2008-08-27 Q3:

Canadian Imperial Bank of Commerce fiscal third-quarter has mercifully come to an end. CIBC disclosed that 91% cliff dive in profits year-over-year, amid the drumbeat of. We beat expectations from the regular financial media. among the damage was an $885 million subprime related write-down along with an increase of $27 million in loan-loss reserves, bringing the total to $203 million. The bank raised about $3 billion in capital for the quarter, we are counting their level 3 assets as zero until further notice.

Here’s the tally thus far:

1. Tally for Write-Downs/Charge-Offs: $6.7 B + $885 M = $7.585 B
2. Tally for cash raised: $2.9 B
   
3. Current level of Level III assets at $0.0
4. Current level of loan loss reserves at $203 M
   

We now sum all the distresses to get CIBC’s current Misery Index of $10.69 B

2008-06-23 Mono Line Crunches CIBC:

In addition to the run-of-the-mill subprime-related write-downs of $2.5B in the second quarter, Canadian Imperial Bank of Commerce just ran smack into the fallout of the insurer downgrades last week.

The running tally is $5.7B + $1B to be tacked on. It is very possible that the bank’s capital raised total soon will go positive as well. <>

2008-05-29:

CIBC once again took the largest chunk of subprime-related write-downs for the latest quarter among Canada’s biggest banks and increased its loan loss provisions by 6%.

Besides $2.5B in subprime write-downs, the second quarter scoreboard included:

a net loss of C$1.1 billion, or C$3 a share, compared with year-earlier net income of C$807 million, or C$2.27 a share. The latest results included a net C$4.54 a share in charges, with C$4.37 of that coming from structured-credit losses. Revenue tumbled 96% to C$126 million.

Total so far is $3.2B + $2.5B = $5.7B

2008-02-20:

In its annual accountably report, CIBC said that 2007 net income was $3.3B, down 7% from 2006. The 2007 revenue decreased primarily due to mark-to-market write-downs on collateralized debt obligations and residential mortgage-backed securities related to the U.S. residential mortgage market. The bank took a total of $753M in pretax charges in 2007 related to its U.S. subprime exposure.

The sum total of subprime-related write-downs as of this date is at least $3.2B, $2B of which was to ACA Capital following a downgrade of the insurer by Standard & Poor’s. In fact, the failure of the monoline insurance industry represents the bank’s greatest risk of future subprime-related write-downs. CIBC has disclosed exposure of $8B related to the U.S. subprime mortgage market.

Concerns are largely focused on the bank’s remaining exposure to the U.S. bond insurance industry, where even the biggest companies in the sector have seen their stock prices plummet amid concerns about how they will deal with the financial crisis.

Future losses are estimated at $1.6B and $4.1B for first quarter and full year 2008. Past results are $753M (pre-tax) charges and 3.2B of write-downs due to U.S. subprime mortgage losses.

Bloomberg is heralding the earnings of Canadian International Bank of Commerce and sounding like Jim Cramer in calling for a bottom for the bank’s troubles.

Canadian Imperial Bank of Commerce surged in Toronto trading after reporting debt write-downs that were less than analysts’ forecast, indicating the worst may be over for the bank that’s had more debt costs than any Canadian lender.

Don’t you believe it. Canada’s fifth-biggest bank really stunk up the joint when it reported its fiscal third quarter 2008 earnings. Soft revenues were hammered by an $885 million write-down on a subprime hit. The bank said that year over year earnings are down 91% to $71 million versus $835-million ($2.31) in the same period of 2007. That write-down follows on the heels of a 2.5 billion write-down in the previous quarter and has forced the bank shake loose the subprime dead weight it’s been carrying.

The bank has taken a number of steps to shore itself up following its writedowns. It sold the bulk of its U.S. investment banking and trading operations to Oppenheimer Holdings Inc., parting ways with 600 employees, in a deal that closed at the beginning of this year. At its Canadian investment banking business it shuffled executives and cut 100 jobs. The bank also raised $2.9-billion (Canadian) of equity this year to strengthen its balance sheet.

But the financial media just won’t quit to then that seems the only good news is bad news. Speaking of the write-downs Rick Hutcheon, president of RKH Investments said this

“The fact that it wasn’t a billion or billion-half writedown was quite encouraging,”

No it’s not, it just means things could have been worse, and the bank expects things to get worse, that is why they’ve increased their provisions for loan-loss.

Provisions for credit losses were increased during the latest quarter to $203 million, up from $162 million a year earlier and up from $176 million in the second quarter of 2008 ended April 30.

Canadian International Bank of Commerce has been the hardest hit of the Canadian banks by the US subprime crisis. The bank is doing a more than competent job of dealing with the position it finds itself, though. It finds itself in that position by its own hand. Despite what the cheerleaders on Bloomberg and Forbes want you to believe the banks weigh out of the subprime words, as with the credit crisis has a long way to go.

The Bank of Montréal’s subprime wright down total has yet to break $1 billion. Our count stands $611 million, with third-quarter pretax writedowns of C$134 million bringing the total to C$745 written down to subprime so far.

By skillfully renegotiating two of it’s commercial paper trusts, the Apex and Sitka Trusts, the bank has avoided taking serious write-downs. But the cracks are beginning to show.

Bank of Montreal’s net income sank 21% in its fiscal third quarter as the lender sharply raised its credit provisions and posted yet another charge for valuation adjustments in its capital-markets division.

Bank of Montreal said its provision for credit losses rose to C$484 million from C$91 million a year earlier. Analysts had expected an increase to C$195 million. The bank said C$247 million of the provisions were for two corporate accounts related to the U.S. housing market that were identified as impaired.

Bank of Montreal sharply increased its provisions in the first and second quarters and said in May that provisions for the balance of the year would be above the C$170 million recorded in the first quarter. It had initially set a target for the year for credit-related provisions of C$475 million; so far, provisions have totaled C$755 million.

Citing the economic environment, the bank reiterated it doesn’t expect to achieve its targeted earnings-per-share growth of 10% to 15% in fiscal 2008.

Let’s just blame it all on the environment right boyz. Of course in addition to preparing for future quarters, the bank wasn’t able to escape sub-prime related write downs for the third quarter.

Profit at Bank of Montreal’s BMO Capital Markets investment bank increased 34 percent to C$259 million from a year earlier, as trading revenue surged more than fivefold to C$220 million. Results in the unit were pared by C$19 million in costs for job cuts, and pretax writedowns of C$134 million for the declining value of debt investments, preferred shares and Canadian asset- backed commercial paper.

According to its third-quarter report Bank of Montréal $5 million worth of assets categorized as levele 3.

