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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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Mon, 11/07/2011 - 18:35 | 1854937 Long-John-Silver
Long-John-Silver's picture

MF Global is only the first domino to fall.

Mon, 11/07/2011 - 18:45 | 1854963 Rainman
Rainman's picture

...and the Squid alumni are playing both cops and robbers. We r fucked

Mon, 11/07/2011 - 18:47 | 1854972 redpill
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!

Mon, 11/07/2011 - 19:05 | 1855017 Leopold B. Scotch
Leopold B. Scotch's picture

It's a craptastical wonderland we all live in.

Mon, 11/07/2011 - 19:18 | 1855035 i root for that...
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".


Mon, 11/07/2011 - 19:44 | 1855086 traderjoe
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.

Mon, 11/07/2011 - 21:30 | 1855262 Careless Whisper
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.

Tue, 11/08/2011 - 04:04 | 1855709 Smithovsky
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.

Tue, 11/08/2011 - 16:49 | 1858125 Rick64
Rick64's picture

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

Mon, 11/07/2011 - 22:00 | 1855299 Michael
Michael's picture

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

Mon, 11/07/2011 - 19:11 | 1855026 iDealMeat
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.
Mon, 11/07/2011 - 22:29 | 1855334 earleflorida
earleflorida's picture

@ iDealMeat

good diggs


Mon, 11/07/2011 - 19:44 | 1855087 knukles
knukles's picture

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

Mon, 11/07/2011 - 20:38 | 1855191 max2205
max2205's picture


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

Tue, 11/08/2011 - 00:18 | 1855526 paarsons
paarsons's picture

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

Wash. Rinse. Repeat.

Fuck it.

Mon, 11/07/2011 - 20:11 | 1855141 Grinder74
Grinder74's picture

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

Mon, 11/07/2011 - 19:11 | 1855025 Al Gorerhythm
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.

Mon, 11/07/2011 - 21:53 | 1855294 WonderDawg
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.

Tue, 11/08/2011 - 03:59 | 1855741 Al Gorerhythm
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.

Tue, 11/08/2011 - 07:22 | 1855839 Comay Mierda
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.

Tue, 11/08/2011 - 00:08 | 1855514 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

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

CFTC Commissioner, Bart Chilton:

Tue, 11/08/2011 - 04:04 | 1855742 Al Gorerhythm
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).

Mon, 11/07/2011 - 18:47 | 1854971 spiral_eyes
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.

Mon, 11/07/2011 - 20:46 | 1855204 LongBallsShortBrains
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!!!!!

Mon, 11/07/2011 - 19:02 | 1855009 Reggie Middleton
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...



Mon, 11/07/2011 - 19:08 | 1855022 peekcrackers
peekcrackers's picture

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

Tue, 11/08/2011 - 00:16 | 1855523 Mr Lennon Hendrix
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.

Mon, 11/07/2011 - 20:29 | 1855172 smlbizman
smlbizman's picture

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

Mon, 11/07/2011 - 18:35 | 1854938 CPL
CPL's picture

Like watching a game of hot potatoe with nuclear material.

Mon, 11/07/2011 - 18:43 | 1854955 Ethics Gradient
Ethics Gradient's picture

A Dan Quayle fan, hey?

Mon, 11/07/2011 - 18:54 | 1854995 Yamaha
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.......

Mon, 11/07/2011 - 18:57 | 1855004 CPL
CPL's picture

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

Mon, 11/07/2011 - 19:15 | 1855032 Ethics Gradient
Ethics Gradient's picture

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

Mon, 11/07/2011 - 21:59 | 1855302 Yamaha
Yamaha's picture

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

Tue, 11/08/2011 - 00:19 | 1855529 Mr Lennon Hendrix
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.

Tue, 11/08/2011 - 03:39 | 1855721 jeff montanye
jeff montanye's picture

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

Mon, 11/07/2011 - 19:13 | 1855029 Taint Boil
Taint Boil's picture

Google rocks man - you can find anything.

Mon, 11/07/2011 - 20:49 | 1855208 LongBallsShortBrains
LongBallsShortBrains's picture


Mon, 11/07/2011 - 20:28 | 1855171 Grinder74
Grinder74's picture

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

Mon, 11/07/2011 - 18:51 | 1854981 data_monkey
Mon, 11/07/2011 - 18:56 | 1855001 CPL
CPL's picture

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

Mon, 11/07/2011 - 20:01 | 1855116 Hephasteus
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.

