Go ahead and use fraudulent accounting principles if you want to. Just stop whining – you sniveling little pricks.

  8. Pat G. commented on Apr 24

    Sure, blame it on the referees.

  9. s commented on Apr 24

    they are not marked at 0 – that is the whole point. So maybe they are worh 50? 60? that is probably 40% below where they are right now. Do the math on the discount and compare it to the equity. Subtacts up to distress.

    How about those markups on credit spreads worsening. This is maybe worse than the mythical accounting for L3.

  10. Moses commented on Apr 24

    The IMF doling out advice abt the US banking system is akin to Barry Ritholtz telling Nolan Ryan how to pitch.

    Very entertaining that everyone and everything in the world is fraudulent but the press. How is that Bar? How is it that the integrity and fortitude of every instition in America is ridiculed with corruption-but the press and those deservingly paid hedge fund managers.

    BR: Have you read anything I’ve written about the Financial Press, especially the US media? Anything?

    How about the column LOSE THE NEWS.

    Do a little homework next time . . .

    PS: That was the top 0.1% of hedge fund manager . . .

  11. Winston Munn commented on Apr 24

    I wouldn’t exatly call these unrealized gains – they are being realized by the stockholders via inflated stock prices – it’s just the banks are not realizing any gains.

    Geez, why actually earn money when you can simply pretend to do so?

  12. stuart commented on Apr 24

    Great article, and pretty much agree with every point made… But what’s to come of it? They’ll get away with it, again, because the ultimate puppet masters want them too. It’s in their interest for the “common good”, just like bailing out BSC. Those who write the rules allow the cheating because they benefit from the cheating. Sadly, it’ll never change. Today’s market rally in financials and homebuilders was a joke and in certain ways symbolizes this point. When the police are in on the fix, and it’s a crooked wheel, what to do. Inform the public. Every blog is being shouted down by CNBC et al. 1% might get it.

  13. VennData commented on Apr 24

    Bear needed to be “bailed” because it had so many “counter-parties.”

    Hey, I’ve got an idea. Make sure none of them are that big.

  14. stuart commented on Apr 24

    Exactly. Any of the PDs are now too big to fail so whatever can be used to keep them afloat will be used, no matter how much deceit is employed and no matter who knows. Yes, extremely cynical, yet countless examples. Look at AMBAC’s keeping it’s ratings… Didn’t want to ignite a causation chain of more losses, so their ratings are left alone. There isn’t a thinking person alive who believes they are actually AAA, but there they sit, with AAA. We all know L3 assets that have no market value aren’t worth squat and the markets for many of them have completely evaporated, yet there they sit, hundreds of billions worth. The stakes are too high, too much money to be lost, so you cheat. Joe public listens to the daily spew from spin central CNBC, so except for the occasional blurb in the 6:00 news of inflationary consequences elsewhere in the world, the last thing they’re thinking of is L3 assets on Goldman’s books. When the Fed has exhausted or decided to halt spending it’s balance sheet away, it becomes an open wound.

  15. Barry Ritholtz commented on Apr 24

    Hey Moses (aka DK),

    Since you asked: If you include a real email address, I’ll (privately explain) 3 of your past 6 comments were flagged by my assistant for unpublishing.

    And by real email address, I don’t mean an anonymous Yahoo or hotmail account . . .

    Stand up and be counted.

  16. stuart commented on Apr 24

    One final comment for tonight. HELOCs. Subordinate to 1st lien mortgages and with an expected housing decline of 20%+, this means every HELOC taken out where the 1st mortgage was issued at a LTV greater than 80% will be negative. Total HELOCs o/s are slightly over $1.2 Trillion… ergo, the banks are facing hundreds of billions in losses on HELOCS. Another skeleton. Already, any property in foreclosure, or with a NOD or with negative equity where there was an outstanding HELOC, the HELOC is now worth zip. There’s not a chance in hell banks come clean on this and I have yet to hear any MSM “journalist” pursue relentless to get an answer from anyone asking why not. Blogs such as this one seem to be one of the very few sources where thoughtful critique of such issues are spelled out.

  17. Mr. Beach commented on Apr 24

    Now that the Fed has widened the array of collateral it will accept — reducing the likelihood of another Bear Stearns like event — what is the end game here?

    Do we just wait and see for the next 18 months until a market re-emerges for these level 3 assets?

    With the securitization business dead in its tracks, where do revenues come from for the next 18 months.

    IMHO, the slow bleed will be punctuated by blowups outside the Fed’s liquidity-umbrella. Anybody borrowing short to buy CDOs will continue to find it difficult to roll-over their loans. If so, who are these entities? Hedge funds? Close-end ETFs?

    I can’t imagine earnings come back?

  18. Darin commented on Apr 24

    Lawyers have a saying,

    “When you don’t have the facts on your side, argue the law; when you don’t have the law on your side, argue the facts.”

    Who said accountants couldn’t borrow (pun intended)?

  19. TomD commented on Apr 24

    Stuart has nailed it in his two posts above.

  20. Moses commented on Apr 25

    Barry I am here buddy.

    I have read your stuff for a while,
    but being the idiotic imebecile I am I did not notice the comments function until recently.

    Hope to be a frequent contributor and exchange ideas as long as your assistant allows it. My common theme is the onus is on the investor.

    Of the 6 posts of which several are gone,
    you did pick the softest ball of all.

    I concede you are critical of the press at large once in blue moon.

    No need to rehash the other five now,
    move forward I am sure the blame everyone and everything but the individual inbestor mentality will undoubtedly bring them forward again.

  21. Moses commented on Apr 25

    Sorry I missed the hedge fund reference.

    Barry-Stevie Cohen pays himself a billion dollars a year based on earnings generated by paying the brokerages for upgrades and downgrades before they are released to the rest of the public. Deserving? Brilliant?
    Corrupt? What do you call this and how do you describe it?

    I have no problem with the practice itself,
    freedom in markets implies some corruption even the legal kind.

    I have a problem with glorifying these individuals. I use individuals in plural because we both know extended extraordinary performance is not possible without shady activity.

  22. michael schumacher commented on Apr 25

    Goldman Sachs’ L3 of what they call “assets” is larger than it’s market cap.

    That says enough to me…


  23. dug commented on Apr 25

    The trouble with lying is when done too much the liars start to believe them too. The Fed believes the CPI numbers and banks will soon believe they aren’t insolvent and adjust their behavior accordingly. Nothing that has been done or will be done can make losses disappear, they can only be moved around. The disturbing thing politically is that it’s a foregone conclusion where the losses are going to end up and the great unwashed masses are already pretty grumpy about their standard of living.

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