Merrill Lynch Smokes its Own Belly Button Lint

By Max Keiser
http://www.huffingtonpost.com/max-keiser/merrill-lynch-smokes-its_b_104667.html



Just before the crash of 1929 huge trusts operated by the largest banks on Wall Street were buying each other's stock to try and delay the inevitable. It's like the passengers of the Titanic trying to drink all the water in the ocean to avoid sinking. Just before the dot-com crash we saw similar banking desperation; banks were lending to zero-revenue and zero business plan start-ups to spend the loans as fast as they could to make it look like they were 'growing' and therefore worthy of an IPO. Before the recent mortgage meltdown and real estate crash, home builders were lending to buyers to buy already inflated (read: fraudulent) appraised houses with zero chance of getting repaid, but 100% chance of cashing out inflated stock options.

In the clearest sign yet that the lending insanity has not gone away and the full impact of the Greenspan drunken credit bacchanalia has not nearly been fully 'discounted.' Take a look at this story on Bloomberg;

By Bradley Keoun June 2 (Bloomberg) -- Leave it to Wall Street to profit from its own distress. Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the ``mark-to- market'' accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall. ``They can post substantial gains as a result of a decline in their own creditworthiness,'' said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. ``It's completely legitimate, but it doesn't make sense by any way we currently have of thinking of net income.''

If a tree falls in the woods and nobody hears it fall, does that stop Goldman, or Merrill, or some other investment bank from collateralizing the perceived sound and selling it as a hedge against some statistical probability worked out by an autistic 'quant' on loan from Bellevue working on the proprietary trading desk?

Is that the sound of one hand clapping, or is that the sound I make when I learn these mirror images of nothing-backed-bonds are in my pension account courtesy of non-falling trees sold by Merrill to boost their stock option related bonuses?

The Bloomberg story goes on to say;

So far, most banks' writedowns are ``unrealized,'' meaning they've been unwilling or unable to liquidate distressed assets. If prices reversed, the banks would record mark-to-market profits. The same is true for the liabilities. Companies can't ``realize'' the mark-to-market gains on their debt unless they buy it back at the discounted price. They're unlikely to do so, because the deterioration in creditworthiness means they'd have to replace the debt with higher-cost borrowings, Willens said. ``No one's going out in the market and actually retiring this debt,'' Willens said. ``It's a shell game.''

I can't believe anyone would allow such nonsensical accounting rules.