Mon, 11/07/2011 - 20:10 | 1855139 SwingForce
SwingForce's picture

There's an extra g in egg, too.

Tue, 11/08/2011 - 00:22 | 1855530 Mr Lennon Hendrix
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?

Tue, 11/08/2011 - 05:15 | 1855774 Ethics Gradient
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.

Mon, 11/07/2011 - 20:53 | 1855216 LongBallsShortBrains
LongBallsShortBrains's picture

Give it to yamaha.

He can put it on the end of


And make


And make

Mon, 11/07/2011 - 18:53 | 1854993 Ponzi Unit
Ponzi Unit's picture

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

Mon, 11/07/2011 - 19:02 | 1855010 love
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. 

Mon, 11/07/2011 - 18:36 | 1854940 SheepDog-One
SheepDog-One's picture

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

Mon, 11/07/2011 - 18:39 | 1854948 Vlad Tepid
Vlad Tepid's picture

But total fabricated bullshit is what makes Morgan Stanley Morgan Stanley!

Mon, 11/07/2011 - 18:41 | 1854952 BORT
BORT's picture

Early June, 2008

Mon, 11/07/2011 - 18:42 | 1854953 DoChenRollingBearing
DoChenRollingBearing's picture

Are there any regulations in place that say that the banks have to show what bonds (etc.) they own?  If there is/were such transparency, than MS monkeying around Level 1 -> Level 2 would not matter if we could all see the toxic assets they might own...

Mon, 11/07/2011 - 18:43 | 1854957 NotApplicable
NotApplicable's picture

So, rats fleeing a sinking ship is no longer considered "activity?"

These people are damn lucky that words have no meaning, otherwise, they'd be fucked.

Mon, 11/07/2011 - 18:44 | 1854960 Ned Zeppelin
Ned Zeppelin's picture

These are not the Level I assets you are looking for.

Mon, 11/07/2011 - 18:46 | 1854967 gmrpeabody
gmrpeabody's picture


Mon, 11/07/2011 - 19:04 | 1855014 Leopold B. Scotch
Leopold B. Scotch's picture


Tue, 11/08/2011 - 00:24 | 1855539 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Comment of the day.

Ned wins a, "Timmah did my taxes, and all I got was this lousy t-shirt!"

Tue, 11/08/2011 - 01:41 | 1855641 Big Slick
Big Slick's picture

"These are not the Level I assets you are looking for."

Morgan Stanley can go about its business.

Mon, 11/07/2011 - 18:44 | 1854961 Lmo Mutton
Lmo Mutton's picture

It's all fun and games till somebody needs a bailout.

Mon, 11/07/2011 - 18:45 | 1854965 jmcadg
jmcadg's picture

Like being caught at school with water bombs. It doesn't take much effort in hiding them in your pockets to make it look like you pissed yourself.

Mon, 11/07/2011 - 18:46 | 1854968 jcaz
jcaz's picture

LOL- that's just classic......   Can't wait to see BAC come up with "Level 37".....

Mon, 11/07/2011 - 18:49 | 1854974 chump666
chump666's picture

Excellent post.

Mon, 11/07/2011 - 19:37 | 1855077 Hansel
Hansel's picture

Yes.  Very well done Tyler.

Mon, 11/07/2011 - 20:34 | 1855179 kaiserhoff
kaiserhoff's picture

Fine post and series of posts on a complex subject.  A little light does make the cockroaches scurry.

Mon, 11/07/2011 - 18:51 | 1854984 Ponzi Unit
Ponzi Unit's picture

3-card Monte played on polished mahogany instead of cardboard boxes.

Mon, 11/07/2011 - 18:52 | 1854990 adyaner
adyaner's picture

Not panic at all, this is petty cash for uncle Ben who will purchase the exposure at 150% par value, to give some buffer to a friendly FED Shareholder...

Mon, 11/07/2011 - 18:53 | 1854991 Smartie37
Smartie37's picture

Looks like White Shoe stepped in Dog Dooooooooooo.......................    

Mon, 11/07/2011 - 19:01 | 1855006 ReallySparky
ReallySparky's picture

Tyler, I sense some frustration in your prose.

