It's A Deal

May 6, 2008

Poof!

First it was Level 3 assets, and now this?

It seems a bank in the suburbs of Philly can’t account for some of its money. No, it’s not tied up in impossible-to-trade securities or hard-to-value assets. They simply can’t find it.

OK, it’s only a shade more than six million bucks, but one would think Rule No. 1 for any bank would be pretty straightforward: Don’t (literally) lose money. In this case, Rule No. 2 would be: Don’t spend another $2 million (and five months) looking for the original $6 million you lost, as Willow Financial Bancorp reportedly did, according to the Philadelphia Inquirer.

It reminds me of a story a source told me not long ago about several billion dollars of bearer bonds. It seems one institution – many years ago – trusted an everyday courier service to deliver said bonds across Manhattan. Well, it turns out that about halfway through the trip, nature called for the van’s driver, who left the van running. Needless to say, away went the van, and the bonds. The van was later recovered, with the bonds. (And we thought we had problems with risk management nowadays!)

Speaking of which, Merrill said Tuesday that its Level 3 assets rose 69% in the first quarter. Not that it matters anymore given that the housing and credit crisis are, somewhat miraculously, now over, but this should otherwise be somewhat alarming. Merrill has about $70 billion of assets on its books that it basically can’t value. Maybe they’re worth a hundred billion! Or maybe 25.

Regular readers know where I stand on Level 3 assets – in my mind, they’re exhibit A in this credit-crisis drama which, incidentally, isn’t over. And get this: As of March 28, these hard-to-value assets made up better than 15% of Merrill’s total assets, up from just over 9% three months prior.

Maybe things have gotten a bit better in the past several weeks, maybe they haven’t (next week's cover story in IDD will look at that), but sound the all-clear bell at your own risk.