2008-08-26 Q3:

Bank of Montreal, reported its third-quarter earnings today. Profits were down on the increase in it’s loan-loss reserves as write-downs increased by $134 million.

Here’s the tally thus far:

1. Tally for Write-Downs/Charge-Offs: $6.11M + $134 M = $745 M
2. Tally for cash raised: $0.0 B
   
3. Current level of Level III assets at $5.0
4. Current level of loan loss reserves at $484 M
   

We now sum all the distresses to get CIBC’s current Misery Index of $1.234 B

2008-05-29 Write It Up:

The Bank of Montreal was good to its word and not only took no further write downs on its assets, but the bank removed some of the previously written down C$495 million investments in the first quarter. The after tax recovery amounted to $28 million and the bank still has not raised significant capital. So the damages and distress come to $639 million - $28 million

2008-03-19: Instead of adding a hefty $1.15 billion to Bank of Montreal’s top line we are reporting that the bank skillfully renegotiate it two of it’s commercial paper trusts, the Apex and Sitka Trusts.

The Toronto-based bank will provide about C$850 million ($839.8 million) of the C$1.15 billion in funding to satisfy collateral calls for the Apex and Sitka Trusts, Bank of Montreal said in a statement today sent by Canada NewsWire.

Bank of Montreal said the risk of a credit loss is “considered low” and that it doesn’t expect to take further writedowns on its C$495 million investments in the trusts as of Jan. 31.

2008-02-29:

The Bank of Montreal has been making disclosures so far with fingers crossed. Today the

Bank of Montreal has signalled it may pull out of an effort to restructure $33-billion in stranded asset-backed commercial paper, as mounting woes in the global credit market leave the bank facing margin calls of more than $500-million on two of its own ABCP trusts.

That’s interesting since we were not aware of a $33 billion Big fat ones to begin with.

Bank of Montreal’s specific commitment to the so-called liquidity line has never been disclosed, but it is one of four Canadian banks that agreed in December to provide as much as $2-billion in total.

The bank reports Q1 2008 results on March 4, but there seems to be at least $495 million more in exposures to look for.

BMO’s problems are particularly acute, with the bank last week announcing $490-million in writedowns and this week facing as much as $495-million more because of the unravelling of two trusts that it runs.

2008-02-22:

Having confessed it’s fourth quarter 2007 sins the Bank of Montreal pre announced a C$490 million first quarter 2008 pretax charge due to the credit crunch followed by the drain to buttress support for two leaky SIVs, of up to US$11 billion to Links Finance Corp and 1.2 billion euros (US$1.76 billion) to Parkland Finance Corp. The charge includes

• C$160 million pretax exposure to ACA Financial Guaranty Corp

• C$175 million related to trading and structured credit positions

• C$130 million for its holdings in a Canadian asset-backed commercial paper investment called Apex/Sitka Tr

• C$60 million before tax increase of general provision for credit losses

• C$25 million pretax write down of the value of its stake in SIVs

The C$11 billion in support to the two SIVs is a sticky item. Last November the bank provided $1.6-billion to support the SIVs, but said that maximum exposure was much smaller. After the 11 billion number was revealed Blackmont Capital analyst Brad Smith was chafed,

“We anticipated some level of additional support would eventually emerge, [but] we believed management had made it clear that full liquidity support would not be extended to its two SIVs,” Mr. Smith said in a note to clients.

Was that the last of it on the SIVs or did the bank have it’s fingers crossed again? We will see when the bank reports on March 4. If nothing blows up it should look like $149M + $490M =$639M

2008-02-19:Bank of Montreal (BMO) saw it’s full-year 2007 earnings drop by 20 per cent to $2.1 billion from $2.7 billion it year before, due to a ‘’slew of one-off charges” the bank recorded $353 million provision for credit losses. The the full year 2007 data is sketchy but the remaining credit related concerns revolve around the bank’s exposure to asset-backed commercial paper and structured investment vehicles. For the fourth quarter

Bank of Montreal reported a 35 percent drop in fourth-quarter earnings to C$452 million, largely due to several capital-markets charges announced in advance.

BMO recorded C$318 million of charges before tax (C$211 million after tax) in the quarter for trading positions, and for lower valuations on its Canadian asset backed commercial paper and SIV investments.

Among the charges, BMO wrote down the value of its holdings of the two SIVs’ capital notes by about C$15 million, or 20 percent.

BMO also cut by about C$134 million, or 15 percent, the mark-to-market value of its Canadian ABCP holdings, which include commercial paper issued by a BMO-sponsored conduit and paper sponsored by nonbank conduits.

There were trading related charges amounted to (pre-tax) $853-million for the full year. Not counting the trading loss we get from above.

Write downs: on SIV + commercial paper = C$15 million + C$134 million

Bank of Montreal is due to report first quarter 2008 earnings on March 4.

2008-08-25 Robin Hooded:

Deutsche Bank has been forced to cough up cash to repurchase some of its own junk, specifically auction rate securities. Deutsche got hit with a $15M fine and must buy back of about $1B in auction rate notes.  <>

2008-08-02 Q2 Stumbling Block:

Deutsche Bank somehow had positive earnings in the second quarter, but the bank still managed to unveil $3.6B in write-downs and $133.86B of Level 3 assets. The bank was also able to increase loan loss provisions to $210.1M, up from $126.1M a year earlier.

Here’s the tally thus far:

1. Tally for Write-Downs/Charge-Offs: $18.6B + $2.3B = $20.9B
   
2. Tally for cash raised: $0.0
3. Current level of Level III assets at $133.86B
4. Current level of loan loss reserves at $387.57M
   

We now sum all the distresses to get Deutsche Bank’s current Misery Index of $155.15B <>

2008-05-22 Write Downs Count of a Different Sort:

We have been keeping a running tally of write downs and other credit related distress taken by the major banks since 2007. But here come a write down count of a different sort, how much in writedowns and credit losses firms have written off per wholesale banking employee.

Deutsche Bank - $7.6bn, 20,000, $380,000 per employee

2008-05-19 - Off Balance:

Banks are not writing down their write-downs and getting away with it. Instead they are writing them down in the balance sheet and there is a distinction.

Deutsche Bank was hiding $7B on the balance sheet, but we will correct things for them by adding $7B to their existing $11.3B total. New sum = $18.3B.

2008-04-28 - No where to Run … or Hide:

Deutsche Bank’s twenty-quarter win streak came to an end as the global credit bubble disaster finally caught up. With their market values in free fall Deutsche Bank was forced to account for the values of mortgage - backed securities and loans for leveraged buyouts. That accounting brought a $487.7 million hit to the bottom line on write downs of $4.2 billion, half of all of 2007 write down total.

