ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Guesstimates Won't Cut It Anymore--Gretchen Morgenson in the NYT 10-28-07

Updated on October 28, 2007

The Derivatives Genie is Out of the Bottle!

Excerpts from Morgenson article;

The $30 billion in losses and write-downs taken by big brokerage firms in the third quarter are not likely to be the last.

After last week it was no longer plausible to deny that mortgage loans, and the complex securities derived from them, had crashed--and caused a lot of damage in the process.

First to face the music was Merril Lynch with an $8.4 billion write-down, $7.9 billion of which was for mortgage-related assets. The write-down was $3.4 billion more than it had warned investors about just three weeks before.

Almost $8 billion of the firm's capital had vaporized in the third quarter because it had underestimated the degree to which its holdings of collateralized debt obligations, or C.D.O.'s had tanked. C.D.O.'s are pools made up, for the most part, of mortgage securities divvied up into tranches of differing risk levels.

The executives on Merrill's dismal conference call conceded that even after they decided to value their C.D.O. holdings more conservatively--resulting in losses--much of their methology was based on "quantitative evaluation." For the rest of us that means that Merrill was in the unfortunate position of having to guesstimate its exposure to losses.

Analysts quickly responded by forecasting an additional $4 billion in write-downs on Merrill's portfolio.

The C.D.O.'s (Merrill's and other banks') that may be subject to a downgrade hold subprime mortgage loans worth $33 billion.

With the C.D.O. market stopped dead in its tracks, it is not clear who will be willing to buy and at what price. But it's a good bet that these forced sales aren't going to add buoyancy to the market. A better bet may be to expect Wall Street to recognize further losses.

Intense auditor scrutiny comes once a year, and that is the period we are in now--fiscal years at many big brokerages, Morgan Stanley, Lehman Bros., and Bear Stearns, for example, in November.

"When it comes time for the auditors to attest, they are going to be very conservative," Mr. Rosner (Graham Securities expert on asset backed securities) said. That means write-downs will have to reflect the reality in the market, not some rosy scenario.

Way back in 2003, Warren Buffett defined derivatives--like those exploding on a balance sheet near you--as "FINANCIAL WEAPONS OF MASS DESTRUCTION."


Last week Merrill shareholders got a taste of that toxicity. Others will soon have their turn.

Here's a link to Morgenson's article.

This Time, Housing Is Taking Department Stores Down With It by Floyd Norris and Michael Barbaro

....Since April, when investors voiced optimism that the housing slide had been contained, shares of the country's biggest department store chains have fallen by about 30 percent. Here's a link to Norris's and Barbaro's article.

Paul Krugman on Mortgage Meltdown

Moyers and Morgenson on Mortgage Meltdown


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)