In a filing with the Securities and Exchange Commission, Merrill Lynch said it had been overstating cashflows - both received from derivatives financing and paid used for trading liabilities - associated with its derivatives business since 2005.
Although it plans to restate its accounts, the mistakes will have no effect on revenues, profits or capital levels, as the mistakes in cash received and cash used are equal and opposite, the bank said. Cashflows will be adjusted by $4.6 billion in 2005, $15.7 billion in 2006 and $22.9 billion in the first nine months of 2007. The error was discovered during the preparation of the bank's full-year 2007 results.
Though the news will have no effect on Merrill's bottom line, it joins a list of cases in which banks have proved unable to properly account for derivatives holdings. As well as the waves of subprime-related writedowns at almost every major bank, Credit Suisse announced earlier this month that its traders had failed to bring their valuations of credit derivatives holdings up to date, leading to an unexpected $2.85 billion writedown. And insurer AIG underestimated its own losses on collateralised debt obligations, which hit $5.2 billion, compared with its own $1.6 billion estimate.
The week on Risk.net, August 19-25, 2016Receive this by email