Last fall investors woke up to realities of FAS 157, the framework the Financial Accounting Standards Board adopted for measuring the value of securities that are difficult to value because of “unobservable inputs.”
The Street has had some time to adjust to the accounting treatment, and investors are slowly coming to grips with the new rules.
Still. the broker’s quarterly earnings press releases make you use your imagination, and are not as comprehensive as the 10-Q filings, several of which were recently filed:
Here’s how the numbers break down. For the quarter ended Feb. 29, Morgan Stanley reported $4.24 billion of net unrealized gains on Level 3 assets and liabilities. That was almost twice the company’s $2.21 billion of pretax income.
Those figures included $8.39 billion of net gains on Level 3 derivative contracts, driven in large part by adjustments on credit-default swaps, which Morgan Stanley used to buy protection against declines in the creditworthiness of various holdings.
Morgan Stanley included the $8.39 billion on its income statement as part of trading revenue, which was $3.39 billion last quarter. So, without those items, Morgan Stanley’s trading revenue would have been negative $5 billion. (Yes, negative.)
At Goldman, net unrealized Level 3 gains were $2.07 billion for the quarter ended Feb. 29, equivalent to 96 percent of the company’s $2.14 billion of pretax income.
Lehman booked $695 million of non-cash gains last quarter on corporate equities classified as Level 3, slightly more than the company’s $663 million of pretax income.The company showed $9.38 billion of such equities as of Feb. 29. The gains suggest a remarkable performance; the Standard & Poor’s 500 Index fell 10 percent during the same period.
Overall, Lehman booked $114 million of net unrealized Level 3 gains last quarter, equivalent to 17 percent of pretax income. Bloomberg
Investors continue to give Goldman the benefit of the doubt; the adoring media coverage, and historical operating performance has resulted in a valuation premium against it peers that the market has yet to wring out.
Goldman’s stock nearly broke out of its recent trading range today, and with each passing day investors are becoming more comfortable with the risks the company is bearing.
Given the numbers cited above perhaps it is time the Street get off Lehman’s back. And if the schoolyard bullies need somewhat to beat up on, they should look no farther than John Mack. With Morgan Stanley’s unrealized gains on Level 3 assets running nearly 200% of pretax income, it appears Goldman is not the only broker getting a free pass from the BuySide.
I am looking forward to the next leg up in the brokerage stocks; it will likely mean the broad market is on firmer footing. I just don’t expect it to happen for a few months, and taking out the 2007 highs is likely out of the question.
At least until 2009.
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Goldman, Morgan Stanley Hit `Level 3’ Jackpot
Bloomberg
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position
What’s particularly terrifyng about the balance sheets of this nations largest “financials” is that all these illiquid Level III assets are tied directly and irreversibly to US real estate values; and home values are plunging, with no end in sight.
IMHO, stay safe by staying sidelined ~
Sparky
Well, Goldman busted through resistance today. All is forgiven, and they are off to Chipotle for $10 burrito’s-hold the rice.
The bears might want to consider the possibility the 2nd half of 2008 is good to equities, in general.
As long as Schottenfeld does not start a rumor, GS might trade with a 2 handle again.
SJ
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