Mon, 11/07/2011 - 19:03 | 1855013 apberusdisvet
apberusdisvet's picture

When you get to Level 5; does everything miraculously disappear?

Hey boss; we're on Level 4; only one more to go before your 9 zero bonus kicks in.

Mon, 11/07/2011 - 19:31 | 1855063 Unprepared
Unprepared's picture

"Hey! Show us your Level III exposure"

"There has never been a Level III in this firm."

"But where have you been hiding all that toxic stuff?"

"We recycle them"

"But how can you recycle toxic waste? You can only burry it."

"This firm never had a Level III"

"OK. What about Ground Zero then?"

Mon, 11/07/2011 - 19:51 | 1855097 knukles
knukles's picture

Same as: "Defcon Oh fuck me...."

Mon, 11/07/2011 - 20:31 | 1855173 Grinder74
Grinder74's picture

After level 5..."They just went plaid!"

Mon, 11/07/2011 - 19:06 | 1855015 mynhair
mynhair's picture

Geez, it's only $39 billion.  My human burns that in a week.

Do wish he had hair....

Mon, 11/07/2011 - 20:38 | 1855190 kaiserhoff
kaiserhoff's picture

That muskrat toupee looks quite fetching on Donald Trump.

Mon, 11/07/2011 - 19:15 | 1855030 Better_late_tha...
Better_late_than_never's picture

Did anyone see Cramer dodge the question about silver on Mad Money? Someone asked what would happen if the cftc "gets their act together" with the position limits. He called chicago the "wild west." ha ha

Mon, 11/07/2011 - 20:34 | 1855180 Grinder74
Grinder74's picture

Whorehouse on every corner? Check.

Community Bathhouse (Lake Michigan)? Check.

Rich guy from out East comes to rule the poor settlers? Check.

Every cowpoke has a gun? Oh, wait this is Chicago we're talking about.

Mon, 11/07/2011 - 19:25 | 1855050 Sequitur
Sequitur's picture

Level 2 and level 3 asset classifications: banker bullshit.

Mon, 11/07/2011 - 19:29 | 1855057 DollarDive
DollarDive's picture

Level 1, Level 2, Level 3 - Complete and utter bullshit fabrication.

Rules created to conceal.

Sunshine is the best disinfectant

Let the sunshine in.


Mon, 11/07/2011 - 21:25 | 1855243 delacroix
delacroix's picture

is the tide going out?

Mon, 11/07/2011 - 22:23 | 1855327 topcallingtroll
topcallingtroll's picture

Looks like it.

Make sure u have a camera to photo all the skinnydippers.

Mon, 11/07/2011 - 19:31 | 1855062 chump666
chump666's picture

C'mon Berlusconi send a F*ck you to everything that is not can do it.  

Europe is decending into chaos....

Mon, 11/07/2011 - 19:33 | 1855070 DollarDive
DollarDive's picture

Our bond markets have become a "SHAM". ;  

All the corporate bonds held in mutual funds and ETF's across America are completely overvalued.  Most bonds are priced off of a pricing grid.  The MF's pay 3rd party "price fixers" to tell them the price of their bonds.  Those prices have no bearing on reality.

Yet the funds use those prices from the "fixers" to determine the NAV of the MF's.

Wait until that market starts to cave.

It will implode on itself instantly when that selling starts to happen.

Mon, 11/07/2011 - 21:07 | 1855230 sgt_doom
sgt_doom's picture

No offense intended, DollarDive, but it's been over 3 years since they discontinued mark-to-market.

Old news, guy......

Mon, 11/07/2011 - 22:27 | 1855331 topcallingtroll
topcallingtroll's picture

Thats not what he is talking about.

The appraisers have their "blue book" of bond values to rip off retail and help bond mutual funds look better.

Just like the real bluebook, the true value of some of these thinly traded bonds is a lot less than the published price.

Mon, 11/07/2011 - 19:35 | 1855072 DavidC
DavidC's picture

Priceless! And brilliant.

Thank you.


Mon, 11/07/2011 - 19:38 | 1855079 slewie the pi-rat
slewie the pi-rat's picture

can we get a DEFCON reading on this?

Mon, 11/07/2011 - 19:52 | 1855100 knukles
knukles's picture

Defcon: Oh, fuck me...