2008-04-28 - No where to Hide:

Deutsche Bank reaffirmed that it would that it expected to write down $3.9 billion related to the U.S. subprime collapse. The bank alos intends a rights issue.

2008-04-01:

Deutsche Bank announced that it would more than double up its writedown total. Tuesday the bank said it expected to write down $3.9 billion due to market conditions triggered by the U.S. subprime collapse.

“Conditions have become significantly more challenging during the last few weeks,” the bank said. “Reflecting this environment, Deutsche Bank anticipates in the first quarter 2008 markdowns in the region of €2.5 billion, related to leveraged loans and loan commitments, commercial real estate and residential mortgage-backed securities.”

In so doing another discontented CEO via words and deeds comes more into line with the reality of the subprime crash and its consequences, as chief executive Josef Ackermann, acknowledged concrete losses for the first time. The acknowledgement brings Deutsche Bank’s writedown tally to $7.1 billion.

We still have no specific information on where these writedowns originate from. Could it be the MortgageIT toxic waste dump? In that case, this may be only the beginning. But even the full announcement may not make this clear.
2008-02-09:

In Macklowe seen in default, no foreclosure yet we witness yet more un-highlighted downside risk Deutsche Bank faces:

Talks between New York real estate titan Harry Macklowe and lenders on Manhattan office buildings he bought last year broke for the day without resolution, a person briefed on the matter said on Friday.

The lack of agreement with the lenders technically could put Macklowe in default, the source said, adding that none of the lenders are currently pushing for foreclosure on the buildings.

…

Macklowe reportedly borrowed $5.8 billion in February 2007 from Deutsche Bank AG to buy seven Manhattan office buildings formerly owned by Equity Office Properties.

Last week, Macklowe, reportedly reached a tentative deal with Deutsche Bank to turn over the buildings, which he bought for $7 billion. Deutsche Bank declined to comment on the matter.

Macklowe reportedly owes Deutsche Bank $5.8 billion in acquisition financing that is known as “non-recourse” — which would allow Deutsche to take control of the buildings, but do not give it a claim to the rest of Macklowe’s empire.

Ruh-roh. On the hook for $5.8B, non-recourse?

Not a manifest risk, you say? Ok kids, raise your hands if you think the price risk on those Manhattan office buildings, now post-credit crunch, is to the upside instead rather than the downside?

That’s what we thought. Let’s be generous and assume the valuations take only a 10% hit. That means Deutsche Bank would be out a cool half-billion. That kind of money starts to add up. Or subtract, as it were.

If the notes are renegotiated, of course, Deutsche Bank will still be out the equivalent value, as it is the carrying cost relative to market value and conditions that is sinking Macklowe. So either principal or interest or both will have to take a haircut.

Sorry Deutsche Bank, you’ve been punked (and by Sam Zell and Blackstone, no less). Welcome to the “bagholder club”.

We wonder how much of the rest of DB’s asset-side loan book could be considered this kind of “top-buying”. Things that make you go “hmmm….”

First Writeup, 2008-02-07:

Deutsche Bank just reported its full 2007 results, reporting a total of about $3.2B in write-downs between the third and fourth quarters (all but about $73M worth / 50M euros in the third), and it even managed to turn a small profit amidst the credit market calamity. And wouldn’t you know it, the bank didn’t have a lick of losses due to the subprime breakdown!

They thus predict a pre-tax profit of about $12.3B equivalent for the present year.

Excuse us if we don’t quite believe the subprime bit … or the rosy forecast.

You see, back in 2006, Deutsche Bank bought a little lending outfit called MortgageIT — a transaction that was consummated in January 2007 (quite late in the housing finance collapse game). While the market was definitely tanking prior to that point (visible on MortgageIT’s Q-3 ‘06 results), Deutsche Bank plowed forward with the acquisition anyway. It paid a little over $400M for the company. It was quite a boon to MortgageIT’s founders, who had just gone public a few years before.

MortgageIT had just got into securitization and something called “CDOs” big time in 2005. They also decided to start retaining a significant chunk of their portfolio. Most of their business consisted of Subprime, Alt-A, Pay Option ARMs, and Jumbo loans.

Well, at least they didn’t get into HELOCs and second lien purchase loans (which are more often than not close to worthless these days).

At any rate, from the last data we saw, MortgageIT had about $4B in its held portfolio, about $4B of loans being held-for-sale, and about $4B of outstanding warehouse lines (late 2006 data).

That’s about $12B of potential exposure backed by some very weak collateral. We wonder how much of that exposure lingers today, buried in the bowels of DB’s balance sheet.

If you know anything, please contact us. DeutscheBank also appears to have some very large gross derivatives positions (in excess of $40T). Now that the reliability of counterparties is coming in to question, some of those net hedges may not match up anymore. Again, if you know anything, contact us.

2008-08-25 Robin Hooded:

Goldman Sachs has been forced to cough up cash to repurchase some of its own junk, specifically auction rate securities. Goldman was stung by a $22.5M fine and must buy back about $1.5B in auction rate notes.  <>

2008-06-17 Same Ole Same Ole:

Goldman Sachs reported credit-related write-downs of less than a billion dollars as they once again low balled estimates and then easily beat them. The write-downs that Goldman reported were $775M and hedging and other losses. They did not raise capital or even put a cent into provisions for loan losses, according to their financial statement. But the illiquid Level 3 toxins are seeping through the bank to the tune of $78B. Watch:

Goldman Sachs appears serenely above the fray, but don’t forget that at May this year its “Level 3″ assets were $78 billion, more than twice its capital.

Here’s the tally thus far:

1. Write-Downs/Charge-Offs: $5.4B + $775M = $6.175B
2. Cash Raised: $0.0
3. Level III assets: $78B
   
4. Loan Loss Reserves: $0.0

We now sum all the distresses to get Goldman’s current Misery Index of $81.175B <>

2008-06-13 Touchable:

There are some preliminary write-down estimates coming out for the big brokers for fiscal second quarter 2008, and Goldman Sachs is in the $3B to $6B range.

2008-05-22 Write Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort: how much in write-downs and credit losses firms have written off per wholesale banking employee.

Goldman Sachs - $4.1B in write-downs, 30,000 employees, $133,667 per employee

2008-05-14 - Sisyphus and Leveraged Loans:

In the hey day of the credit bubble and the carry trade, Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers took in mountains of money making loans for leveraged buy outs. Banks make money by lending money so fewer loans usually translates to less profits. But in the topsy turvey aftermath of the credit bubble all loans are suspect and leverage loans among the most toxic, which is why the WSJ is reporting that, banks are trying to rein in their balance sheets:

…, Lehman Brothers and Goldman Sachs are the most exposed to higher-yielding, and riskier, loans as of the first quarter: Over one-third of Lehman’s loan book is in high-yield. Goldman’s book is about half high-yield. Lehman leads the pack among its rivals with $28.7 billion of exposure to leveraged loans as of the first quarter. Goldman chopped its exposure to $27 billion from $43 billion last quarter.

