Presenting The Latest Eurodebt Exposure Masking Scam Courtesy Of Morgan Stanley: Level 1 To Level 2 Transfers

Tyler Durden's picture

For the latest gimmick to mask PIIGS sovereign debt exposure (where we already know that the traditional fallback of "gross being irrelevant and only net being important" crashed and burned today after Jefferies offloaded precisely half of its gross exposure, while raising net, thereby confirming that gross exposure is indeed a risk), we turn yet again to Morgan Stanley. As a reminder, despite our note that the company's gross exposure (which is now a major risk factor, thank you Rich Handler for proving our "bilateral netting is flawed" thesis) to French banks alone is $39 billion, Morgan Stanley downplayed this by saying that only $2.1 billion is the actual net funded exposure to Peripherals Eurozone countries. We'll see if Jack Gorman will have to revisit his defense after today's Jefferies action. Well as it turns out, we now have gimmick number two, one which will surely delight the bearish investors out there looking to find a bank doing all it can to mask not only its gross but net exposure (and wondering why it has to resort to such shenanigans). Presenting the Level 1 to Level 2 switcheroo, courtesy of, who else, Morgan Stanley.

From the just released 10-Q:

"Financial instruments owned—Other sovereign government obligations.    During the quarter ended September 30, 2011, the Company reclassified approximately $1.8 billion of other sovereign government obligations assets and approximately $2.1 billion of other sovereign government obligations liabilities from Level 1 to Level 2. These reclassifications primarily related to European peripheral government bonds as transactions in these securities did not occur with sufficient frequency and volume to constitute an active."

Uhm, are you serious? Transactions in all PIIGS securities were sufficiently active in both frequency and volume. We are delighted to present Morgan Stanley with a CUSIP list of all PIIGS bonds together with price and volume data if they so desire to confirm to them that their excuse is about to get tested substantially by the market as one not of prudent accounting (we jest: Level 2 assets are merely a legal way to get par marks for a security that is realistically trading at 35 cents on the dollar in the case of Greece and 87 in the case of Italy), but one of yet another attempt at blatant obfuscation.

And to confirm that this reasoning behind this reclassification in a quarter in which there was massive volatility in all PIIGS securities, is pure lunacy, we ask: did Morgan Stanley reclassify any PIIGS bonds from Level 1 to Level 2 in Q1 or Q2, when vol was indeed less and when one could make the argument that there is a basis for a Level 1 to Level 2 transition?

Here is the language for the 9 months ended, not just Q3:

Financial instruments owned—Other sovereign government obligations.    During the nine months ended September 30, 2011, the Company reclassified approximately $1.8 billion of other sovereign government obligations assets and approximately $2.1 billion of other sovereign government obligations liabilities from Level 1 to Level 2. These reclassifications primarily related to European peripheral government bonds as transactions in these securities did not occur with sufficient frequency and volume to constitute an active market.

So... the only time Morgan Stanley did the Level 1 to Level 2 shift was in Q3, when everything was trading, was volatile trades occurred in both "frequency" and "volume" yet when Morgan Stanley's back office couldn't find enough marks to justify keeping PIIGS bonds at Level 1? And let's not forget the fact that the Level 1 to Level 2 amount was $2.1 billion or... precisely the amount of the firm's self-professed net funded exposure!


Just like the DVA fudge, should we now expect every single bank to report a transfer in PIIGS exposure from Level 1 to Level 2 (only for Q3 mind you)? And if so, just how ugly is it about to get for US bank stocks with PIIGS exposure.

As for Morgan Stanley, please keep coming up with more and creative ways to mask the fact that your publicly disclosed net exposure to Europe is totally fabricated and meaningless. The market is just going to love picking off your Sovereign flow book at 1.5% gross losses (just like with Jefferies) as you scramble to offload your gross exposure next to prove, yet again, just how unexposed to Europe you "truly" are.

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Long-John-Silver's picture

MF Global is only the first domino to fall.

redpill's picture

Maybe this is why they can never really investigate Goldman.  By the time everyone with a conflict of interest recuses themselves, there's no one left to conduct the investigation!

Leopold B. Scotch's picture

It's a craptastical wonderland we all live in.

i root for that fat jersey governor's picture

the game being played right now is called "bull riding contest": wanna make some $$? ride the bull at your own risk but it sure will make you some money.

