Emac's Stock Watch | Fox Business
« Why an Underfunded FBI Could Hurt You
The Fallout at Countrywide Escalates »

  • June 17, 2008 08:36 AM EDT by Elizabeth MacDonald

    Are Wall Street’s Writedowns Overstated?

    Lehman Brothers (LEH) as expected reported a $2.8 bn loss yesterday. Goldman Sachs (GS) reported profit results today weaker than a year ago, and Morgan Stanley (MS) is due tomorrow, with Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM) and Merrill Lynch (MER) due out in July. Writedowns are the order of the day on Wall Street.

    Never before in the history of the stock market have investors witnessed such colossal losses. Wall Street’s freelance experiment, in which it took it upon themselves to answer the very rich call for 100% home ownership in this country, has taken a calamitous turn.

    But have the financials’ writedowns been overstated? 

    Estimates have it that the writedowns and losses from the housing and credit crisis are veering toward $400 bn worldwide, with the International Monetary Fund estimating the writedowns worldwide at $1 tn when all is said and done.

    However, a new study from the Bank of International Settlements, the premier organization for central bankers around the world based in Basel, Switzerland, warns the writedowns may be overblown due to accounting rules used to book them. 

    It’s an issue I’ve cautioned you about before (see my blogs, “What’s Really Rocking the Stock Market,” “What Inning is the Great Credit Crunch In?”, “The Reality Check That Bounced”, and “What Congress Must Ask the Federal Clean-Up Crew”). Wall Street can use a range of accounting methods to value its illiquid asset-backed securities, none of which are bullet-proof. The rules have been called to mark to myth or mark to make believe.

    It’s more like mark to madness.

    The accounting rules have created massive writedowns, which are the reason why shares in the Wall Street powerhouses are trending down toward levels only seen at Time Warner, with its ocean liner of debt. By the end of 2007, two-thirds of the subprime writedowns were booked at just ten banks and brokerages.

    The BIS study on the potential overstatement of the financials’ writedowns do not take into account the fact that the accounting rules creating potential overstatements also likely inflated Wall Street’s profits when the housing bubble was ballooning (which let various chief executives walk out the door with rich pay packages based on fake earnings—see “Final Thoughts on the Fat Cat CEO Pay Hearing”).

    To calculate its writedowns, Wall Street often uses a hotly debated index that tracks credit default swaps (CDS), which are basically derivatives that are bets on the direction of an asset, in this case, the value of mortgage-backed securities (including subprime). The indices, called the ABX  series, is run by Markit, a London-based company that sells financial data, portfolio valuation information and over-the-counter (OTC) derivatives processing.

    Markit’s ABX index is illiquid and is only about two and a half years old. Trading in the first ABX index series started in January 2006. Each index consists of a group of equally weighted, static portfolios of CDSs based on 20 subprime MBS transactions.

    “It is simply absurd to mark down the value of performing assets just because some recently concocted illiquid indices based on illiquid securities have plunged,” says the closely followed economist Ed Yardeni.

    “It is widely-recognized by policymakers that so-called fair value accounting rules have needlessly exaggerated and exacerbated the credit crisis.”

    The BIS quarterly report includes a study of the value of mortgage-backed securities (MBSs), including “an analysis of the pitfalls of using Markit’s ABX indices to value mortgage-backed securities,” notes Yardeni. Check out pages six and seven of the report at http://www.bis.org/publ/qtrpdf/r_qt0806.pdf.

    The BIS estimates that the value of subprime MBSs issued from 2004 to 2007 is about $600 bn. But, the BIS says that by the end of May, ABX indices valued these securities at only about 59 cents on the dollar. Now the BIS is only talking about mortgage-backed securities valued at triple AAA here—other hot spots on the balance sheet have erupted from lower-graded MBSs, home equity and other consumer loans, leveraged loans, among other items.

    The BIS says that the ABX indices would imply total losses of about $250 bn on mortgage-backed securities, with almost half of these writedowns—$119 bn—coming from top-notch AAA-rated securities.
    But the BIS says the ABX indices overstates the $119 bn in writedowns by, get this, more than 60% due to a variety of reasons.

    The BIS recalculated what the losses on these AAA securities ought to be, and they total only $73 bn, bringing the total subprime-mortgage-related losses down 18% to $204 bn. 

