Brokers' Fictitious Gains
Friday’s WSJ had this insightful column on Wall Street's earnings, Brokers’ Head-Scratcher.
“Still, some investors remained concerned about earnings quality, in part, because the firms all benefited from a tumble in the value of their own debt. Accounting rules require firms to take a gain on such declines if they are applying market values to some forms of debt or financial instruments.
At Bear Stearns, the already dismal quarter would have been even worse without about $225 million in such gains. Morgan Stanley, which also had a rocky quarter, said it booked $390 million in such debt-related gains, while Goldman said it benefited from nearly $300 million in this way. Lehman didn't specify its gains, but said they helped lower to $700 million the hit the firm took from markdowns on loans and securities.”
So much for a great quarter !
UPDATE: September 26, 2007 1:55pm
Goldman Sachs cut MER's q3 eps estimate from 1.95 to 0.15:
Analysts at Goldman Sachs (GS) to reflect "an extremely challenging operating environment" in the third quarter. "These estimates include a multi-billion dollar write-down due to weakness in mortgages, leveraged loans, and [collateralized debt obligations," they wrote in a research note. Goldman Sachs "significantly" cut its third-quarter and 2007 estimates for Merrill Lynch and "marginally" lowered its 2008 and 2009 forecasts, and reduced its price target on the stock to $94 from $108. Merrill Lynch "appears to be caught in the cross hairs of a number of headwinds in the quarter -- leveraged loan losses, mark-to-market losses on their CDO exposure, and deteriorating mortgage fundamentals," the analysts said. Merrill Lynch's shares were down 2% at $70.70 at last check in afternoon trading Wednesday.
>
Source:
Brokers' Head-Scratcher
KATE KELLY and DAVID REILLY
WSJ, September 21, 2007; Page C1
http://online.wsj.com/article/SB119033489643234610.html
Wednesday, September 26, 2007 | 11:45 AM | Permalink
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Barry, I just noticed you're now on the board of MicroIslet (MIIS).
http://biz.yahoo.com/pz/070926/127424.html
I recall you mentioned this company in the past, do you have the liberty to discuss it in more detail?
Posted by: TexasHippie | Sep 26, 2007 11:59:30 AM
Inadvertent hedging?
Posted by: AD | Sep 26, 2007 12:00:48 PM
Bear Stearns (BSC 119.0, +4.76) is a standout this morning. Briefing.com is hearing that the stock is up on chatter that a Chinese bank could take a 30% stake in the company. A Bear Stearns spokesperson would not comment on the rumor
Posted by: Neal | Sep 26, 2007 12:01:46 PM
I think you meant to say "Fictitious" in your headline.
best, GG
~~~
BR: Doh! (Damn spell checker).
I'll fix it . . .
Posted by: Graffiti Grammarian | Sep 26, 2007 12:04:41 PM
Yes the old adage of Hold and Hope could'nt be truer for these brokers....
Here I thought that holding and hoping was a stupid strategy....what was I thinking??
CIao
MS
Posted by: michael schumacher | Sep 26, 2007 12:09:17 PM
What a great gig! When does the music stop though?
Posted by: justin | Sep 26, 2007 12:48:45 PM
GS just WTFdowngraded ML to "Get This Shit Out Of My Portfolio", Q3 earnings from 1.95 to 0.15, that's zero-point-one-five. Schwing!
Posted by: L'Emmerdeur | Sep 26, 2007 1:52:35 PM
Two key levels worth keeping an eye on are in the 2 major financial etf's, the XLF (which includes banks, brokers, and insurance co's) and the RKH (regional bank etf but includes BAC and JPM). Both have given back almost all of the Fed rate cut euphoria and are trading just above last Monday's close (33.66 in XLF and 147.75 in RKH), the day before the Fed rate cut and well off the intraday high levels of 35.67 and 159.64 after the surprise 50 bps cut. The homebuilders are of course already gave up its rate cut rally. I raise this issue b/c these are the obvious groups that are most sensitive to fed policy and the level of interest rates.
Posted by: Peter B | Sep 26, 2007 2:17:59 PM
Barry, please tell me the .15 isn't Level 3 Asset Widcat Finance. For that matter please tell me it's not Level 2 Marked To Goldilocks. Concerning the CPI, let's throw in the FASB for complete bullshit accounting rules.