Mon, 11/07/2011 - 19:38 | 1855080 comfortablynumb
comfortablynumb's picture

To clarify....Level 2 gives them the ability not to use the last quoted price as you would with a Level 1.  They've basically had a (convenient) change in fair value accounting policy, I would love to see where they are marked at and what quotes/internal models they are using to value these bad boys.    

Mon, 11/07/2011 - 23:10 | 1855405 Iam_Silverman
Iam_Silverman's picture

"They've basically had a (convenient) change in fair value accounting policy, I would love to see where they are marked at and what quotes/internal models they are using to value these bad boys.    "

This has to be the most concise and correct interpretation yet.

Thanks for clearing up the difference between Level I and Level II.  Although they are allowed to "Mark to Model", exactly how they model the predicted outcome is the most important theme here.  To model the end result, they need to be able to cherry pick the best return scenario based on a range in time, so changing the level makes sense.

Mon, 11/07/2011 - 23:12 | 1855413 Ponzi Unit
Ponzi Unit's picture

So, Level 4 is unicorn?

Tue, 11/08/2011 - 06:46 | 1855819 CPL
CPL's picture

...riding on moonbeams while shitting skittles.

Mon, 11/07/2011 - 19:53 | 1855101 BetterOffDead
BetterOffDead's picture

The move to level 2 under FAS157 is inconsequential to the valuation, it is only a disclosure. If anything, it only invites more scrutiny as level one assets are generally reserved for exchange traded instruments with very active markets (the allocations between levels is somewhat subjective and differs from bank to bank). Assets in level three invite the most scrutiny as management judgement is almost exclusively relied on. I would be more worried if Euro sov debt was classified as level three when there have clearly been trades in the market place.

Mon, 11/07/2011 - 20:24 | 1855163 comfortablynumb
comfortablynumb's picture

You are right, I think Tyler's point was they changed policy for these and no longer use direct quotes from a valuation service (i.e. Bloomberg) leaving the ability to internally model or use some form of valuation other than a direct quote.  Theoretically should still be where market is quoting although who knows anymore. 

Mon, 11/07/2011 - 19:55 | 1855104 infinity8
infinity8's picture

Ok, maybe a stupid question but, when they say "transactions in these securities did not occur with sufficient frequency and volume to constitute an active", are they talking about their transactions or transactions in general? Is there a rule for this type of reclassification?(not that it matters anymore)

Tue, 11/08/2011 - 00:22 | 1855533 infinity8
infinity8's picture

so, nobody knows?

Tue, 11/08/2011 - 02:20 | 1855668 infinity8
infinity8's picture

whatev, comments just above me only serve to make me more confused. . . come on - I'm an honest poster here!

Tue, 11/08/2011 - 02:31 | 1855674 pain_and_soros
pain_and_soros's picture

the quote you bolded left out the word "market" at the end.

They are claiming that there were not enough transactions in the market (it was illiquid or not liquid enough) to be able to establish a reliable "mark" or price to value their bonds/investments...which Tyler showed was a pile of dung.

No hard & fast rule that I am aware of to apply in terms of necessary volume and frequency to be considered "active", but generally, if you could sell your holdings without influencing supply/moving price, then I would say you have an active market & price you can use to value your holdings...



Tue, 11/08/2011 - 02:53 | 1855692 infinity8
infinity8's picture

Thank you! I was just wanting to make sure I understood what level of BS I'm dealing with in this instance.

Tue, 11/08/2011 - 02:59 | 1855697 infinity8
infinity8's picture

so, fast and loose as usual, near as I can tell.

Mon, 11/07/2011 - 19:55 | 1855105 quacker
quacker's picture

Been looking for a place to work this in. I would think Tyler would make a post just about this, it's absolutely astounding, should be the biggest news of the day.

Washington Post is reporting that Wall Street has made more money in 2 1/2 years of Obama than under the ENTIRE 8 YEARS OF THE BUSH PRESIDENCY!

Now we know it's because of the privately owned international banking cartel printing it into their pockets - but nonetheless, this should be huge, beyond huge.

Mon, 11/07/2011 - 20:18 | 1855152 Bastiat
Bastiat's picture


Tue, 11/08/2011 - 00:35 | 1855560 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You can take that to the BANK!

Mon, 11/07/2011 - 19:59 | 1855112 tekhneek
tekhneek's picture

Been MIA for about a week, just in case you guys missed it:

Bank of America to pay $410,000,000.00 in the Overdraft Fee class action lawsuit:

13.2 millon customers affected. approx. 4.5 billion in overdraft fees since may 2001 to january 2011.

