NEW YORK (Reuters) - Wall Street banks either are reluctant to give investors a full picture of their troubled assets or they never had a grip on their exposure in the first place, said Tanya Azarchs, a Standard & Poor's ratings analyst.
Either prospect is unsettling.
Azarchs told the Reuters Finance Summit on Thursday that some banks' wide range of estimated losses demonstrates the uncertainty in putting a value on collateralized debt obligations and subprime mortgage securities.
"I think it speaks to ... banks having problems getting their arms around their exposure," she said. "I don't think any management would voluntarily do that, keep revising."
Merrill Lynch & Co Inc MER.N on Wednesday night unveiled $5.7 billion in previously undisclosed exposure to subprime mortgages. The company declined to comment on why it didn't make the disclosure on October 24, when it announced an $8.4 billion write-down and provided details on CDO and subprime exposure.
In addition, Merrill also said in a quarterly filing that its net exposure to CDOs was $15.82 billion, or about $600 million more than what it disclosed on October 24.
Net exposure figures do not include assets that are hedged against losses. As Merrill demonstrated, hedges are not airtight because counterparties can wiggle out of contracts that protect companies against losses. A terminated hedge triggered the $600 million rise in Merrill's net CDO exposure.
"We don't take the hedge at face value, because hedges can not work the way you want," Azarchs said. "It provides some protection. We don't think it's 100 percent."
Analysts at Citigroup (C.N: Quote, Profile, Research, Stock Buzz) expect $64 billion or so in CDO-related write-downs to be announced by Wall Street firms. The bulk of the new write-downs will come from highly rated CDO slices that many investors and analysts thought were safe.
"Yet that apparent safety was not to last," Citigroup analysts said in a research report. "Their valuations are extremely sensitive to movements in the underlying markets, in this case, subprime mortgages."
Azarchs said top executives earlier this year did not view the highly rated CDO tranches as exposure, or a potential problem.
"They didn't worry about it, and it just dawned on people after the end of September that there's some risk here," Azarchs said.
(Reporting by Tim McLaughlin, editing by Gerald E. McCormick)
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