    Why does the ABX overstate the writedowns?

    For one, ABX prices may not be representative of the total subprime universe, due to the indices’ limited coverage of the overall market, the BIS.

    For instance, securities picked up by any given ABX index are valued at about $31 bn. But the 2004 to 2007 vintage subprime MBS volumes are estimated at around $600 bn in outstanding amounts, so each ABX index only represents some 5% of the overall universe on average.

    However, the deals making up the indices hew pretty closely to the same collateral attributes (FICO and loan to value ratios, for example) to the overall market, by vintage, the BIS report says.

    More importantly, ABX prices may not be representative because each index series covers only part of the capital structure of the 20 deals included in each index, the report says.

    On top of that, the indices appear to misrepresent deals as being long term in nature, making the writedowns larger, when they are actually shorter in duration, which in turn should make the writedowns lower, the BIS report explains.

    The BIS report says that, specifically, tranches referenced by the ABX’s AAA indices are not the most senior pieces in the capital structure. Instead the ABX indices reference tranches with the longest duration (expected average life), the so-called “last cash flow bonds,” the report notes. The triple AAA ABX index prices reflect subprime deals that are longer in duration than those out there in the remaining AAA subprime MBS universe. 

    So, these claims receive any cash flow allocations long after all other AAA tranches have been paid. Because these tranches are showing low cash flow allocations, the ABX index records them as having lower value, creating the resulting writedowns, the BIS report says.

    BIS recalculated the writedowns, using newly available data for MBS tranches with shorter durations. The BIS says the $119 bn of losses implied by the ABX AAA indices as of the end of May are erroneously overstated by 62%, using its more realistic assumptions.

    Now, you know I don't make it a habit of trying to call the end of the world and I don't think we're headed for the abyss. I also fully support a moonshot to Mars so we can pack all those recession fanatics on it so they can annoy each other into oblivion. It's true, if you call a recession long enough, you can call yourself a seer, as someone once said--a stopped clock is right twice a day. Global growth is here to stay.

    And the BIS study, though it doesn’t cover all asset-backed securities and other hot spots on the balance sheets, sure should give you pause.

    With that caveat, always beware of self-deluded Wall Street bankers who exhibit a blinding, unquestioning belief in their own brilliance. They will have you believe that the worst is behind us.

    We've heard such comments from former executives at Bear Stearns (BSC), Merrill Lynch (MER), Citigroup (C), Lehman Brothers (LEH), and Countrywide (CFC). Keep in mind when you hear such absurdities this quote from education expert Laurence J. Peter: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

    I'm mindful of comments earlier this year out of Lehman Brothers, that the worst of the crisis is behind us. How Lehman can intimate all is well when Lehman is effectively THE MARKET for these securities (I’m sorry for the capital letters I needed to emphasize this) and all is not fine, is, well, beyond curious.

RSS Subscribe to Comments

DrDetroit

from article: "Now, you know I don’t make it a habit of trying to call the end of the world and I don’t think we’re headed for the abyss. I also fully support a moonshot to Mars so we can pack all those recession fanatics on it so they can annoy each other into oblivion. It’s true, if you call a recession long enough, you can call yourself a seer, as someone once said–a stopped clock is right twice a day. Global growth is here to stay." I do say - I find this a refreshing reminder. People often develop, or perhaps through lack of development - end up with a pysche that's disconnected and in turn project their own disconnected sense of being (often just the mere mortality) onto the world as a canvas - then go off about 'end times' when really ? It's just their own view on their own demise - but demise ONLY because their persona model is disconnected. Perhaps it is true with economics as well - if we become disconnected - even as a nation state - we begin to project just because we think in isolationist terms politically - that - oh no, just because we're having 'health' problems (e.g. economic health problems as a nation in the US) that the entire world is going to heck in a handbasket. I really like that reminder at the end of that paragraph. "Global growth is here to stay". I came to a similar conclusion after hearing Alan Greenspan talk as he was going about - well - finally talking after he stepped down, and in so many interviews he covered that protectionism is dead and that we're in a global economy now, that no one person can even comprehend it, nor one nation state can even exploit it and my favorite part - that we're at a (I'll add breathtaking) pivotal point in Werstern Civilizaton to witness a global economy emerge. So indeed, Global growth IS here to stay and personally ? Not even being in the sector of economists (a term that left me grasping for definition and understanding as a child, then again the world 'soul' did too) ? I find my greatest challenge is re-educating myself, or re-training myself to start to look at the nation state I live in from a global perspective, rather than looking or defining the world through a nation state perspective. I read things like "China is now endeavoring in exports to local surrounding countries such that the US consumption is not longer necessary for China to grow" etc, somehow I grew up thinking America was the world, almost geospatially, and now ? I see that most of the goods in my house ? I think they have 'Made in China' stamped on them -yes, I'm cheap ! My food soon to be CAFTA probably (although Columbian farmers sure seem to be saying they are exploited). I used to joke "Come to America, it's for sale" or "Why invade America when you can just buy it". This is the case with Abu Dhabi. Hmm... Seems typing in this box gets slower as the message gets longer. Oh well, neat article. Good point on Global Growth is here to stay.

