[FoxV]

Just came across this today, which kind of surprises me as I thought my "sources" would have picked up on this sooner.

The bloodbath in credit and financial markets will continue and sharply worsen

some pre-amble:

Banks have 3 "levels" of assets (bonds, securities, derivatives, etc). The "Level 3" assets are those that basically have no market value because nobody is buying them. In such a case Banks have been allowed to us a market model to estimate what the value of the assets are (Marked to model).

The only problem comes from the fact that the Model is internal to the bank, and often so complicated that the ratings agencies (wanting to collect fees and not appear stupid) say "Oh yeah, that's a great model, I give it an A+. Good work little JP".

Thus level 3 assets are now often said to be "Marked to Make Believe" (the most glaring is using historically low interest and foreclosure rates as well as historically high home appreciation to say what an MBS is worth)

Anyways, FASB-157 (takes effect November 15th) is a new regulation that states that if your model does not include real market facts, its worthless. If banks have to change their models to reflect the current market, that means most of this stuff is going to turn into toilet paper. The banks will then be forced to write down Hundreds of Billions in losses (see the update at the end of the article above)

So anybody? Thoughts?, Comments? Fall-out Shelter?

[RonMN]

Yup, the financial institutions have only written down about 10% of the true losses. It's been on CNBC and WWW.ML-IMPLODE.COM and WWW.DOLLARCOLLAPSE.COM.

Writedowns may end up being a quarter to a half a Trillion dollars by the time it's all said & done.

Great Depression #2 here we come!

[Chuckmak]

http://www.bloomberg.com/apps/news?pid= ... refer=home

$this->bbcode_second_pass_quote('', 'B')anks Face $100 Billion of Writedowns on Level 3 Rule (Update1)

By John Glover

Nov. 7 (Bloomberg) -- U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.

The Financial Accounting Standards Board's rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, Royal Bank's chief credit strategist Bob Janjuah in London wrote in a note today. The new rule is effective Nov. 15.

``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' Janjuah said. ``The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ``mark-to-make believe.''

Wall Street's biggest firms have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley, the second-biggest U.S. securities firm, has 251 percent of its equity in Level 3 assets, making it the most vulnerable to writedowns, followed by Goldman Sachs Group Inc. at 185 percent, according to Janjuah.

Morgan Stanley fell $3.72, or 6.8 percent, to $50.79 at 1:15 p.m. in New York. The New York-based bank is down 23 percent this month. New York-based Goldman Sachs dropped 3.97 percent to $214.29.

Morgan Stanley may write down $6 billion of assets, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said yesterday.

Merrill is Healthiest

Citigroup Inc., which this week said losses from subprime assets may be $11 billion, has 105 percent of its equity in Level 3 assets, Janjuah wrote. The New York-based bank fell 2.51 percent to $34.20, a four-and-a-half year low.

Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and other debt securities, has Level 3 assets equal to 38 percent of its equity ``and may well come out of all of this in the best health,'' Janjuah said. Merrill lost 4.36 percent at $53.91.

``If you look at the writedowns just at Citi and Merrill already it's about $20 billion, so $100 billion may be on the conservative side globally,'' said Sajiv Vaid, who manages the equivalent of about $10.5 billion of corporate debt at Royal London Asset Management in London, a unit of the U.K.'s biggest customer-owned insurer.

The losses are likely to hurt shareholders more than bondholders because the banks may be forced to sell stock to raise additional capital, Vaid said.

`Unobservable' Inputs

Under FASB terminology, Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to- model, an estimate based on observable inputs and used when there aren't any quoted prices available. Level 3 values are based on ``unobservable'' inputs reflecting companies' ``own assumptions'' about the way assets would be priced.

ABX indexes, which investors use to track the subprime-bond market, are showing ``observable levels'' that would wipe out institutions' capital if the benchmark's prices were used to value their Level 3 assets, according to Janjuah.

The indexes have tumbled this year because investors expected rising numbers of borrowers to default on home loans, cutting the cash flowing to the bonds that package the mortgages.

Lehman Brothers Holdings Inc. has the equivalent of 159 percent of its equity in Level 3 assets, and Bear Stearns Cos. has 154 percent, according to Janjuah's note, called ``Bob's World: Feast and Famine.''

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

[Twilight]

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