2008-05-08 - Sleight of 2008-05-08 - Not Quite “On The Level”:

Minyanville reports that Goldman’s level three assets have reached 191.56% of shareholder equity. For those that have bought into the current financials rally, are you feeling better about your Goldman purchase yet?

2008-04-14 - Goldman Sachs Gives Deep Discount to Relieve Debt:

And now even Goldman Sachs is running out of steam, running out of options, and just plain trapped by the credit crisis. So, with its veneer of invincibility wearing thin, Goldman is giving deep discounts on its debt saying ”take it, just make it go away.”

2008-04-09 - Goldman Sachs Level 3 Assets Surge:

What does Goldman Sachs do when it wants to beat the street by a penny, nickel or a billion dollars? They use the magic of level 3.

2008-04-07 - Goldman’s leverage ratio continues to go up:

With the financial industry scrambling to de-leverage their entanglement with debt securities, mostly held with borrowed money, Goldman Sachs is going the other way with its leverage ratios. Defiant or desperate, we will have to wait to see.

2008-03-21:

Mish points out something provocative about Goldman’s earnings:

“… commercial real estate loans that were moved from Level 2, where assets are valued in part using market prices, to Level 3.”

Goldman has $873 billion in assets. That means Goldman moved $8.73 billion in commercial real estate loans from Level 2 “Mark To Model” to Level 3 “Mark To Fantasy”. Something tells me Goldman did not like the answer their model was giving them.

That’s one bullet temporarily dodged with the usual disingenuous legerdemain. You can run but you can’t hide, boyz.

2008-03-18:

Goldman Sachs low-balled its earnings estimate, then reported that its income was halved from the year before. The hits included subprime mortgage related losses to the tune of $2B:

The bank made a net loss of $1bn on residential mortgage loans, a result of the ongoing sub-prime mortgage crisis. It also made a loss of another $1bn on some low-grade investments.

Immediately after that, the Golden one got (are you sitting down?) handed an upgrade from analyst Alexander Protsenko of Wachovia Securities. You can forgive for asking what Alex was paid for it, but that’s normal business procedure Wall Street:

…the company has a superior capital position among its peers and its AUM business is well positioned for either risk markets or liquidity. The exclusion of Bear Stearns from the competitive marketplace is expected to benefit Goldman Sachs going forward, the analyst adds.

No one knows anyone’s capital position. That was part of the original scam, Alex. And the take down of Bear Stearns, rather than aiding Goldman Sachs, portends the fate of it.

2008-03-17:

And the bell tolls too for Goldman Sachs. Today the planet’s greatest two-timing inside trading financial powerhouse just saw the monster of its making (and others) get $3B closer.

The bank’s $3bn write­down will be based partly on the declining value of its 4.9 per cent stake in Industrial & Commercial Bank of China (ICBC), which is held separately on Goldman’s balance sheet.

The $3B will almost certainly be followed by bigger and better write-downs. Whether or not it was supposed to, the steroid-injected investment house is slowing down, like an open field sprinter running out of gas. The weight of a $3B write-down doesn’t imply that the credit crisis will take down the bank, but the pack is catching up, and if they can catch Goldman Sachs who can they not catch?

The $3B in new write-downs updates the running total to $5.4B.

2008-03-11:

For Goldman Sachs, the downgrades keep coming. Last month it seemed that it would take a specialized volatile investment vehicle or a VIE to take down the Golden Godfather, but now it looks like the usual suspects will make a good showing for themselves:

The firm expects Goldman to report inventory mark downs totaling almost $5B in in the 1st half, including $3.5 billion in Q1, due to leverage loans, CMBS, and principal investments, including ICBC and SMFG and other equity investments.

What we are really interested to see is the exposure Goldman has due to the leverage on its own balance sheet. Is it reasonable or does it more closely resemble the 40 to 1 nature of Lehman? We will have to wait until March 18 to find out.

2008-02-27:

Bloomberg points out another reason Goldman’s nose is likely not as clean as you might think based on their write-downs so far:

VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn’t had any of the industry’s $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

…

Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.

VIE’s are yet another alphabet-soup three-letter-acronym that simply stands for “off-balance-sheet vehicle” (and hence, liability). We talk more about them over at our Citigroup entry.

Mish also has a nice rant on this subject and the above article.

$11.1B in losses from these plus some 20% losses on $26B of leveraged loans would come to an additional (approximately) $16B in further write-downs.

Numbers like that would easily wipe out Goldman’s ‘07 earnings. Entirely.

So, yeah, we’re not exactly ready to go long the Golden boys of finance just yet.

2008-02-20:

Investment banks now face around $197 billion in exposure to leveraged loans used to back big buyouts in 2007, adding inestimable stress to their efforts to extricate themselves from the credit crunch. Was it worth it?

Not for Goldman Sachs. In addition to the $2.4B we now see they have a whopping estimated $26B exposure to leveraged Loans they made during the bubble binge.

2008-01-29:

Goldman is an “interesting” case. The firm has only written down about $2.4B related to subprime, a number which was supposedly larger on a gross basis, but which was effectively reduced by hedging. Deutsche Bank figures there are remaining exposures of $1.8B in subprime CDOs, and $2.9B in subprime RMBS.

The bank’s own Q3 10K figures give $2.9B for CDO exposure.

In counterparty-risk land, Goldman reportedly has in excess of $23B in exposure to AA-or-lower counterparties. That comes to about 70% of tangible equity according to Dec. 2007 figures. Thus we reckon we have yet to see most of how the roiling of insurers and tottering of other counterparties involved with mortgage securitization has impacted Goldman Sachs.

2008-08-25 Fannie & Freddie Bite:

Now we know the real reason Treasury Secretary Hank Paulson engaged in such a full sprint to prop up Fannie and Freddie before the Olympics. It wasn’t just to save the Chinese. Let’s take a look:

JP Morgan Chase estimated that its holdings of Fannie Mae and Freddie Mac preferred stock lost about half of their value the third quarter now underway, according to a regulatory filing with the Securities and Exchange Commission. JP Morgan says it owns preferred shares of Fannie and Freddie with a $1.2 billion par value that has been written down by $600 million.