June 17, 2008 at 12:00 pm

DrDetroit

from article: "I’m mindful of comments earlier this year out of Lehman Brothers, that the worst of the crisis is behind us. How Lehman can intimate all is well when Lehman is effectively THE MARKET for these securities (I’m sorry for the capital letters I needed to emphasize this) and all is not fine, is, well, beyond curious." Remember Alan Schwartz ? Friday night from his home in Palm Beach ? CEO of Bear Stearns ? "Everything is FINE, it's all speculation driving the negatives" Then ? by sunday Bernanke is opening a window to lend out to investment banks, first time since the great depression, and cutting a deal to save BS. By monday it was over. Looking at Lehman's stock ? uh, pretty clear to me if you look at rending, although I see SOME people say - looks like a great opportunity. Then again, maybe they would have said the same on BS. I lately have been asking myself what General Tommy Franks, and CountryWide have to do in commmon. I see a connection between Dick Cheney, Lockheed Martin, Larri Di Rita, Tommy Franks, CountryWide, Fox News and Bank of America. Maybe I'm crazy here, but I've been putting these people together. It all started when I saw Tommy Franks on the cover of some magazine with a big cigar in his mouth, oh yeah, it was a cigar magazine ! behind some nice styling desk. I asked myself, wow, what's he up to... he was the sr. architect that went down to the bush ranch for 5 months to plan for the war on terror. Turns out - he discovered banking, and now sits on the Board of Directors of Bank of America. all is well - Then I see this guy Larri Di Rita - the Pentagon sr. spokesperson under Rumsfeld- Di Rita was in charge of the media campaign for War on Terror - his last contribution before leaving the pentagon was to make sure the flushing of the Koran story got out via Fox News at GITMO - then ? Go figure, HE TOO moved over to become Bank of America's sr. spokesperson. I observed these two incidencs before CountryWide formally went belly up, and to some degree before 'sub prime' was even in the news. It was at the same time though that the CEO of CountryWide moved all of his stock back in Fall of 2006. He SAYS he had plans YEARS before to move that stock - oh well. All is well, but anyone who watches Fox News (I only watch for entertainment and to more or less see what propaganda I'm supposed to be buying next) - KNOWS that fox was CountryWide's #1 advertiser. Almost every commercial break in between being spooked that there is no tomorrow - and that terrorists would according to Dick Cheney - nuke a US city 'for sure' - contained a CountyWide ad. Now, remembering Neal Bush and the looting of the Savings and Loan. And CountryWide holding the MOST mortgages of ALL us homes of any US mortgage lender ? I started thinking when I observed Franks and Di Rita move over to CountryWide- for the TWO sr. architects on the war on terror - promoted by a network that practicly created the war on terror as a mind set with 'Terror Alert >>> Elevated run across the screen for YEARS - 24/7' running CountryWide ads in between ? Gee - you know ? to get into an Adjustable Rate Mortgage when you don't really quality ? you really WOULD have to believe there was no tomorrow. If you wanted to believe there was no tomorrow ? you could just turn on Fox, because there you could be assured - the terrorists ? are coming, and according to Cheney - promoted again and again, they WILL nuke a US city. Odd, where did Fox get it's intelligence on this ? Either way - you add it all together, and you have what I think is this. Bush's brother looted the savings and loan sector GEORGE bush is looting the entire US mortgage sector. BOTTOM LINE - CountryWide brings 12 figures (that's hundreds of billions) of red ink to Bank of America, and you can BET BoA will get the BS treatment up and coming from Bernanke. That means ? over 100 Billion - FREE AND CLEAR - in the - what ? 