-------Original
Message-------
Date: 6/11/2007
9:30:24 PM
Subject:
Mark-to-Model on Wall Street: The Numbers
Nouriel Roubini hoists
a
nice piece of detective work from his comments: Bernard
has gone down the list of Wall Street banks, looking at how much they
have in the way of level 3 ("mark to model") assets, compared to their
total equity. This is a ratio I haven't seen before, but it's certainly
fascinating. Here are the results:
| Bank |
Level 3 assets |
Equity |
Ratio |
| Morgan Stanley |
$88 billion |
$35 billion |
2.51 |
| Goldman Sachs |
$72 billion |
$39 billion |
1.85 |
| Lehman Brothers |
$35 billion |
$22 billion |
1.59 |
| Bear Stearns |
$20 billion |
$13 billion |
1.54 |
| Citigroup |
$135 billion |
$128 billion |
1.05 |
| Merrill Lynch |
$16 billion |
$42 billion |
0.38 |
Says Bernard:
This becomes very interesting now, doesn't it?
Looks to me like
Goldman Sachs and Morgan Stanley are by far in the WORST situation among
the investment banks.
And yet the media is focusing all of their
attention on Merrill Lynch---which actually has by far THE LEAST
EXPOSURE of all of them.
Now Merrill Lynch and Citigroup were leaders when it came to
structuring CDOs; Morgan Stanley and Goldman Sachs were not. So there's
a good chance that the level-3 assets of Morgan Stanley and Goldman
Sachs are not nuclear-waste CDOs but rather other products which might
well have no impairment at all. Indeed, in the case of Goldman, there's
a good chance that a large chunk of its level-3 assets represent
short positions in the mortgage market, rather than the long
positions which scuppered Merrill and Citi.
Meanwhile, if you're more interested in sheer magnitude than in the
ratio, Citigroup has a crazily enormous total amount of level-3 assets:
$135 billion. Has anybody bothered to chart that number over the past
few years? I suspect it's much bigger now than it has been
historically.
But if you're looking for the next shoe to drop, I think that it
might well be Bear Stearns. If it wrote down anything like the
proportion of level-3 assets that Merrill Lynch did, it could put a
serious debt in its total equity. And Bear, of course, was a very big
player in the mortgage market. Jimmy Cayne might have dodged a bullet
when the WSJ accused him of playing too much golf and occasionally
smoking a joint. But large fictional valuations on mortgage-backed
securities? That's the kind of thing investors take seriously.
If I was running a Wall Street bank, then, I'd immediately come out
and announce exactly what proportion of my level-3 assets had a
mortgage-backed component to them. Unless and until that happens,
questions will continue to surround these institutions.
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