It’s nice to see that Paulson is still in business taking care of his buddies on Wall Street. The Street certainly takes care of its own, but so far all the kings men can do little but catch a falling knife. Since the write-down has already been taken according to a regulatory filing, we’ll add $600M to JP Morgan’s total pain, bringing it to $20.1B.  <>

2008-08-15 Morgan Settles:

JP Morgan will buy back $3B of peddled junk and pay a fine $25M for dumping without license. It’s the kind of thing that happens every day, and you don’t feel bad about it unless you get caught. JP Morgan feels bad.

JPMorgan agreed to buy back $3 billion of debt and pay a $25 million fine.

Regulators say brokerages misled investors into believing that auction-rate debt, which has rates that reset in periodic auctions, was safe and the equivalent of cash. Much of the $330 billion market has been frozen since February, when brokerages abandoned their traditional role as buyers of last resort.

Our twin tallies for Pain and ARS-Buyback now stand at $19.5B and $3B. 

2008-08-12 Falling Faster:

It wasn’t JP Morgan that took down Bear Stearns. Rather it was the credit crunch, and now that same merciless disaster follows Morgan’s every move. In just two months, the bank has already exceeded its second quarter write-down total.

JPMorgan Chase & Co. had its biggest decline in six years after reporting a $1.5 billion loss on mortgage-backed assets in less than two months.

Could it be that the credit crisis offers no reprieve, not even to those whose CEOs squat at the Federal Reserve Board meetings? <>

2008-07-23 More Misleading:

JP Morgan took $1.1B of write-downs due mainly to mortgages and leveraged buyout loans gone sour. The company reported earnings of over $2B in the second quarter, along with a sundry of write-downs and distresses which included a $1.25 billion increase in loan loss provisions. Using the company’s numbers of $1.1B as a low ball estimate of write-downs taken for its fiscal second quarter 2008, let’s do some math.

1. Tally for Write-Downs/Charge-Offs: $9.9B + $1.1B = $11.0B
2. Tally for cash raised: = $0.0
3. Current level of Level III assets at $6.0 B
4. Current level of loan loss reserves at $1.25 B + $1.25B = $2.5 B
   

Adding 1.-4. we get the Misery Index = $19.5 B

2008-06-23 Is Morgan in Trouble Again?:

JP Morgan devoured Bear Stearns in March, and was then spurned by Washington Mutual. Now the bank is making another high profile move, this time to acquire Wachovia.

2008-05-22 Write-Down Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort: how much in write-downs and credit losses firms have written off per wholesale banking employee.

JPMorgan Chase - $9.8B, 25,000 employees, $392,000 per employee

2008-05-21 - Leaving London:

It is probability the best thing, maybe the only thing, JP Morgan can do, but now there is one less subprime lender in the UK. In fact, all the banks including JP Morgan have severely limited credit flow to all borrowers. Thus spreads a contagion.

2008-04-17: On The Sly

At its earnings release, JP Morgan CEO Jamie Dimon said the credit crisis is almost over, but then did something to make it seem like it’s just got off the ground. Like a politician seeking bribes, Dimon went with hat in hand in an attempt to collect $6B. Maybe it’s just for a rainy day? We are not making this up. As for the earnings reported, they included $2.6B in first quarter write-downs:

The New York-based bank set aside $4.42 billion for loan losses and took about $2.6 billion in write-downs tied to mortgages, loans to fund corporate buyouts and tight credit markets. Its allowance for credit losses rose $2.52 billion from the end of 2007 to $12.6 billion.

The company also set aside $1.1B in the first quarter for future home equity loan defaults, up by $395M from the fourth quarter of last year. Counting the loan loss provisions as a distress, we get

$3.7B + $5.1B +$1.1B = $9.9B

2008-04-16: JP Morgan Earnings Cut in Half

Don’t look now, but JP Morgan just gobbled up another $5.1B in write-downs.

JPMorgan Chase & Co., the third- biggest U.S. bank, said profit fell 50 percent after $5.1 billion of writedowns and provisions linked to subprime mortgages, bad home-equity loans and financing for leveraged buyouts.

Thats almost double the prior $3.7B to which we add.

$3.7B + $5.1B = $8.8B

2008-04-15 : Bear Stearns Pukes as Earnings Fall 79%

JP Morgan may have a bit of indigestion after swallowing whole Bear Stearns and its rotting balance sheet.

2008-04-13 : Leader of the Pack?

It may be that JP Morgan is sprinting to catch Goldman Sachs as the leader of the Wall Street pack. If they catch up, things will play out the old fashion way: buyouts. One thing is certain: Morgan has already surpassed Barclay’s in one important measure.

2008-03-26 (2):

Don’t look now, but Bloomberg reports in a long article on credit lines that JP Morgan has about $251B of undrawn credit line commitments (or at least, they did at year-end 2007). This is much worse a fact than it would seem in isolation, since now more than at any other time in living memory, borrowers need to draw down those credit lines (which is the main point of the article).

2008-03-26:

In “Grim Outlook for JP Morgan,” Yves Smith picks up a thread from Institutional Risk Analytics and discusses how JP Morgan is hardly bulletproof, despite their role as would-be savior of Bear Stearns and presumably of the financial economy by extension:

JPM is far from a financially strong institution. It has the highest gearing of any of the three large US banks (and remember, that includes the CDO-laden, walking wounded Citigroup) and by their measures, also has the highest level of economic risk per their metrics. JPM’s chickens have not yet come home to roost because its book is heavily weighed toward corporate business, and those problems are coming to the fore later….

Although IRA does not say so explicitly, the reasoning appears to be that the Fed pushed Bear into JPM’s arms as a way to shore up JPM. If asking a firm to take on a $13 trillion derivatives book, of which only $2 trillion is exchange traded, is a favor, I’d hate to see what punishment looks like.

Smith goes on to compare the current implicit consolidation strategy with a “martingale” gambling strategy. That’s nearly as bright as it sounds. God help us all.

Some more, quoted directly from IRA:

To understand the grim outlook for JPM, start the analysis with derivatives. Because of its huge market share in all manner of OTC derivatives, JPM represents a “super sample” of overall OTC market risk. In terms of total size vs the bank’s balance sheet, JPM’s derivatives book is more than 7 standard deviations above the large bank peer group.

Because of this huge OTC derivatives book, the $1.6 trillion asset bank can tolerate just a 15bp realized loss across its aggregate derivatives position before losing the equivalent of its regulatory Risk Based Capital (RBC). And much like the GSEs, JPM’s positions are too big to hedge - despite what Mr. Dimon may say to the contrary about laying off his bank’s risk. And note that we have not even mentioned subprime assets yet.