Mon, 11/07/2011 - 21:56 | 1855298 Rick64
Rick64's picture

He said the average customer in the case had $300 in overdraft fees, making them eligible for a $27 award — less than one overdraft charge — from the lawsuit.

  Fraud and crime do pay, very well in fact. 

Mon, 11/07/2011 - 20:29 | 1855127 drivenZ
drivenZ's picture

They're still 1.8 billion net long Italy at 9/30. That can't be working out well.  


Though as usual there's some hyperbole baked into any ZH article...they can't mark this stuff at par, as is alluded to. But if you have $5 billion worth of Sov debt that you can pick up a few points on vs the current bid, that's what 50? 100 mill?. 


Mon, 11/07/2011 - 20:08 | 1855131 topcallingtroll
topcallingtroll's picture

Keep hammering them Tylers.

They dont ignore you now.

Mon, 11/07/2011 - 20:16 | 1855148 chump666
chump666's picture


(From THE WALL STREET JOURNAL) By Vanessa Fuhrmans While the world speculates on whether Greece will ultimately leave Europe's currency zone, Europe's biggest tour operator is already anticipating it. German-based travel giant TUI confirmed Monday it sent notices to Greek hotels in recent weeks, asking them to accept payments in new Greek currency in the event of an exit from the euro. The letters, issued by TUI's Nordic tour-operating unit, added yet another jolt to Greek nerves and pride in recent days. In the letters, the operator asked Greek hoteliers to sign a contract amendment moving to protect TUI were Greece to quit the euro and switch to a new and significantly devalued currency. Greece took center stage last week -- first when political maneuvering in Athens appeared to raise the specter of a Greek withdrawal from the common currency, and then when politicians moved to suffocate such fears with a government shake-up. TUI's move, which was disclosed over the weekend in the German tabloid Bild-Zeitung, has quickly sparked outrage across Greece's tourism industry, which accounts for nearly one-fifth of the country's economy. The Hellenic Chamber of Hotels called the move premature and "potentially destabilizing." It said it had issued a letter of protest to the Greek economics ministry and the German embassy in Athens, while the government's tourism ministry sent a letter to TUI voicing its unhappiness. TUI defended the move as responsible planning by a public company for a possible scenario. Economists say returning to the drachma would prompt a devaluation of as much as 50%. (END) Dow Jones Newswires

Mon, 11/07/2011 - 21:12 | 1855239 sgt_doom
sgt_doom's picture

In America, over the weekend, one of our routine propaganda network shows, this time NPR (Fox-CNN-NPR-ABC-CBS-PBS-AP), ran a piece on how lazy those Greeks are, and framed it by interviewing both Greek-Americans (!!??) and Greek immigrants to America.

Of course, while it's been some years since I bummed around Europe (including Korfu, outstanding, and Athens, they seemed decently industrious to me at that time) it is besides the point whether the Greeks are the world's laziest workers, or the most industrious on the planet,

the point being that the banksters have sold trillions of dollars worth of debt on Greek debt, and Spanish debt, and Latvian debt, and Slovakian debt, and Icelandic debt, and Portuguese debt, and Irish debt, and Italian debt, etc., etc., etc.

This should be obvious to everyone by this time.

Or not.....

Mon, 11/07/2011 - 21:32 | 1855265 chump666
chump666's picture

The whole world has gone lazy.  You get credit fed into consumption cycles at an interest rate, you rely on credit too much you get lazy. Simple.  The CB's print and we all think inflation is not going to happen.  But then payday comes, when these corrupt/lazy/sh*t economies want to re-finance their fudged balance sheets.  Greece is just that.

An appalling situation in Europe, Germany underwrites lazy, corrupt countries to protect the flawed EUR and greedy banks like Dexia.  We have all been gamed.  Now we take the pain. The banks take the PAIN TRADE from HELL, no more bailouts.  We just break them up,  The Greeks got double gamed, they have a PM who should go into exile...but somehow that a-hole is hanging in there.

ESFS bailout fund will flop, Greece WILL be booted out, or they boot themselves out...either way.  Italy will implode. France and Germany will strike/riot...Europe's ice-age is coming.


