Level 3 Assets at MS, GS, LEH, BSC, C, MER

With the current credit crisis in the U.S., it is important to monitor the following development.

Extracted from Online Trading Academy email newsletter (free subscription).
"The Financial Accounting Standards Board (FASB) is the referee for accounting practices. They recently issued a new rule which will be implemented November 15. Essentially, Statement 157 requires a financial firm to divide its assets into three categories called simply enough, Level 1, Level 2 and Level 3.

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.)

.... It seems that some companies have far more Level 3 assets than they have capital. Take a look at these six banks which have already posted their Level 3 assets ahead of the deadline:

• Morgan StanleyEquity base: $35 billionLevel three assets: $88 billionLevel 3 to equity ratio: 251%
• Goldman SachsEquity base: $39 billionLevel 3 assets: $72 billionLevel 3 to equity ratio: 185%
• LehmanBrothersEquity base: $22 billionLevel three assets: $35 billionLevel 3 to equity ratio: 159%
• Bear StearnsEquity base: $13 billionLevel three assets: $20 billionLevel 3 to equity ratio: 154%
• CitigroupEquity base: $128 billionLevel three assets: $134.8 billion Level 3 to equity ratio: 105%
• Merrill LynchEquity base: $42 billionLevel 3 assets: $35 billionLevel 3 to equity ratio: 38%"

I will certainly monitor the above stocks especially MS, GS, LEH and BSC and consider shorting them when the time is ripe. At the moment, these stocks are recovering from their recent losses. It seems that there are more room for these stocks to go down.

- PersianCat04 (Millionaire-in-progress)