…

At the end of 2007, JPM aggregated 97bp of gross loan charge offs, 1.25 SDs above peer, and produced a Loss Given Default of 85%, likewise well above peer. The Exposure at Default calculated by the IRA Bank Monitor using data from the FDIC was 202%, more than 2 SDs above peer.

With Bear Stearns included, JP Morgan now has a $90T (yes, that is Trillion with a “T”) book of derivatives. Only $2T of Bear’s $13T were exchange-traded.

2008-02-20:

The beat goes on.

JP Morgan Chase was the bookrunner for $217B of US leveraged loans last year, has $26.4B of exposure to show for it, and came away with $1.3B in fees. But JP Morgan would have had to write down $1.5B of its leveraged loans if they had fallen at the same rate as the market.

We will have to see how much they write down and when or if they sweep it off their balance sheet in some shady accounting trick.

2008-02-04

JP Morgan has written down very little so far: $1.3B in the fourth quarter, and $2.4B in the third (due to subprime). However the money center bank still managed to turn a profit of almost $3B, leaving its stock to hold out better than most of its competitors (though most are rallying thanks to aggressive Fed rate cuts — which as we all know will solve all of the problems documented on this site!).

But according to pre-fourth quarter Deutsche Bank data, JP Morgan still has about $12B of subprime loans on its books, and $6.8B of subprime CDOs. They may also have considerable exposure to otherwise risky non-subprime mortgage loans (and other sorts of consumer loans). One area in specific is home equity loans, which falter as market values drop (per the article linked above):

Dimon and his team have underestimated the losses on the bank’s $95 billion portfolio of home equity loans.

Late last year, Dimon said home equity losses would be $250 million to $270 million per quarter over the next several quarters. On Wednesday during a conference call, the company said the losses could be $100 million more per quarter than its earlier forecast.

Home-equity losses also contributed to the 38 percent decline in fourth-quarter profit at Wells Fargo & Co, the first decline in more than six years.

Wow! That $95B is a huge source of write-down risk.

This certainly will not be helped by the trends of a recession (prime borrowers losing their jobs or failing to get raises and becoming unable to pay), inflation and people simply walking away from their homes when they are underwater. Home equity loans, as second liens, quickly become worthless in depreciating markets combined with short-sale or foreclosure situations.

We’d wager that the write-downs JP Morgan has taken so far will be dwarfed by the ones they take on these and other shaky consumer loans still on their books.

Starring in this August 22nd edition of “FDIC Friday” is Columbian Bank of Topeka, KS, which developer loans seem to have sunk.  Here is the usual boilerplate FDIC page on the shutdown.

This is from Bloomberg:

The bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner’s office and the Federal Deposit Insurance Corp., the FDIC said today in a statement.

Citizens Bank and Trust will assume the failed bank’s insured deposits. Columbian Bank’s nine branches will open Aug. 25 as Citizens Bank and Trust offices, the FDIC said. Customers can access their accounts over the weekend by writing checks or using ATM or debit cards.

 

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2008-08-25 Robin Hooded:

Merrill Lynch has been forced to cough up cash to repurchase some of its own junk, specifically the auction rate securities. They have agreed to a $125 million fine and to repurchase $10 billion to $12B from State of Massachusetts investors and separately $7B via the SEC. The agreements with New York, Massachusetts and the SEC are each seperate, but some of the investors covered by the SEC are also covered by New York or Massachusetts or both so the most Merrill will repurchase under all three agreements is $12B. <>

2008-07-29 It’s Still Not Over:

In order to beat the street, Merrill Lynch soft balled its second quarter write-downs. Now they have to cough up the remainder before third quarter reporting.

2008-07-17 It’s Still Not Over:

It’s not over til it’s over, but it’s just not ending for Merrill Lynch. Level 3 is rising, and the write-downs keep cascading in on top of the $37.5B already written-downs. The company apparently does not report its loan loss provisions or has another name for it, so for now we estimate that the Misery Index has gone up $18B since last summer. Combined with the new write-down tally, the total comes to:

1. Tally for Write-Downs/Charge-Offs: $37.5B + $9.75B = $47.25B
2. Tally for cash raised: $34.4B
3. Current level of Level III assets at $69.86B
4. Current level of loan loss reserves at $*

Misery Index > $83.5B

2008-07-11 Level 3:

Merrill Lynch has almost no shareholder equity. It has been almost entirely contaminated by toxic Level 3 trash:

Merrill has $61.7 bn cash and equivalents on its balance sheet, it has $36.5 bn in shareholder equity, but it has $34.4 bn in illiquid level 3 trades, both assets and liabilities that it can’t get a pricetag on because no one wants these items. It’s got $9 bn in toxic subprime collateralized debt obligations, those cut and paste jobs few can make any sense of, with another $4.6 bn in asset-backed securities propped up by corporate bonds and loans. It’s got $44 bn in exposures to residential mortgages as well.

This helps us put Merrill’s level 3 balance into some perspective. Shareholder equity = $36.5B, but only $2.1B is real. In other words if they wanted to sell it all tomorrow only $2.1B would even have a market. In the real non-SFAS No. 157-world, shareholder equity is only a fraction of what it’s reported to be.

2008-07-02 Cut Down Again:

Merrill Lynch is cut down again by Meredith Whitney of Oppenheimer and UBS analyst Glenn Schorr.

2008-06-27 Cut Down Again:

Merrill Lynch has been quite busy this week. After receiving downgrades and retreating from Australia, it happened to come up that the bank still believes the direct pipeline to politicians’ pockets is the superior business model. The upshot is that the write-downs for the sacond quarter could go as high as $5.4B.

2008-06-02 Cut Down:

Merrill Lynch, the third-biggest U.S. securities firm by market value, was cut to A from A+ by S&P today in a move that may foretell of more serious write-downs and credit-related losses to come.

2008-05-22 Write Downs Count of a Different Sort:

We have been keeping a running tally of write-downs and other credit-related distress taken by the major banks since 2007. But here comes a write-down count of a different sort, how much in write-downs and credit losses firms have written off per wholesale banking employee.

Merrill Lynch - $31.7B, 48,100 employees, $659,044 per employee

2008-05-21 - Leaving London:

It is probability the best thing the bank could do, maybe the only thing, but now there is one less subprime lender in the UK. In fact, all the banks including Merrill Lynch have severely limited credit flow to all borrowers. This is how a contagion spreads

2008-05-19 - Off Balance:

Banks are not writing down their write-downs and getting away with it. Instead, they are writing them down in the balance sheet, and there is a distinction.

Merrill Lynch was hiding $5.3 billion on the balance sheet, but we will balance things out for them by adding $5.3 billion to their existing $32.2 total bringing them up to $37.5 billion.