Mon, 11/07/2011 - 21:20 | 1855251 chump666
chump666's picture in prepare for Germany getting more frisky about the sh*t economies of EZ.  Now if German companies are playing the Greece is a EU zombie and the Germans like their EURO's printed in Germany.  The endgame is very, very close. Who on earth would buy junk bonds from junk Europe?  ESFS is dead.

Time for a market beatdown.

Mon, 11/07/2011 - 20:20 | 1855155 Pancho Villa
Pancho Villa's picture

PIIGS debt is getting hotter and more radioactive by the minute. How long until it reaches criticality and vaporizes anyone holding it?

Mon, 11/07/2011 - 20:38 | 1855189 Bastiat
Bastiat's picture

Radioactive nitroglycerin:  move it and die fast or hold it and die slowly.

Mon, 11/07/2011 - 20:28 | 1855167 agrotera
agrotera's picture

I am pretty sure even the filings are given "national security" status and per presidential executive order, SEC filings don't need to be accurate if the company is performing functions considered important to our national security--thus, the banks wtih their TBTF status, are TSTF (too sacrosanct to fail) and thus TCTF (toocorrupt...)...thanks to the privately owned federal reserve that owns our legislators.

And, anyhow, why weren't special purpose vehicles outlawed long ago, and when are the folks that head the financial accounting standard board (FASB) going to carry any responsibility for the vehices sanctioned to legitimize fraud?

Mon, 11/07/2011 - 20:36 | 1855184 Withdrawn Sanction
Withdrawn Sanction's picture

Sounds like bank fraud to me...

"Whatya been doing, George?  Playing the market with the company's money?  ...

You know what Im going do for you, George? As a stockholder in the Building and Loan, Im gonna swear out a warrant for your arrest.  Misappropriation of funds, manipulation, malfeasance...

Mon, 11/07/2011 - 21:45 | 1855185 ebworthen
ebworthen's picture

When told of Jefferies "50% reduction of exposure" Egan Jones simply reaffirmed last week's downgrade.

To save Morgan Stanley, and Europe, don't be surprised if QE3 is $2T + aimed at housing (backstopping mortgages).


Tue, 11/08/2011 - 00:41 | 1855571 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Maybe Kyle Bass is smelling what the Fed is cooking.

Mon, 11/07/2011 - 20:49 | 1855206 adr
adr's picture

I nominate Charles Ponzi for most influential historical figure of all time. No man has had a greater impact on the world.

I mean the scheme existed before Ponzi but he got it named after him.

Mon, 11/07/2011 - 21:03 | 1855227 YesWeKahn
YesWeKahn's picture

you have to like this one:



Papandréou aurait justifié le référendum par la "menace d'un coup d'Etat"


D'après Libération, Georges Papandréou aurait évoqué une "menace de coup d'Etat militaire" devant ses partenaires européens mercredi à Cannes pour justifier son appel à référendum. "En clair, il fallait couper l'herbe sous le pied des conspirateurs en en appelant au peuple", note le correspondant du journal à Bruxelles, Jean Quatremer sur son blog. Mais "ni Angela Merkel, ni Nicolas Sarkozy, ni Christine Lagarde, la patronne du FMI, ni les autres responsables européens présents à ce dîner n'y ont cru une seconde. Seuls des soupirs agacés ont accueilli ces propos", ajoute le journaliste."


Mon, 11/07/2011 - 21:10 | 1855238 darteaus
darteaus's picture

Muchas gracias.

Mon, 11/07/2011 - 22:07 | 1855310 Unprepared
Unprepared's picture

He should have evoqued that Al Qaeda in Islamic PIIGS (AQIP) has just opened an office in Athens.

Mon, 11/07/2011 - 22:29 | 1855335 HoofHearted
HoofHearted's picture

Jean Quatremer must be an official mouthpiece for Sarko.

Mon, 11/07/2011 - 23:24 | 1855434 Ponzi Unit
Ponzi Unit's picture

Roughly translated, G-Pap tried to sell the idea that his call for a referendum came about to avert a military coup. None of the European big shots in attendance at the big dinner last Wednesday believed him for one second. His claim was met with worried sighs.

Mon, 11/07/2011 - 21:50 | 1855290 Eireann go Brach
Eireann go Brach's picture

Morgan Stanleys chief accountant must be a shoe in to be the next Treasury Secretary!

