Esoteric Dissertations from a One-Track Mind

November 8, 2007

More Insight Into the Credit Crisis

Filed under: economy — Tags: — codesmithy @ 8:51 am

As I have examined earlier in “Understanding the Credit Crisis” the main question we are facing is determining how much money has been lost in structured investment vehicles that were backed by sub-prime loans. We know more disclosures of large losses are going to take place because people are continuing to foreclose. The delay is between companies holding these structured investment vehicles actually doing an honest reevaluation of their holdings. Something these companies are reluctant to do, because it means admitting huge losses and possibly restatement of past earnings.

The vast profits the financial sector has been reporting is based on unrealistic valuation of these structured investment vehicles. Obviously, they need to be reevaluated, so the question is where are companies hiding these assets in their balance sheets. The answer is “level 3 securities.” RGEmonitor looks at the % of shares in level 3 securities of various financial companies.

Company Level 3 % Level 3 assets to equity ratio summary
Goldman Sachs 15% 185%
Morgan Stanley 13% 251%
Lehman Brothers 8% 159%
Bear Stearns 7% 154%
Citigroup 105%
Merrill Lynch 2% 38%

Morgan Stanley recently reported a $3.7 billion write-down.  It claims that its remaining exposure in the subprime market is $6 billion.  Merrill Lynch reported a $8 billion write down and Citigroup is projected to be around $11 billion.  As the RGEmonitor article states, new accounting rules (FASB 157) will be put in place on November 15th.  The Royal Bank of Scotland Group Plc. project about $100 billion in additional write-downs according to FASB 157.  Basically, things aren’t adding up.  I honestly don’t think we’ll know how bad things will get until February 2008.  However, there still seems to be a lot of potential to go down, and an accurate picture of the situation is still elusive.

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1 Comment »

  1. […] under: economy — Tags: Art Laffer, Credit Crisis, Peter Schiff — codesmithy @ 7:04 am Back in November I wrote this about the credit crisis: Basically, things aren’t adding up. I honestly don’t think we’ll know how bad things will […]

    Pingback by A Review of the Credit Crisis « Esoteric Dissertations from a One-Track Mind — March 10, 2008 @ 7:04 am


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