Off-Balance Sheet, Off-Shore, Offensive

Merrill Lynch and a number of the other big New York financial institutions made the mistake of taking huge risks on Structured Investment Vehicles (SIV's) for the potential reward of a modest return but not hedging the downside. These CEO's have been paid enormous sums of money to make money and manage risk. It is becoming very clear that, with the exception of Goldman Sachs, risk was not managed.

Merrill Lynch stated a week ago that they would take a $5B hit on their sub-prime and SIV's. Then when they released their earnings it had turned into a $8B write-down. This is for a firm that makes maybe $6B in profits in a year.

The fact that it went from $5B to $8B in the course of a week tells us that they have no idea what the ultimate hit will be. It shows that they are still not marking to market but are marking to model. I suppose they took another look at their model and decided that the write-down should include and additional $3B. But instead of $5B or $8B it could be $10B or who knows what.

Perhaps even scarier Merrill Lynch and others are hiding their SIV assets in off-balance sheet entities. Some of these off-balance sheet entities have even moved off-shore for even greater opaqueness. This is exactly the type of fraud that was perpetrated by Enron, hiding huge losses off its balance sheet until it was too late for the firm to stop its ultimate collapse.

Where is the SEC? Absent as usual. Without Eliott Spitzer as New York Attorney General to do the SEC's job for them, the SEC continues to be the feckless, financial statement collecting bureaucrats that they always have been.

Not a single one of these CEO's that failed their shareholders by not managing risk has been fired. No government investigation is underway to reveal what is being hidden in these off-balance sheet entities. It is appalling.

Disclosure: at the time of this posting the author was long GS.