Friday, November 02, 2007

"Enron-esque characteristics" / Deals With Hedge Funds May Be Helping Merrill Delay Mortgage Losses

Enron reloaded! I shouldn´t be surprised. This on top of Off Balance Sheet Vehicles, financing “Vulture Funds” to buy bank assets, UFOs (or Unidentified Financing Objects) & Level 2 and Level 3 accounting etc. makes me believe that this cartoon isn´t so far of the mark......... :-)

Enron lebt! Eigentlich sollte ich nach den letzten Meldungen über Off Balance Sheet Vehicles, die Finanzierung von “Vulture Funds” um Problemkredite aus der Bilanz zu bekommen, UFOs (or Unidentified Financing Objects) und Level 2 & Level 3 Buchführung usw nicht weiter überrascht sein. Evtl. ist der nachfolgende Cartoon doch nicht so übertrieben wie einst vermutet...... :-)

If the SEC, Auditors etc don´t act this should be viewed as another step in the bailout process..... Is still anybody wondering why gold is doing so well......

Sollten die Aufsichtsbehörden, Buchprüfer usw das auch noch durchgehen lassen darf man das wohl als weiteren Schritt in Richtung Bailout werten.....Gibt es immer noch welche die sich Fragen warum Gold so gut unterwegs ist......

Deals With Hedge FundsMay Be Helping MerrillDelay Mortgage Losses WSJ
Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer.

In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said.

> I assume that they aslo provide the probably very cheap financing.....

> Ich gehe mal davon aus das Merrill zudem noch die wohl günstige Finanzierung sicherstellt.....

While the Merrill-related entity's assets and liabilities weren't on Merrill's own balance sheet, Merrill might have been required to take a write-down if the entity was unable to sell the commercial paper to other investors and suffered losses, the person said. The deal delayed that risk for a year, the person said.

At issue with any hedge-fund deals is whether there was an attempt by Merrill to sweep problems under the rug through private transactions kept out of view from investors. Some previous scandals, such as the collapse of Enron Corp. and the troubles of Japan's financial system in the 1990s, involved efforts to hide problems through off-balance-sheet transactions.

Ground Zero
Merrill has become ground zero of mortgage problems in the U.S. Last week, the firm announced a $7.9 billion write-down fueled by mortgage-related problems -- one of the largest known Wall Street losses in history -- after projecting just a few weeks earlier that the write-down would be $4.5 billion. Merrill also took a $463 million write-down, net of fees, for deal-related lending commitments, bringing the firm's total third-quarter write-down to $8.4 billion.

The rapid widening of Merrill's losses has led investors to wonder whether other banks and brokerages have a good grasp of their exposure to bad debt. Bank shares fell sharply yesterday, contributing to a 2.6% fall in the Dow Jones Industrial Average. Merrill's shares fell $3.83, or 5.8%, to $62.19 in 4 p.m. trading on the New York Stock Exchange.

Making the Rounds
"Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities," Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note. "One fund claimed that Merrill was offering a floor return (set buy-back price)," she said in the note, "so this risk would return to Merrill." Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter.

Thanks to Randy Glasbergen

In recent weeks, Merrill has been scrambling to line up hedge funds to take as much as $5 billion in mortgage-related securities, people close to the situation said, part of what Merrill executives refer to as a "mitigation strategy." Under the strategy, which started earlier this year, Merrill has tried several means of lowering the risk of its exposure to mortgage-backed securities, these people say.

In accounting for such transactions, "the general guiding principle is whether the benefits and risks of ownership were transferred," says Charles Niemeier, former chief accountant for the SEC's enforcement division and now a director of the Public Company Accounting Oversight Board. Legal questions can arise if the seller retains some exposure to the risk of the assets losing value, and if the deal is designed to disguise the picture of a business's financial health.