3 billion CountryWide acquisition. NOT BAD for 7 years work. Personally, I think bush also wanted to flush the social security monies onto Wallstreet to bring 2 trillion + in 'good times for all' as to investment firms LIKE Bear Stearns etc. That plan never surfaced, but he DID try to convince people that they never had the option for a 401k or roth IRA to begin with if they wanted to privatize. I mean, really, if people don't manage their OWN retirement account ? you really think you can FORCE a mandated necessity for education onto people that flat out clearly aren't capable or wanting to manage their own retirement account ? heck no, Wall Street would have partied all night long on 2 trillion dumped. Either way though, the TWO sr. architects on war on terror - will profit HANDSOMLY in the short term when Bank of America gets the 'bonus assistance' on the 100 + billion in red ink CountryWide brings to BoA. I bet if I dug some more, I'd find some OTHER characters at BoA that 'just discovered banking' after leaving the pentagon or bush admin. Bear Stearns ? Lehman ? the rest of the world that ended up HOLDING the BUNK bundled loans that piped through CountryWide ? they're the ones that pay. All the while BoA is going to get the DEAL of the CENTURY with their - eeks - 3 billion acquisition of nations LARGEST mortgage firm for US homes. Let's see- if you are told the world is ending, terrorism is going to release biological weapons, chemical - nuclear - really ? and you're giving opportunity to buy a home 'as if' the world IS going to end as you're being told on TV? wouldn't YOU TOO ? have potentially bought into the whole bait setup ? In the end, I think Liz MacDonald has it right, fear not ANYTHING, look forward to global growth - the world isn't ending, I might tag on - don't fear terror forever, and don't promote it either - it's just no good for kids growing up to be meditating on this stuff, NO way to let a child's psyche develop- I mean, sheesh, isn't a child's discovery of nuclear weapons ENOUGH to weigh down healthy development psychologically ? Why tag on 'fear terrorists who will use them' too ? What's the point of trying to protect a life that's being promoted to live in fear and borderline psychosis via some Bill O'reilly scaring the kids that 'oh no, the terrorists, they're gonna get nuclear weapons' What child can live sanely with that message ? I say if you're going to spook people that way, you better have names, faces, and actual intelligence to back it, or you're screaming fire in an elementary school. Mark my words, BOTTOM LINE, Bank of America will get assistance from the Fed on the CountryWide acquistion, and BOTTOM LINE, the two sr. architects that helped people 'live in fear of terror' to spook them to TAKE those ARM's and otherwise sub prime loans - will PROFIT from the ENTIRE fiasco. Profit handsomely. I find something wrong with that. I have to ask myself if this was all orchestrated. Remember, 9.11 was one thing, Afghanistan - ODDLY under bush's father GAVE 3 billion in aid through the CIA TO Bin Laden IN Afghanistan at one point to fight Russia. Here for 3 billion, Bank of America - and the TOP military brass behind the LATEST afghanistan venture - will be acquiring the company that holds the MOST US mortgages at over a hundred billion dollar profit. NOT BAD work for 7 years - Bush could have cornered the frozen orange juice market too I wager ! jk. Hey, these are all facts people. And the facts are - the two people who were behind creating a sense of hopelessness to fuel sub prime use on the consumer side - again, you would have to believe there IS no tomorrow to take out loans with no money down, interest only on a 350k home that was really worth 220k the year before... but those two people will be making out SERIOUS profit from the Bank of America acquisition. Without Fox News - it would not have been possible- and THAT is where you have to begin a criminal investigation if ask me. Just too convenient - the network that spooks people into living like there is no tomorrow - running statements from the Vice President that terrorists WILL eventually nuke a US city - really, where DOES Cheney GET his intelligence. I find that criminally negligent to spook people like that, I mean, they just might go out and buy a sub prime mortgage product or something believing they might a well live it up before the terrorists 'get us'. Gee Odd - top 10 cities in the world to live in report today - no US cities. And yet ? "Buy American" still lingers for those that have not woken up to realize -it's a global economy - and once you start focusing on the species - instead of nationality - and the the world instead of some arbitrary abstract temporary territory ? there really IS something to look forward too - and yes, humanity and the world are JUST fine, and I look forward to a wonderful world in the future. The icing on the cake is - once nationalism erodes ? or as I like to say - evolves ? or simply people start to realize Bretton Woods is dead, and we have more to offer each other together than apart as nations with nuclear weapons ? you know ? terrorism just disappears with nationalism. No more nation state ? no more target for terrorists... isn't that peculiar. Good article on pro-globalism Ms. MacDonald!

