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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!

SERIOUSLY, MORGAN STANLEY!?

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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Tue, 11/08/2011 - 06:31 | Link to Comment jomama
jomama's picture

if it were the africans, the chinese, the indians, or the mexicans running the world banks and causing the class war we would be railing them for it.

Tue, 11/08/2011 - 01:54 | Link to Comment pain_and_soros
pain_and_soros's picture

The accountants who sign off on this blatant crap should be arrested, sued & sanctioned.

They could stop this BS, but instead contribute to it.   They have no credibility left & that is the only possible thing they could ever offer.

Tue, 11/08/2011 - 02:25 | Link to Comment Island_Dweller
Island_Dweller's picture

Off Topic: Interesting interview from Bart Chilton on King World News

 

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/11/5_Bart_...

Tue, 11/08/2011 - 04:31 | Link to Comment reggiehammond
reggiehammond's picture

The market reminds me of the WWF. Even a mongoloid child with a compromised sensorum could deduce the outcomes are predetermined, but there is still an exciting nebulosity enshrouding securities price oscillations in a particular veil of lunacy (the whim, caprice, and craziness of rich assholes) beckoning one to watch just as you would watch a pretty woman masturbate. The masses are engrossed because people tend to dwell on the primitive (pussy, money, violence, etc) and are so trapped by opressive debt that dreams of wealth via stock trading (whatever assholes Jim Cramer + Bob Pisani get tv time to talk about) offer near perfect escapism. I'd imagine much like the WWF the market has a Vince McMahaon figure who tells people like Ted Dibiase and his bodyguard Virgil (the investment banker lowlife alpha male idiots or prime ministers) exactly what to do. Sadly, in the WWF these carnal discussions are kept from the public so the masses would continue to attend WWF events/watch PPV TV (Wrestlemania, Royal Rumble, Summer Slam, etc.) and seem surprised at the choreographed results. Now, if someone could get his/her hands on shit like say hypothetically a CFO talking to Steve Cohen or a member of the Fed having lunch with Goldman Sachs partners (we fucking know this shit happens daily) it would sound alot like McMahon talking to Hogan about what to do when Lady Elizabeth hands the Macho Man a chair. I really like the type of discerning inferences that people at Zero Hedge are able to make from data that has probably already been censored/muted/compromised (which implies the robustness of how fucked the situation really is). Imagine the specificities. I'd love to be a fly on the wall.........In order to draw even deeper and more meaningful conclusions, one would need greater access. Less hypothesizing more sleuthing. Go hard. Apply for a job at one of the profligate institutions and act really normal/helpful. Think Watergate but instead of bringing down a Presidency take aim at C, GS, JPM or any one of these houses of sin. 

Tue, 11/08/2011 - 06:18 | Link to Comment Pondmaster
Pondmaster's picture

WE... MUST.. SAVE ......THE TBTF BANKS. AT ANY COST , WITH ANY LIE !!!!!!

Tue, 11/08/2011 - 06:44 | Link to Comment ivars
ivars's picture

Something does not fit with end of 2013 or beginning of 2014 being the date of US debt crash correction. So the anwer could be:

that defaults of USA Treasury to FED will happen in discrete (DISCRETE as in DISCRETE scale, not as in discrete presence) way starting from November 2012,->and that is the reason of Gold price connection with this election cycle, then FED buys more, then Treasury defaults again etc. It will be kind of a new "permanent"  way of handling country debt and monetary issues combined.

I just wander what other consequences it will bring to USD value  ( vs. commodities, other currencies), will it become fashionable way to handle part of debt in every country (except Europe where partial debt corrections happens as  country by country defaults as there are no local central banks). Than of course every countries currency will devaluate in a similar manner to the USD except that USD will still be sitting on bank balance sheets even if they will receive a default in JPY ( e.g. Japan). So despite US correcting its debt to FED , USD still will have the longest (one of the longest ) lifetimes among currencies. The currencies that can outdo USD will be those where total government debt and other debt in the economy is small relative to GDP, and where USD etc is not too prominent on the balance sheet of central bank.

Also, does it MEAN Ron Paul can make it to president with coming recession etc and consequently exploding debt? Or his idea will be stolen by Obama?

"Congressmen and Presidential hopeful Ron Paul, who chairs the House sub-committee on monetary affairs says the Fed should not be holding this “ficitious” debt any longer against US tax payers."

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&start=860#p35004

Tue, 11/08/2011 - 07:09 | Link to Comment 1000pips
1000pips's picture

Go Euro!

Tue, 11/08/2011 - 08:00 | Link to Comment nmewn
nmewn's picture

What fresh new accounting hell is this?

Lets move the broken down rusted out sovereign debt vehicle sitting on blocks from the front yard to the backyard so we can get a better appraisal to sell the house.

Its a net win!!!

“The recapitalization of European banks is also turning out to be a damp squib,” according to a Nov. 6 note from CreditSights Inc. “This does nothing to fix >>>the main problem<<< of restoring sovereigns’ risk-free status.”

http://www.bloomberg.com/news/2011-11-08/european-banks-cutting-sovereign-bond-holdings-threatens-to-worsen-crisis.html

Wed, 11/09/2011 - 11:35 | Link to Comment old austrian
old austrian's picture

Just want to understand how this helps them, as I'd have thought these securities would be classified as Held to Maturity and therefore marked at par anyway irrespective of whether they are Level 1 or 2? Or does the reclassification to Level 2 allow them to dick about with the valuation parameters and avoid the full writedown?

Tks

Wed, 11/09/2011 - 11:35 | Link to Comment old austrian
old austrian's picture

Just want to understand how this helps them, as I'd have thought these securities would be classified as Held to Maturity and therefore marked at par anyway irrespective of whether they are Level 1 or 2? Or does the reclassification to Level 2 allow them to dick about with the valuation parameters and avoid the full writedown?

Tks

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