2008-05-14 - Sisyphus and Leveraged Loans:

In the hey-day of the credit bubble and the carry trade Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers took in mountains of money making loans for leveraged buy outs. Banks make money by lending money so fewer loans usually looks like less profits. But in the topsy-turvy aftermath of the credit bubble, when all loans are suspect and leverage loans among the most toxic, banks are trying to rein in their balance sheets.

That’s why the cancellation of Cumulus Media’s $1.3 billion buyout looks like good news for Merrill Lynch’s heavy loan book. Already Merrill has reduced its corporate loan book by 20%.

Merrill Lynch still has $14 billion exposure to high-risk loans.

2008-05-08 - Sleight of Hand:

Minyanville reports that Merrill’s level three assets have ballooned to 225% of shareholder equity. Problem solved, or sword of Damocles?

2008-05-06 - The New Default Swap:

Merrill Lynch is swapping the mortgage-backed assets in danger of default into its level 3 accounting column. The increase in level 3 liabilities from Q4 of 2007 to Q1 of 2008 amounted to $17.7 billion, an increase of nearly 70 percent.

2008-04-17 - Caught:

Merrill Lynch and CEO John Thain sought to get out in front by playing fast and loose with reckless disregard for other people’s money and today those other people saw that risk catch up:

Merrill Lynch & Co. posted its third straight quarterly loss and said it will cut about 3,000 more jobs after the credit seizure forced the investment bank to write down at least $6.5 billion of debt.

For the fiscal first quarter 2008, Merrill wrote down $6.6 billion to CDOs and another $3.1 billion to the plummeting value of mortgage-related securities on hold at its U.S. banks, giving a total of $9.7 billion written down so far this year.

In the bigger picture, the company has written down $18 billion on CDOs alone in the past nine months, and has also
written off about $29 billion worth of risky asset-backed securities and leveraged loans.

The reality for Merrill Lynch is as it was for Bear Stearns–STARK. John Thain was hired as chief executive four months ago, but not to save the company. For a major bank that rose to the top on Ponzi finance and now knows no other finance system, the end of days of Ponzi finance bring no salvation. No, it is more likely that Thain’s purpose is “to hit one out of the park.” That best explains the psychotic frenzy of risky double-down dealing that Thain has engaged his company in since his arrival. It is a low-probability desperate attempt to squeeze a few cents out of each share for the cadre of elite insiders, ala Bear Stearns, but it is no rescue, you can be sure of that. In fact you may as well chalk Merrill up as ailing, or better yet get a new category –Dead Man Walkin’.

2008-04-16 - Caution to the Wind:

Merrill Lynch is due on Thursday to report first quarter earnings along with mortgage securities write-offs of another $6 billion to $8 billion. Perhaps it would be more appropriate to have Merrill, Thain and company explain themselves, but don’t count on it.

2008-03-26:

Don’t look now, but Bloomberg reports in a long article on credit lines that Merrill has about $59.3 billion of undrawn credit line commitments (or at least, did at year-end 2007. For comparison, however, Citigroup had $471B and JP Morgan had $251B). This is much worse a fact than it would seem in isolation, since now more than at any other time in living memory, corporate borrowers need to draw down those credit lines (which is the main point of the article).

Money center banks collectively have $1.4 trillion of untapped credit commitments. We don’t think they have $1.4 trillion of capital, however.

2008-03-19:

We can add it now or add it later, but we will add it because (from Mish):

Let’s face the facts. When you file a $3.1 billion lawsuit against someone who is insolvent, you can all but kiss $3.1 billion goodbye.

Merrill Lynch is not going to collect a dime from this lawsuit for the simple reason the guarantee of XL Capital Assurance Inc. is likely worthless.

Say so long to another $3.1 billion.

2008-02-21:

Merrill Lynch has been pegged by Oppenheimer analyst Meredith Whitney for an estimated $19B more in write-downs due to leveraged loans. There is probably more to come.

2008-02-04:

Merrill (along with UBS) is in trouble with a veritable hornets nest of suddenly-angry regulators:

The SEC, deepening its own set of investigations into whether Wall Street firms improperly mispriced mortgage securities, recently upgraded probes of UBS and Merrill Lynch & Co. into formal investigations, people familiar with the matter say.

…

The investigations could raise the stakes for Wall Street in the multiple probes examining whether financial firms deliberately misvalued, or “mismarked,” massive holdings of mortgage securities. Most of the current investigations into mortgage matters involve civil authorities; the U.S. attorney launches criminal investigations and has a history of prosecuting Wall Street-related matters.

…

Other regulators led by the SEC are examining whether financial firms should have told investors earlier about the declining value of such securities and how they priced them on their books, people close to the matter say.

In its investigations, the SEC also is delving into whether Wall Street firms placed higher values on securities they own than those they placed in customer holdings, the people say. The SEC previously has said it has opened roughly three dozen investigations tied to the downturn of the subprime market, which primarily is tied to borrowers with poor credit histories.

We hope you kept your noses clean, boyz.

Initial Writeup, Feb. 3, 2008:

Merrill Lynch has been one of the hardest-hit banks by the credit crunch and subprime debacle. As per their Q-4 2007 report, the bank wrote down about $7.9B in the third quarter and a whopping $11.5B in the fourth quarter — an amount “bested” only by UBS. There was also $310M written down due to the collapse of bond insurer ACA Capital. This brings the total loss in these areas for 2007 (as reported so far) to almost $20B.

The bank reports a continuing $4.8B exposure to subprime CDOs, over $43B of held subprime RMBS, $1.6B of direct subprime loans, $13.8B in subprime-linked CDS, and $1.6B of exposure to ACA remaining. Suffice it to say, we expect more write-downs to come out of these exposures.

Also worth noting is a general $23B of derivatives exposure to counterparties with “AA”-or-lower ratings. That represents 70% of Merrill’s tangible equity. This could turn out to be a huge source of future earnings risk for the bank.

By way of review, Merrill was one of the top pushers of subprime product in the frenzy of the past few years, even purchasing major nationwide subprime lender First Franklin in late 2006 in an attempt to have more of the bonanza of profits for itself. That purchase turns out to have been ill-fated, as the company’s post on the Mortgage Lender Implode-o-Meter thoroughly illustrates. Volume is now essentially non-existant.

Merrill jettisoned its CEO Stan O’Neal to pay for the company’s subprime sins (this apparently had nothing to do with “punishing” O’Neal — who received a $160M golden parachute on his way out). However, all indications are that there will be much more purgatory to pay. For example, as Mish reports, Merrill is having to take back some of the junk they dealt, especially that which was sold to public entities. Mish argues (and we agree) that this action may start a trend, not just at Merrill but any other banks that put out similar product, and especially as municipalities find themselves effectively broke.

