That brings us to the tens of billions of Level 3 assets. Typically, these are packages of stuff like mortgages, credit-card receivables, leveraged loans and various and sundry other things -- a bit of the lending kitchen sink, in other words. Market pricing is pretty much nonexistent, and such assets are valued at more or less what management says they're worth. In Janjuah's sardonic phrase, Level 3 assets are "marked to make-believe."
And here's where the new rule is destined to make life a lot more difficult for holders of Level 3 instruments, by mandating far more stringent means of figuring their value or else. And the or-else could translate into writing them down. Reason enough why no one seems in a particular rush to buy such assets.
According to Janjuah's calculations, Morgan Stanley, which is still grimacing over a recently disclosed trading loss of $3.7 billion, has 251% of its equity in Level 3 assets. At Goldman Sachs, the Level 3 commitments run 185% of equity. At Lehman, such assets are the equivalent of 159% of equity; at Bear Stearns, 154%.
Citigroup, which owns up to something like an $11 billion hit from subprime and other bum loans, a dismal total that occasioned the exit of its top man, has Level 3 assets equal to 105% of its equity. Rather ironically, Merrill Lynch, which is upward of $8 billion poorer after taking its bitter medicine to purge itself of overvalued subprime and assorted other loans, and whose CEO also was shown the door, has Level 3 loans equal to 38% of its equity. That makes it the least vulnerable of the major lenders. |
