Looking Behind the Velvet Curtain: SEC Probing Wall Street Banks for Hidden Subprime Losses

The Wall Street Journal broke the story earlier this morning that the Securities and Exchange Commission has been combing the books of major Wall Street investment banks for any evidence of hidden subprime losses:

Securities regulators are checking the books at top Wall Street brokerage firms and banks to make sure they aren’t hiding losses in the subprime-mortgage meltdown, said people familiar with the inquiry. The SEC is looking into whether Wall Street brokers are using consistent methods to calculate the value of subprime-mortgage assets in their own inventory, as well as assets held for customers such as hedge funds, the same people said. The concern: that the firms may not be marking down their inventory as aggressively as assets held by clients. While the issue is a technical one, and such checks occur routinely, it is sensitive for the markets. That is because, at least through their latest earnings reports, few big Wall Street firms have reported big subprime losses despite the turmoil roiling the markets.

I personally find this interesting, because HW readers know how surprised I’ve been over the strong performance of nearly all of the major Wall Street players recently, amid what’s so far looking to be a historic meltdown in the secondary mortgage markets. The WSJ reported that the SEC’s inquiry is focusing primarily on repo desk operations, in an attempt to see if the Wall Street banks are marking their own assets similar to whatever asset repricing has been forced on investors as of late. After all, wouldn’t it be overly convenient if an investment bank was making margin calls based on repricing activity at a repo desk, and then failing to apply the same repricing to its own assets (including any assets siezed)?

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