Mon, 11/07/2011 - 22:19 | 1855323 alex_g
alex_g's picture

MS also moved sovereign government obligations assets and liabilities from level 2 back to level 1, about 2 bln worth.  Not really seeing the crime here.  If I'm wrong, show me with facts, not just smoke/fire hyperbole...

Mon, 11/07/2011 - 22:36 | 1855343 topcallingtroll
topcallingtroll's picture

But look at which specific ones were moved and in which direction.

Mon, 11/07/2011 - 22:59 | 1855377 alex_g
alex_g's picture

They don't break out specific issues, just Other Sovereign, assets or liabilities.  The values are generally consistent with other periods and represent a small part of their assets.  BTW, almost all of their corporate and municipal holdings are classified as level 2.  Most large corporate issues trade everyday.  Like i said, not seeing the crime here.

Mon, 11/07/2011 - 22:59 | 1855379 centerline
centerline's picture

Devil is in the details.  If they are purposely misrepresenting exposure, then it is fraud.  Seems the "rules" (not that rules seem to matter anymore) are pretty clear on classification here.

Funny to watch the scramble lately in what otherwise has been a real EU freak show.

Mon, 11/07/2011 - 23:27 | 1855438 Ponzi Unit
Ponzi Unit's picture

Fraud is the zombie business model, not the aberration.

Mon, 11/07/2011 - 23:06 | 1855399 Tyler Durden
Tyler Durden's picture

They moved 2 billion in sovereign obligations from Level 2 to Level 1? Really? Can you please point out on what page of the 10-Q Morgan Stanley discloses the movement of sovereign obligations from Level 2 to Level 1.

We'll go ahead first: on page 20 of the 10-Q they disclose the move from Level 1 to Level 2 of $2.1 billion in Sovereign debt.

Your turn.

Mon, 11/07/2011 - 23:17 | 1855419 Iam_Silverman
Iam_Silverman's picture

"Your turn. "

That's pretty tame Tyler... Marla would have eaten his lunch and stuffed him in the bag.

By the way - where has Marla gone?  Not in her cave, smoking?

Tue, 11/08/2011 - 06:33 | 1855811 Zero Govt
Zero Govt's picture

"..tame.." ?

Er, these soverieng assets (debts) have legs and are going walkies

Tue, 11/08/2011 - 13:48 | 1857045 Iam_Silverman
Iam_Silverman's picture

I was referring to the amazing level of decorum Tyler exhibited when spanking a troll that was trying to dismiss the basis of the article with obfuscation.  His (onetime) foil Marla would have been, how can we say, more forward in her reply?

Mon, 11/07/2011 - 22:46 | 1855361 chump666
chump666's picture

More Euro-bizarro:

Spain could be fined by the European Union for its high unemployment rate as the EU is planning to include that indicator as one of the assessment criteria to measure economic imbalances amongst its member states, reports El Mundo in its Tuesday Internet edition.
If the measure is approved, EU nations will have three years to bring their unemployment rates to a maximum of 10% or face fines of up to 0.l% of their gross domestic product.
With a 22.6% average unemployment rate, Spain would face sanctions for up to EUR1 billion ($1.38 billion), the paper adds.
Newspaper website:

Mon, 11/07/2011 - 23:05 | 1855397 centerline
centerline's picture

I hear austerity does wonders for unemployment!  And big ass fines do wonders for austerity measures.  Man, you just can't make this shit up anymore.  EU apparantly has switched over to an alternate reality.  Next up, PIIGS do fly.

Mon, 11/07/2011 - 23:20 | 1855425 Iam_Silverman
Iam_Silverman's picture

"EU apparantly has switched over to an alternate reality."

Actually, I think that something was lost in the translation.  Maybe what it really said was:

Any country that REPORTS a high level of unemployment will be fined?

Mon, 11/07/2011 - 23:51 | 1855486 chump666
chump666's picture

Who knows.  But Europe's 'crisis' is like a bad joke that doesn't have a punch line.

You can use that quote if you like.


Mon, 11/07/2011 - 22:49 | 1855365 earleflorida
earleflorida's picture

great article - blood is boiling about now - just can't make this stuff up anymore  - man, when this bubbles blows,... it'll take out every prick on wall street

thanks tyler 

Mon, 11/07/2011 - 23:05 | 1855398 luna_man
luna_man's picture

Keep putting it to them "ZH"!!...Tyler, PLEASE, make sure to have a sidekick in place, should ever the need arise!...someone trained by you, in an undisclosed location, to carry on!...YOU NEVER KNOW...