And that means there’s a lot more “off-balance-sheet exposure” lurking.

Merrill Lynch, Deutsche Bank and Goldman Sachs came into the fold Thursday as all three settled with New York Attorney General Andrew Cuomo in the auction rate securities suit. For the majority of investors, the glass is very much half empty. First some numbers:

• Goldman Sachs will pay a $22.5 million fine and buy back about $1.5 billion in auction rate notes, while
• Deutsche Bank will pay a $15 million penalty and buy back about $1 billion of the notes.
• Ensemble Merrill Lynch will buy back between $10 billion and $12 billion and pay a $125 million fine under the agreement reached with Massachusetts and New York, and the SEC.

While Merrill Lynch was forced to take back the biggest chunk of regurgitated auction rate securities, its fraud was also the most egregious. In early August, Merrill said that it would buy back the securities from retail clients, but the announcement was a faint attempt to preempt a harsher settlement that would be imposed by regulators. When clients who had already cashed out at a loss tried to get reimbursement, they found a door slammed in their face. Witness:

But when Merrill “voluntarily” announced plans to buy back securities from retail clients last week, it made no such provision for clients who had already cashed out at a loss.

“It’s like Merrill said, ‘Let’s jump before they push us, and maybe we’ll hit the awning instead of the street,’ “

And they were right. Those who cashed out with a loss were left out in the cold.

Merrill agreed to buy back $7 billion of untradable debt instruments from investors, small businesses and charities who bought them from the bank, the SEC said Friday .

The figure excludes ARS that have already been redeemed by the issuer, such as a municipality, according to an SEC official. That explains the difference between the SEC amount and the $10 billion to $12 billion in the agreement announced by New York State Attorney General Andrew Cuomo on Thursday.

Even though the move left many in the lurch, at Merrill Lynch they are as happy with the deal as Andrew Cuomo. Here’s how Cuomo congratulated himself:

“We have certainly addressed the bulk of the crisis here in terms of the number of people and established a strategy for the total resolution of the problem,” the attorney general, Andrew Cuomo, said in an interview.

The CEO of Merrill Lynch also emphasized a strong friendship with regulators:

John Thain, chairman and chief executive of Merrill Lynch, said he was pleased to reach an “amicable resolution” with regulators and glad that the bank’s “clients would have the certainty of a favorable resolution to this unprecedented liquidity crisis.”

Favorable is right, if you mean from the bank’s point of view:

New York Attorney General Andrew Cuomo’s auction-rate securities settlements with Wall Street banks show that the man who bills himself as the “people’s lawyer” favors savers over shareholders.

The almost $35 billion of frozen debt that Citigroup Inc., UBS AG, JPMorgan Chase & Co., Morgan Stanley and Wachovia Corp. agreed to repurchase covers less than 18 percent of the $200 billion Cuomo last week estimated was outstanding, and is targeted at individuals, charities and small businesses.

Then Thain, who took the rare step of meeting personally with Mr. Cuomo, simply couldn’t restrain himself. (WARNING: This can make you sick.)

“We are pleased our clients have the certainty of a favorable resolution to this unprecedented liquidity crisis,” Thain said in a statement.

Well you can believe Thain about as much as you would Cuomo. Of course the people’s lawyer cares about savers, individuals, charities and small businesses. At least he would like you to think he does. If we were cynical we’d even think he’s trying to gloss over the other 82 percent of the $200B that the banks would otherwise have had to pay. If Bloomberg and the Wall Street Journal were doing their jobs, they might mention this.

Lest Mr. Cuomo be confused with Robin Hood, let’s be clear: the crime here is fraud, not being rich. So wealthy defrauded investors are intrinsically deserving of a lower level of justice than identically defrauded retail investors? Well, that’s inside out of the way things are usually done, but we’d bet the banks would rather pay 18 percent to the puny pups than 82 percent to the big wolves. Is it true that wealthy investors are inherently no good and deserve to be defrauded?

“A lot of institutions were lied to by their brokers, and brokerage firms put their own interests ahead of their institutional customers,” said Jacob Zamansky, a securities lawyer at Zamansky & Associates in New York who represents institutional investors in auction-rate cases. “Cuomo was run over in his haste to get a settlement by these major firms.”

Securities lawyer Zamansky said many of the institutions he represents will go to arbitration to seek damages for “fraudulent” sales of auction-rate securities.

“I think it’s outrageous that the firms are going to wait two years to deal with the liquidity for institutional investors,” Zamansky said. “These are companies that have to make payroll, that have to make investments. Some of the companies can be out of business by then.”

Well, at least Mr. Zamansky seems to have the right idea, even if the financial media doesn’t. As for the SEC, those clowns sound more like the lapdogs than watchdogs:

The U.S. Securities and Exchange Commission reached an $8.5 billion agreement with Merrill Lynch & Co. to settle allegations the firm misled investors when marketing auction-rate debt.

Merrill will buy back up to $7 billion in securities from individual investors, small businesses and charities and take steps to cover their losses, the SEC said in a statement today. The bank must also use “best efforts” to help other businesses and institutional clients unload about $1.5 billion in frozen debt, the agency said.

“Merrill Lynch’s conduct harmed tens of thousands of investors who will have the opportunity to get their money back through this agreement,” the SEC’s enforcement chief, Linda Thomsen, said in a statement.

Oh gosh, you mean “try their best.” Yeah, thanks for nothing, Linda Thompson. Did Thain meet with you too?

Let’s see if we can figure how this all got worked out. Hmm…. Hmmmmm… Sensing political pressure or political opportunity, Cuomo launched an investigation at the big banks and dug up some damaging dirt. Let’s hear what the grapevine has to say:

Securities firms have little defense against regulators because of incriminating documents and the risk to their reputations, said William Shepherd, a Houston attorney whose firm, Shepherd, Smith Edwards & Kantas, has met with more than 500 investors holding the securities.

“The regulators had these firms dead to rights,” said Shepherd, who worked as a bond market salesman in Texas for 20 years. “All the firms will be shamed or forced to do something, even Goldman which seems to be saying that all of their clients are rich and sophisticated.”

With the heat on, the big banks sat down with Mr. Cuomo to discuss his political ambitions and whether or not they would push back Spitzer style or behave more “amicably,” to quote Thain. That’s where a deal was made in everybody’s best interests, and what began as an aggressive effective investigation and punitive legal action morphed into a protect-the-big-banks sham. It’s the same age old scam to protect your big billionaire’s first.

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