International Investing

Mauldin describes Level 3 assets - what they are and where they are.

Under FASB terminology, Level 1 means assets that can be marked-to-market, where an asset’s worth is based on a real price, like a stock quote. Level 2 is mark-to-model, an estimate based on observable inputs which is used when no quoted prices are available. You can go get several bids and average them, or base your assumption on what similar assets sold for.

Level 3 values are based on “unobservable” inputs reflecting companies’ “own assumptions” about the way assets would be priced. That would be market talk for best guess, or in some cases SWAG (as in Simple Wild-***ed Guess.)

Scary. Even worse is the following table summarizing the big banks holdings of this stuff (Data from Nouriel Roubini):

Citigroup Equity base: $128 billion
Level three assets: $134.8 billion
Level 3 to equity ratio: 105%

Morgan Stanley Equity base: $35 billion
Level three assets: $88 billion
Level 3 to equity ratio: 251%

Lehman Brothers Equity base: $22 billion
Level three assets: $35 billion
Level 3 to equity ratio: 159%

Goldman Sachs Equity base: $39 billion
Level 3 assets: $72 billion
Level 3 to equity ratio: 185%

Bear Stearns Equity base: $13 billion
Level three assets: $20 billion
Level 3 to equity ratio: 154%

Merrill Lynch Equity base: $42 billion
Level 3 assets: $35 billion
Level 3 to equity ratio: 38%