Mon, 11/07/2011 - 23:44 | 1855474 High Plains Drifter
High Plains Drifter's picture


take a break................awsome...........

Tue, 11/08/2011 - 03:30 | 1855716 AustriAnnie
AustriAnnie's picture

Added that to my list of things to do, right after Devils Pool Victoria Falls.

Thanks! Nice to take a break now and then from the chaos.

Mon, 11/07/2011 - 23:57 | 1855499 quacker
quacker's picture

From Google headlines a few minutes ago:


Stocks Recover on European Crisis Reassurances - 
        NEW YORK (TheStreet) -- Stocks recovered late in Tuesday's session after an influential European Central Bank member provided reassurances that the eurozone crisis will eventually be brought under control.

"Stocks rallied after Bloomberg reported that ECB governing council member Jürgen Stark told an audience at a conference in Lucerne, Switzerland that the eurozone crisis will be brought under control within two years."

That's the cover story for the rally - a central banker said everything will eventually be OK. This is what the stock market has become.

Tue, 11/08/2011 - 00:10 | 1855517 props2009
props2009's picture

Bond market updates from C3X (Free Edition)


and there monthly update (Free edition) "Return of Fear in nov":

Tue, 11/08/2011 - 00:24 | 1855537 chump666
chump666's picture

some USD bids are coming in.  The market got juiced by EU officials and their mania, but those Italian bond yields!

Tue, 11/08/2011 - 00:21 | 1855532 AndrewCostello
AndrewCostello's picture

None of the numbers that our governments tell us add up.  This whole world economy is a fraud, and they are quietly grabbing all the physical gold and silver that they can while telling us that they will fix things.  The amount of hidden debt is in the hundreds of trillions, and any figure lower than that is a lie.



Tue, 11/08/2011 - 00:42 | 1855573 Maestro Maestro
Maestro Maestro's picture

The real purpose of switching from Level 1 to Level 2 -- like all those other little games that we play -- is to avert your eyes from the prize.  The prize is our privilege to be able to create worthless digits and buy your goods and services with them without paying anything of value in exchange.

We don't have to switch from Level 1 to Level 2.  We don't have to find a market to sell our bonds; or make CDSs perform, or even save the financial system for that matter.  For we have the power to buy anything -- including a brand-new financial system right after this one collapses.  Gold is not our nemesis.  All of you will be happy to sell it to us at a higher price at a later date.  We will be happy to oblige you with one form of fiat or another.  Gold is just another story we tell to make you forget that you are slaves.

Gold, euros or dollars.

It doesn't matter as long as you have a price.

Tue, 11/08/2011 - 00:45 | 1855578 Ponzi Unit
Tue, 11/08/2011 - 00:49 | 1855590 Mr Lennon Hendrix
Mr Lennon Hendrix's picture


Fiat is just a means of exchange, it is nothing else.  It has changed hands for energy, but that does not mean it always well.  FOr a minute, what if it can no longer change for goods.  Is this why Central Banks are printing hand over fist?  Because maybe they know their game is over as soon as the energy source has more sway than the trade (fiat).

Tue, 11/08/2011 - 01:23 | 1855630 FlyPaper
FlyPaper's picture

I sincerely doubt that one can make any generalization of intelligence based on someone's religion (as proposed above), either in the posivite or the negative.  

I certainly am no fan of the Fed, but the anti-semetic comments are really over-the-top and frankly kinda disgusting.  The FED sucks, and its sucked for the 100 years since its inception.  Its primary competency is making it easy for politicians to get their hands on easy money; and to suck the rest of the economy dry.  

Honestly - is this a "jewish" issue?   No.  Is it a bunch of Keynesian doofuses (and at this point this is the nicest thing I can think to say about Alan Greenspan) who believe in a self-serving socialist banking system that is crony-ridden and flawed from its inception.

Let's call it what it is.  Just makes people look stupid to espouse racism as a cause when there are a thousand other reasons to choose from.

Tue, 11/08/2011 - 03:09 | 1855705 bjennings
bjennings's picture

Perhaps you subscribe more to Jackie Mason's way of thinking

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