I don't know how many times I said this - it doesn't matter people are disgusted by the "bailouts" or "money priniting", never underestimate the central banks and the power of corrupt politicans. The market will not crash now - maybe next year. But given the EU is determined to win the "battle" despite losing the "war", money will be available for whoever needs it. No matter how weak or riduculous the concept of the new EU bailout package, it will work for a couple of months. Plus year-end retail frenzy is almost here, santa rally is getting started.

For people who buy SH and forget about their account for a year, I would say it is not a bad approach. But for people like me who trade "actively", riding the fake bull might not be a bad idea to get your new iphone5 or a new "sun room".


traderjoe's picture

Whatever. You can play with the Ponzi masters.

Or, I'd also say that gold did quite nicely today thank you very much.

Careless Whisper's picture

It was announced today that Robert DeNiro is playing ponzi master Bernie Madoff in a new movie. I'm thinking that the next movie, when everything is unravelled, will be about MF Global. Who will be cast to play Jon Corzine? My pick is Larry David.

Smithovsky's picture

Tyler(s), let this story sit at the top for a bit - you (ZH) single-handedly have the power to reduce these banks' exposure, as evidenced by Jefferies.

Rick64's picture

Is it my imagination or did half a dozen comments just disappear?

Michael's picture

I like to think of it more as rat scat. Follow the droppings.

iDealMeat's picture

Definitely some interesting characters on the BoD.


Donald T. Nicolaisen
Mr. Nicolaisen served as Chief Accountant for the U.S. Securities and Exchange Commission from September 2003 to November 2005. Prior to joining the SEC, he was a senior partner at the accounting firm PricewaterhouseCoopers. Mr. Nicolaisen began his career at the firm's predecessor, Price Waterhouse, in 1967, and held a wide range of management and leadership positions, including serving on the firm's U.S. and global boards and leading Price Waterhouse's national office for accounting and SEC services. Mr. Nicolaisen currently serves on the Board of Directors of MGIC Investment Corporation, Verizon Communications Inc. and Zurich Financial Services.


Hutham S. Olayan
Ms. Olayan has been a director since 2006. Ms. Olayan is a senior executive and director of a private multinational enterprise, The Olayan Group, a major investor worldwide as well as a leading diversified business in Saudi Arabia and also serves as president and chief executive officer of Olayan America Corporation, a Group affiliate based in New York. Ms. Olayan holds a bachelor’s degree from the American University of Beirut and an MBA from Indiana University. Ms. Olayan’s outside affiliations include serving as a director at the Peter G. Peterson Institute for International Economics (since 2004), trustee of the American University of Beirut (since 1993) and overseer of the Memorial Sloan-Kettering Cancer Center (since 2008). She is a member of various advisory councils of non-profit organizations, including The Brookings Institution, Carnegie Middle East Center, US-Middle East Project and The Conference Board. Ms. Olayan is also a founding member of the Arab Bankers Association of North America. She served as trustee of the Conference Board (2002-2008) and as a director of Thermo Electron Corporation (1987-2002).


James W. Owens
Mr. Owens has been a director since 2011. From 2004 to 2010, he was the Chairman and Chief Executive Officer of Caterpillar Inc., a manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. Mr. Owens served as Vice Chairman of Caterpillar Inc. from December 2003 to February 2004 and as Group President from 1995 to 2003, responsible at various times for 13 of the company’s 25 divisions. Mr. Owens joined Caterpillar Inc. in 1972 and served in numerous management positions until 1993, when he was elected Vice President and Chief Financial Officer. Mr. Owens is also a director of Alcoa, Inc. and International Business Machines Corporation. He is a board member of the Council on Foreign Relations and Chair of the Executive Committee of the Peterson Institute for International Economics. Mr. Owens is member of The Business Council and a trustee of North Carolina State University. Mr. Owens also serves on the President’s Economic Recovery Advisory Board. He graduated from North Carolina State University in 1973 with a Ph.D. in economics.
earleflorida's picture

@ iDealMeat

good diggs


knukles's picture

Except thems beholden the Squid that don't recuse themselves.

max2205's picture


How long is the road that the can is being kicked down?

paarsons's picture

They'll just print a shitload of money like we did in the States.

Wash. Rinse. Repeat.

Fuck it.

Grinder74's picture

Actually, there's always the midgets they keep on staff, that is when they're between filming gigs.

Al Gorerhythm's picture

If they didn't get preferential treatment, then MFG hid their actions from the CFTC or the CFTC is incompetent or are politically/financially captured. Somebody's gonna get an ass whupin, if the press pursues this.

WonderDawg's picture

If the press pursues this? Are you kidding? The press has passed on hundreds of opportunities to pursue corruption and incompetence in the financial industry, government, regulatory agencies, you name it. Every once in a while they'll pop a senator or a congressman, or a bishop for the catholic church, but by and large they ignore all the truly juicy shit, as they are told to do so.