June 17, 2008 at 1:58 pm

DrDetroit

Oh yeah, go figure, guess what job Rumsfeld started out as in life An investment banker. You think there is any chance this is Savings and Loan part II only with US home mortgages ? bottom line - CountryWide bundled em up - sold em off, and folks like Bear Stearns, and now Lehman - HSBC- UBS - you name it - all pay for it... bottom line- the TWO sr. architects on the 'war on terror' - Larry Di Rita and General Tommy Franks will make out like bandits when BoA gets corporate federal welfare to help with the CW losses ensued on the 3 billion buyout. If Rumsfeld wasn't originally an investment banker, I might not think to myself - hey, it's JUST possible this was all one sellout and in the end ? hey, the US citizens win, for the 'live in fear of terror' really ? how long will anyone want to live like that. Eventually people will just correct their psyche and bury it, Greenspan says people NEED to have hope to want to work, and educate themselves. I agree. Fox took that hope away for several years - and for what ? what did we gain from promoting all the focus and Fox News Alerts - ? wasted time, people buying mortgage products - clearly they had to believe there was no tomorrow - and you know ? it's darn peculiar there was Fox to remind them - almost every commercial break - that they could get a home loan with no money down, interest only - JUST the panacea for someone believing there is no tomorrow. Ms. Macdonald - you thoughts on focus on Global Growth ? That is probably the remedy for this last 5 or so year era of 'let's live like there is no tomorrow, as if we can only define ourselves through nation state'. Now, heh, it is unfortunate that no one can afford to fly right now, OR even travel to Europe where the dollar is worth so little - and frankly ? not even accepted in many places in Europe anymore. So, in some way, US citizens are kind of trapped to isolationism - literally - because no one can afford to travel the world and realize, there is more out there - more to look forward to - many cultures - indeed - a WONDERFUL world out there, and a WONDERFUL global economy to celebrate. Thanks for the article - got me thinking that as nationalism evolved from fuedalism, certainly something will evolve from nationalism, without question for me - globalism.

June 17, 2008 at 2:12 pm

DrDetroit

You know ? I am a fan that intelligence wins. I am a fan that winning thinking systems - well- win. If I'm wrong on this speculation ? that Rita + Franks + Fox + CountryWide is one big investment banking scam to bring BoA 12 figure profits - which it will ? hey - fine, better days ahead. If I'm right ? The losers can come forward or live and die disconnected from the rest of humanity, and that to me, would be a living hell- to find out you lived your whole life - and wasted the opportunity to celebrate something far far far greater than yourself - collectively - what joy indeed to have that kind of cathartic breakthrough to ponder life is integrated and will exist for eternity. Even if these jokers turn themselves in, or not - providing I'm right this is Neal Bush Savings and Loan looting #2 only with US Mortages and CountryWide ? STILL - better days ahead, always why ? because- winning thinking system win and where Elaine Pagels states that it is the winners who write and score history ? I say - it is the winners who move on in life in the name of humanity. I tell ya, when I come across good intelligent people ? I get reminded that life IS integrated, that purpose is collectively derived more so than not. I've had it with this Wilsonian isolationist crapola spewed out of the White House on America is all that exists in the world. I've had it - and the world has had it with Bretton Woods USD definitions. There are more Euro's than US Dollars right now in circulation, the US needs to fix their airline sector and let their citizen's travel more abroad to get some fresh air. Sometimes I have to think - gee - that really hurts that people can't even get OUT of the country to travel, or vacation, and experience the world, but that's a different story and stems from petro - too many thoughts on that - all in all I think the weak dollar is like giving futures steroids. If I were Bernanke, I'd raise rates tomorrow 1% and take the better of two kinds of losses.