Posted by: SPECTRE of Deflation | Sep 26, 2007 2:35:27 PM
You can just hear the ML executives bitching about the accounting shenanigans at GS. "You bastards, you write us down but barely write down any of your own assets". Wait for the pissing contest to start. I wouldn't be surprised to see ML come out and write down GS stating they're suspicious about the quality of assets GS is keeping on its balance sheet and expects future material write downs as such, it's downgrading its 2008 and 2009 earnings for GS with a price target of a buck ten.
Posted by: Stuart | Sep 26, 2007 2:36:44 PM
i'm surprised that people are surprised at this...
these guys aren't known for their honesty.
i wonder how long they'll keep the charade up?
Posted by: m3 | Sep 26, 2007 3:11:26 PM
I hear that a bank from "Mars" is interested in all U.S. banks. Is this true?
Posted by: justin | Sep 26, 2007 3:11:32 PM
I guess Warren Buffet is an idiot for considering a 20% stake in Bear Stearns?
Posted by: Fred | Sep 26, 2007 3:34:55 PM
So Bear Stearns is in such a dire financial pickle it needs to sell a stake in inself (reminds me selling body organs) and its stock soars on the news....
this is too bizarre for words.
Posted by: karen | Sep 26, 2007 3:36:38 PM
Mr. Ritholtz is presently CEO and Director of Equity Research at FusionIQ, an independent quantitative research firm, a position he has held since May 2007. He has also been Chief Market Strategist for Ritholtz Research, an independent institutional research firm, since June 2006, and has served as Chief Investment Officer at Ritholtz Capital Partners, a New York hedge fund. From August 31, 2002 to January 2006, Mr. Ritholtz was Chief Market Strategist for Maxim Group, a New York-based investment bank.
BR...You are truly the man of a million job titles! Is the research avenue your primary focus or is that an offshoot of the money management biz? Good luck on the ventures.
Posted by: matt m. | Sep 26, 2007 3:43:04 PM
Not really Karen. Their cost of funds has been raised from the lock up in the capital markets. Fresh capital will fix that. Blood in the streets will ALWAYS bring out the smart/brave investors.
Do you remember they couldn't give away Bank America at $5?
Posted by: Fred | Sep 26, 2007 3:43:13 PM
"I hear that a bank from "Mars" is interested in all U.S. banks. Is this true?"
- - - - - -
I heard the same thing. A member of the Ferengi trade delegation was commenting how the depressed value of the US dollar relative to gold-pressed latnum was making the US financial sector look cheap.
Posted by: Short Man | Sep 26, 2007 3:59:23 PM
fred i remember that Warren buffett was buying homebuilders in jan/feb 2007
even gates foundation doing the same thing.....it was in the news.....i guess they thought home builders were very cheap back then (or they just wanted to dump their current holding, hence the news/rumour)
http://article.wn.com/view/2006/11/15/Gates_Foundation_beefs_up_holdings_with_home_builders/
************
Wed Nov 15, 2006 10:25am ET Market View | | By Karey Wutkowski WASHINGTON (Reuters) - Microsoft Corp. (MSFT.O: , , ) Chairman Bill Gates, through his charitable foundation, showed a strong interest in home builders despite a struggling market, reporting that the entity had taken new stakes in seven of the nation's largest home-building companies. The Bill & Melinda Gates...
*****
http://www.buffettsecrets.com/newsletter-jan204.htm
Posted by: techy2468 | Sep 26, 2007 4:27:22 PM
My two cents is the whole banking system is insolvent. We'll keep dancing around trying to pretend everything is fine until someone talks and all the counterparty derivative risk that the bears have talked about comes true.
Posted by: Shrek | Sep 26, 2007 5:36:55 PM
Can you share what yer smoking Shrek? Is is Donkey dung?
Posted by: jojo | Sep 26, 2007 7:04:11 PM
speaking of fiction...
The Bretton Woods II Fiction: The world economy is on the threshold of significant upheaval because of the substantial structural change in the global financial architecture, now popularly known as “Bretton Woods II.”
Posted by: glory | Sep 26, 2007 7:14:22 PM
Look JoJo,
The Fed would not have signed 6 23A expemption letters, opened the discount window to accept MBS & other impaired securities at an 85 price, and cut the discount rate 100bps if some major players were not technically insolvent. Either a few players go down or we are in the process of "turning Japanese" to borrow a phrase, experiencing a long-drawn process of recognizing all of the mortgage & CP losses that are flowing through to the securities these banks own. Like the old Fram commercial said, "you can pay me know or you can pay me later". If the dung shoe fits, wear it.