Al Gorerhythm's picture

Yeah, I know, I should have emphasized. Its a big IF. Your frustration is EMINENTLY warranted. We are (mostly) all in the same room here.

Comay Mierda's picture

The modern press is sites like ZH. corporate media is slowly losing its foothold. I can't wait for the day CNBC files for bankruptcy and cramer has to find work as a janitor cuz no one will hire his lying ass. Also can't wait to see bank bankruptcy filings to see how much they owe CNBC in spin fees.

Mr Lennon Hendrix's picture

Dude, Bart Chilton admits the CFTC is a piece of shit.  Bart Chilton!

CFTC Commissioner, Bart Chilton:

Al Gorerhythm's picture

Bart is their pin-up boy, the relaxed surfy dude. I don't get that guy at all. Must be the overspray from the other shit slingers that sticks to him (Just my opinion but I may be wrong. Politics I suppose).

spiral_eyes's picture

The first domino to fall?

For me, it could be Iran. That story overshadows everything coming out of the Euro-circus.

LongBallsShortBrains's picture


Could just the talk of war between Iran and Israel be the tipping point for the "market"?

Talk war

Market falls

Blame Iran.
Instead of blame it on the politicians and the banks and the fed.

After all, nobody could see that coming!!!!!

Reggie Middleton's picture

Hmmm... Pretty good stuff. I think we should have a tag team bout with the big banks, Tyler. See ZeroHedge Is Good In Uncovering BS, But I Will Not Be Outdone In Busting BS Bank Reporting - I Simply Refuse, Right BNP?

A quick visual excerpt to go along with the Morgan Stanley quip above...

I must admit, that this type of investigative reporting takes
very sharp minds, very witty reporting and a thirst for finding the
truth. It probably can only be accomplished by tall handsome brothers with that sharp sense of humor... Know what I mean??? From the Bank Run Liquidity Candidate Forensic Opinion (A full forensic note for professional and institutional subscribers) released in August:

Click to enlarge...



peekcrackers's picture

right on reg..  The squid Hunter in the house.

Mr Lennon Hendrix's picture

I think we should have a tag team bout with the big banks, Tyler.

Reggie, we do.

And yes, fights will go on as long as they have to.

smlbizman's picture

this article kicks ass......god damn i love football....

CPL's picture

Like watching a game of hot potatoe with nuclear material.

Yamaha's picture

+10! Dan Quayle - don't you just long for the days when you could at least identify the idiot in the room? Now it a race for an IQ under 40..... Remind them to breath.......

CPL's picture

I am currently manually breathing and aware of the air drafting across my eyelids.

Ethics Gradient's picture

Sorry. It was a potato joke. It'll be in wikithingopedia, I'm sure.

Yamaha's picture

Yes it was. Still remember big Dan correcting the student -

Mr Lennon Hendrix's picture

Big Dan's family is one of the oldest political families in America, along with the Pierce/Buhes, Rodhams, Edwards', McCains, Gores, etc.

jeff montanye's picture

what is it about schools and stupid politicians? i am reminded of w. bush's 9-11 morning reading.

Taint Boil's picture

Google rocks man - you can find anything.

Grinder74's picture

Duh! That's how it's spelled in "Austrian".  Jeez.

CPL's picture

Ha!  My extra e remains for trolls everywhere to find.

Hephasteus's picture

Spelling is just convention. Because theres 2 conventions for tomatoe there's 2 conventions for potato. But oddly they are not equal in their stuggle for dominance despite phonemes.

Colour me surprised.

SwingForce's picture

There's an extra g in egg, too.

Mr Lennon Hendrix's picture

While we are on the subject, why did English stop using the "E"?  Instead we use a "Y", a totally benign letter.  Anyone?  Bueller?  Bueller?

Ethics Gradient's picture

Well, not being the kind of guy that follows the herd, from now on I'm gonna sdfs fa opigdjf peiornb iodrg oigrjrkjg goijrekgjn.

LongBallsShortBrains's picture

Give it to yamaha.

He can put it on the end of


And make


And make

Ponzi Unit's picture

You say tomatoe, I say tomato, let's call the whole thing off...

love's picture

i've been taking a little bit of nuclear material from work and saving it up,

i'm going to put it up for sale on ebay.

the money should come in handy now i've got two mouths to feed. 

SheepDog-One's picture

Swindle and scam...and someones got to pay the tab soon.