Merrill’s write-down shows how little we know about real earnings
Posted by: in Stocks Money NewsFiled under: Scandals, Merrill Lynch (MER), Housing
While shares of Merrill Lynch & Co. (NYSE: MER) slid nearly 6% on the news of its much larger than expected write-down on subprime loans and CDOs, its significance is larger. The fact that Merrill increased its write-down by $3.4 billion not based on any sort of fundamental change, but based on a decision to use “more conservative assumptions,” is indicative of just how much leeway these banks have in deciding how much money they make.
In The Smartest Guys in the Room, the documentary about Enron, the narrator explains that the use of what Enron called market-to-market accounting (although it really wasn’t market-to-market — more like market-to-whatever the hell we feel like) allowed the company to report pretty much whatever earnings it wanted.
It appears that the investment banks are in the same position with their loan portfolios.
According to BreakingViews, “More worrying for Merrill’s investors, it reeks of dilettantish risk management. There have been more than enough signs this year that mortgage markets were cratering. And Merrill was arguably in a better position than most of its peers to judge the extent of the wreckage.
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