Other big securities firms with mortgage-related losses have arranged similar deals with hedge funds. As disclosed in a recent page-one article in The Wall Street Journal, Bear Stearns Cos. sold $1 billion of risky mortgage loans to a hedge fund under a one-year pact known as a "mandatory auction call." Bear Stearns agreed to participate in an auction for the loans that provided the hedge fund with a guaranteed minimum return.

Three big U.S. banks are assembling a group of financial institutions to create an investment pool to buy some mortgage-related securities from "structured investment vehicles" that are being forced to sell. That effort, which is backed by the Treasury Department, has also led some investors to question whether the goal is to delay the point at which banks recognize losses on troubled assets. The banks say their aim is to forestall forced selling of the assets.

In mid-July, before the credit crunch worsened, Merrill reported better-than-expected earnings with little impact from exposure to mortgage-backed securities. Asked about the firm's mortgage position on a call with analysts, Merrill Chief Financial Officer Jeff Edwards said: "Proactive aggressive risk management has put us in an exceptionally good position." Two weeks later, Mr. O'Neal personally sent an email to Merrill employees assuring them the firm had such risks well in hand.

By the end of June 2007, Merrill had CDO exposure of $32.1 billion and a subprime-mortgage exposure of $8.8 billion, totaling $40.9 billion. Much of the CDO exposure was in triple-A rated "super senior" slices. These were supposed to enjoy strong protection against defaults, but they began to decline steeply in price in late July.

By the end of September, Merrill says it reduced such positions through sales, hedges and write-downs to $15.2 billion of CDOs and $5.7 billion of subprime mortgages, a total of $20.9 billion. The write-downs totaled $6.9 billion for CDOs and $1 billion for subprime mortgages.

> Nice to see that the call for transparancy is working so well.....

> Schön zu sehen wie die Forderung nach mehr Transparenz so konsequnet umgesetzt wird.....

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Blogger jmf said...

Cheyne paid staff shock

Hedge fund managers at Cheyne Capital Management shared a £101m pay bonanza just eight months before one of their investment vehicles collapsed.

Staff at the London-based hedge fund, including founders Jonathan Lourie and Stuart Fiertz, shared the cash in the year to December 2006…

The accounts show that Cheyne uses a Bermudan offshoot called Cheyne Global Services (CGS) to pay its staff, who are technically employed by CGS and seconded back to Cheyne.

Cheyne pays the money to CGS to cover costs and expenses, most notably the remuneration of employees

Well done :-)

I would like to see the face from the investors that have lost large parts of their investments


1:59 AM  
Anonymous Anonymous said...

By John Bogle - Tuesday, 02 January 2007

Management became the master of the numbers, and our public accountants, too often, went along. In what I've called "the happy conspiracy" between corporate managers, directors, accountants, investment bankers, and institutional owners and renters of stocks, all kinds of bizarre financial engineering took place. The reported numbers met the demands of the expectations market, but often had little to do with the realities of the business market. Loose accounting standards made it possible to create, out of thin air, what passes for earnings, even under GAAP standards. For example:

* Cavalierly classifying large charges against revenues as "immaterial."
* Hyping the assumed future returns of pension plans, even as rational expectations for future returns deteriorated.
* Counting as revenues sales made by lending corporate monies to the purchasers.
* Merger adjustments involving huge write-offs of accounts receivable, only to collect them later on; and write-offs of perfectly good plant and equipment, eliminating future depreciation charges.
* Excluding the cost of stock option compensation from corporate expenses. (This practice has now, happily, been prohibited.)
* And, lest I forget, timing differences between GAAP and tax accounting.

And I haven't even touched on the concealment of debt in special-purpose entities, abused most notably by Enron.

5:28 PM  
Blogger jmf said...

Moin Anon,



And I haven't even touched on the concealment of debt in special-purpose entities, abused most notably by Enron.

Lets hope that this time some Blue Chip names will take hard hits trying to hide the risks associated with these kind of behaviour

And looking at C, Merrill etc i really can´t hide my Schadenfreude

1:49 AM  
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11:20 PM  

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