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

Indeed, according to a MarketWatch article from September – based on Bernstein Research – many Wall Street firms put an excessive amount of securities in the level 3 bucket that uses unreliable models for valuation. The share securities in the level 3 is:

15% for Goldman Sachs;

13% for Morgan Stanley;

8% for Lehman Brothers;

7% for Bear Stearns

and only 2% for Merrill Lynch.

So, what is a level three asset: Ummm….Basically, it’s sh#@ that you cannot sell, because there is no regular market, and your asset value is pulled out of the ether using models that no one understands.

Merrill Lynch just tanked, and its CEO was fired with just 2% of its assets being level 3, and look at where the other investment banking firms are.

It’s stuff that might be a million dollars, and it might be ten dollars, but you cannot tell until you try to sell it.

Or, to quote the Prudent Bear:

We may be about to find out. From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models.

I’m beginning to think that I should put everything in gold under my mattress.^*

It’s 1929 all over again.

^*Not really. But perhaps moving some more assets to foreign denominated stuff would be in order.