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What to Make of Merrill's Second-Quarter Results?


Wachovia, JPMorgan also head-scratchers.

Having been away and disconnected from the markets for the past three weeks, I am trying to play catch up on what I missed.

At the risk of forcing Minyanville readers to relive recent history, I would just like to share one thought on what I believe is an increasingly troubling theme from financial services firms - and that is quarter end balance sheet asset and liability values.

Now for the second time in as many quarters, Wachovia (WB) has announced earnings one week only to go back a week or two later to adjust significant balance sheet values – the first time was for bank-owned life insurance and this second one was for litigation reserves. While I appreciate its diligence, it makes me wonder whether quarter end means the last day of the quarter, the day earnings are announced or the day the 10-Q for the quarter is ultimately filed with the SEC.

And if that is the case, how do I reconcile that notion with Merrill Lynch's (MER) second quarter results, which were issued on July 17th with its subsequent announcement on the 28th of a brand new $5.7 billion incremental loss to be booked not in the second quarter, but in the third quarter on a sale of assets that was clearly in the works in June? Could the company not have seen the risk to its loan asset values going into quarter end? And if not, why not?

And if it had seen the issue, would or even could JPMorgan (JPM) have waited until this week to announce an incremental $1.5 billion write-down on its mortgage portfolio( which was reported to have been largely predicated on the values achieved by Merrill Lynch on its asset sale)?

And what about Freddie Mac (FRE) and Fannie Mae (FNM), both of whom reported substantial fair value write downs of their liabilities for the second quarter just days after the US government announced it was explicitly going to guarantee the corporations' senior debt? Maybe I am all wet, but my guess is there might have been a little change market value as a result.

Admittedly I am not an accountant, but the actions I see make me increasingly wonder whether quarter end results really mean anything.

And, if they don't, what really was the point of Sarbannes-Oxley compliance?
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Position in SKF and JPM debt obligations.
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