Credit Crunch May Cost Banks, Brokerages $500 Billion

Posted In: Brokerages, Crash Prophets, Credit, Derivatives, Foreclosures, Investment Banks, Level 3 Assets, Mortgages, Subprime, Wall Street

Last Friday, legendary investor Jim Rogers told Bloomberg in an interview:

I am short the investment banks, as you know. I added more not too long ago. There’s a lot of phony bank bookkeeping going on. You should learn the word level 3 accounting, level 3 assets, because you’re going to hear a lot about it in the next 6 months.

Forget the 6 months. The Royal Bank of Scotland Group’s chief credit strategist Bob Janjuah put out a report yesterday that predicted the credit crunch will cause $250 billion to $500 billion of losses at banks and brokerages globally. According to Bloomberg, Janjuah said, “This credit crisis, when all is out, will see $250 billion to $500 billion of losses. The heat is on and it is inevitable that more players will have to revalue at least a decent portion” of assets they currently value using “mark-to-make believe.” He explained the significance of level 3 assets in his note. “The Financial Accounting Standards Board’s rule 157 makes it more difficult for companies to avoid putting market prices on their hardest-to-value securities, known as Level 3 assets,” Janjuah said. Rule 157 goes into effect on November 15.

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What gives me nightmares is the staggering dollar amounts we’re talking about here. To date, the credit crunch has forced Wall Street banks and brokers to write down at least $40 billion as the result of record foreclosures. Yet, Bloomberg is reporting the following levels of exposure:

  • Morgan Stanley, 251% of equity in level 3 assets
  • Goldman Sachs, 185% of equity in level 3 assets
  • Lehman Brothers, 159% of equity in level 3 assets
  • Bear Stearns, 154% of equity in level 3 assets
  • Citigroup, 105% of equity in level 3 assets
  • Merrill Lynch, 38% of equity in level 3 assets

“If you look at the writedowns just at Citi and Merrill already it’s about $20 billion, so $100 billion may be on the conservative side globally,” Sajiv Vaid of Royal London Asset Management in London told Bloomberg yesterday. Janjuah said Merrill Lynch, with the least amount of exposure to level 3 assets, “may well come out of all of this in the best health.” Citigroup doesn’t look too bad either.

Wouldn’t it be something if Merrill Lynch’s ex-CEO Stan O’Neal ends up looking like a hero, and people stop calling Citigroup “Shitty-group,” after all is said and done?

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