Friday, November 09, 2007

Coming down to the wire

So, the fiscal year is drawing to a close, at least at Goldman Sachs. So, bonuses are about to be calculated. As the economy is run for the convenience of Goldman Sachs, not for investment banks in general, they still expect to collect a lot of money there. But, there could still be an issue.
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.
[Royal Bank chief credit strategist Bob] 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.''
Morgan Stanley 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. Goldman, the biggest U.S. securities firm, fell 4 percent in New York trading today.
'Mark to Make Believe', or Level 3 Assets, are valued using the bank's own estimation of the value of the asset. One could instead mark to market (level 1), using the value such assets are sold at, or to model (Level 2), using the value a particular model (and the choice of models greatly mitigated Morgan Stanley's early write down this week) would predict for an asset given a number of free parameters.

This is another reference from a Housing Bubble Blog comment, this time by this guy.

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