June 17, 2008 at 2:21 pm

DrDetroit

from Article: "Now, you know I don’t make it a habit of trying to call the end of the world and I don’t think we’re headed for the abyss. I also fully support a moonshot to Mars so we can pack all those recession fanatics on it so they can annoy each other into oblivion. It’s true, if you call a recession long enough, you can call yourself a seer, as someone once said–a stopped clock is right twice a day. Global growth is here to stay." You know ? Thinking about my lasts thoughts on this thread ? I just occurred to me some strange flat out facts in today's America. For one ? Even if people WANTED to go out and experience the world ? most people can't - they are lucky to find an airline probably that isn't in trouble - even if they COULD afford to fly abroad ? The USD is worth so little in comparison to so many other currencies, you'd have to be somewhat wealthy to afford going to say - even Europe right now. So, this point is - US citizen's are - whether they like it or not - STUCK in America, further ? many lower class people can't even afford to drive 50 miles now without questioning the costs in gas expenses. One certainly has to think twice about driving a distance such as across America. That's right, people can't even afford to drive across America right now, borderline FLY inside the US. DOE says expect $4 gas at least until end of 2009. Great - US citizen's can be sold a message of Fear Terror forever from Fox News, and in the meantime - they can't afford to go anywhere. Gee, was it worth it Fox News ? What do you have to show for yourself after all the media hype you've driven to spook people about terror - what did anyone gain. What ? did you show an actual terrorist that you wanted people to look for ? No. This entire network bandwidth has cost the psyche and peace of mind of every American Child who happened to tune in, and for what ? It's cost people into buying into loan products thinking - hey, Fox News tells me day in - day out - that terrorists are eventually going to monkey wrench everything with a nuclear weapons - according to Dick Cheney at least - so, hey, why not take out that Adjustable Rate Mortgage - or take a home equity loan to max out my second mortgage -or hey, I'll go no money down, interest only - what the hey - the world is ending for America right ? So says Fox. Now that people are thoroughly hopeless - I think Fox News has to be accountable, I define crime as that which is disadvantageous to ones community. It has been disadvantageous to spook people - to focus on it - day in, day out, running Terror Alert Elevated >>> 24 hours - 7 days a week across people retinas. There needs to be some accountability. I hope the greater than 100 billion profit coming to Bank of America via CountryWide's 3 billion acquisition ends up not in the hands of at least two of the people who brought us the 'war on terror'. Oh, I'm sure someone will say -oh no, it was World Trade Center 9.11 - Yeah, that's the day Bush (find the video on youtube, where bush says he watched the first plane hit, um, no one released that video until day 2) bush claims he saw the first plane hit, then he just say there for 14 minutes. WHo in their right mind would just sit there after news as that. He knew, I feel it in my bones, I could be wrong. This IS a bush looting of America, from the mortgage sector on down, the social security funds were supposed to be looted to, 2 trillion dumped onto Wall Street would have covered the sub prime losses to, no one would even care or think about it. if Rumsfeld wasn't an investment banker to boot, Tommy Franks wasn't on the board of directors for Bank of America, or Larry Di Rita who crafted the media for war on terror wasn't over at BoA now, and Fox running the CW ads in between psychologically terrorizing every viewer to live in fear and panic - for what ? for what ? what did that do except spook people into taking sub prime loans, I'd think twice and differently. Some AMAZING coincidences and connection I see I can't discount. If the Fed DOESN'T hand out free candy to BoA to hedge losses from CW acquisition, hey, yeah, this was one fun screen play candidate, but if the Fed DOES hand out free money to BoA for CW - you can BET this is Neal Bush Savings and Loan looting only looting the entire US mortgage sector. Point of this post was to share a realization I just had an hour or so ago that people can't even afford to leave the US, let alone drive around it. At some point, what's left to defend ?

June 17, 2008 at 3:22 pm

about this blog

  • Elizabeth MacDonald is the stocks editor for Fox Business Network. She is recognized as one of the top prize-winning business journalists in the country, and has received 14 awards, including the top prize in business journalism, the Gerald Loeb Award for Distinguished Business Journalism, and the Newswomen's Club of New York Front Page Award for Excellence in Investigative Journalism.

browse posts

most popular posts