Posted by: Clyde | Sep 26, 2007 9:27:38 PM
Look JoJo,
The Fed would not have signed 6 23A expemption letters, opened the discount window to accept MBS & other impaired securities at an 85 price, and cut the discount rate 100bps if some major players were not technically insolvent. Either a few players go down or we are in the process of "turning Japanese" to borrow a phrase, experiencing a long-drawn process of recognizing all of the mortgage & CP losses that are flowing through to the securities these banks own. Like the old Fram commercial said, "you can pay me know or you can pay me later". If the dung shoe fits, wear it.
Posted by: Clyde | Sep 26, 2007 9:28:53 PM
Wow, just checked the blog and was going to respond, but Clyde said it all.
Posted by: Shrek | Sep 26, 2007 10:32:49 PM
s miok Says:
September 25th, 2007 at 11:49 pm
Be careful.
Scottrade does not allow any Money Market accounts -AND- does CD at 10K +.
So much for taking care of the small investor.
Please correct this set of statmenets, if I am wrong. Thanks.
Raymond Says:
September 26th, 2007 at 12:34 am
You’re correct about both. Scottrade offers no money market fund option and their CD min is $10,000. The rate they offer on their interest bearing cash account is also pretty low. If you stockpile your cash, I’d suggest moving it elsewhere. Scottrade must be profiting quite well from their cash accounts. Too bad most people don’t know better.
Posted by: michael | Sep 27, 2007 12:10:43 AM
techy why don't you tell the entire story, the "gates foundation" unloaded said homebuilders about 6 months later, no sign of them on the 13F.
And Buffett buying BSC? i thought he was against derivatives and wouldnt want to go through another General RE unwind fiasco nightmare headache PITA, is he up to his old shenanigans of saying one thing and doing another?
BTW, a post on my calls over the past week, curves steeper, emg markets higher, USD lower, damn im good & slightly richer-
Posted by: corky+mr clean=jeff macke | Sep 27, 2007 1:02:21 AM
The worst is passed. You can clearly see that in the Ted Spreads, and the bounces in the ABX markets. The FDC deal (bonds) were OVERSUBSCRIBED) at a small discount. You will hear none of that information here, of course.
Grave dancers always come in when others are fraidy cats.
Posted by: Fred | Sep 27, 2007 9:30:03 AM
Maybe maybe not, but we are going to have generate a lot of credit from somewhere to keep this party going and right now I dont know where its going to come from.
Posted by: Shrek | Sep 27, 2007 10:34:32 AM
Why I Distrust Goldman Sachs’ Good Fortune
“Goldman's profits rose astounding 88 percent in the last quarter...What makes this 88 percent pop in profits even more
amazing is how poorly the rest of Wall Street did...
Any company with such an outsized performance would automatically cause skepticism in any self-respecting journalist...
Back on Aug. 21 Treasury Secretary Hank Paulson made one of his many appearances on the friendly confines of CNBC...
Paulson: ‘We've re-energized The President's Working Group on Financial Markets. I think it's my job to talk regularly to market participants, but also talk regularly to key regulators and make sure that we are seeing the same issues, the same problems, working toward the same solutions." Liesman then changed the subject.’
Whoa! Let's get back to the part about it being the job of the U.S. Treasury Secretary to "talk regularly to market participants."
Does that mean that Paulson regularly calls his old colleagues at Goldman Sachs and consults?
Does that mean it is "the job" of this high government official, with an incredible number of secrets, to phone up his friends at Goldman whenever he's concerned about the market's actions? Why call "market participants" if not about the market?”
http://www.nypost.com/seven/09272007/business/why_i_distrust_goldman_sachs_g.htm
Posted by: John Crudele | Sep 28, 2007 7:04:29 AM
Here is an article posted 8/29/07.
"LEH - Lehman Brothers: Earnings Growth or Just Paycheck Bonuses?"
http://www.crossprofit.com/article.asp?id=103
WSJ article is two weeks behind blogosphere.
Posted by: CrossProfit | Sep 30, 2007 7:34:58 AM
In regards to the Bear Sterns buffet rumor- didn't LTCM have the same rumor floating around?
Posted by: steve | Oct 3, 2007 10:50:34 AM
