- Level-one assets, which are easy to value or trade, have to have quoted prices in active markets such as US government bonds or gold bullion;
- Level two assets, which are not as fully marketable as level one, but still sufficiently tradeable to have a definite value;
- Level-three assets usually artificial financial instruments, which do not have quoted prices in active markets.
The times quoted the following numbers for the holdings of level-three assets;
- Lehman has $22 billion;
- Bear Stearns $20 billion;
- JP Morgan Chase $60 billion.
- Goldman Sachs. has $72 billion of level-three assets, out of total assets of $900 billion.
Here is a question no banker wants to hear; if a large proportion of a banks balance sheet can not be properly valued, then what is the value of the bank? The answer must be "eerrr, we don't know". I hesitate to examine the implications of that kind of answer, but the name Northern Rock does come to mind a little more quickly than I would like.
Six months ago, it would have been hard to imagine that investment banks could be in such poor shape. Yet it all goes back to one source; property. This news might be coming out of the US at the moment, but take no comfort from that. It is just that their housing market is about 18 months further down the road of financial ruin. We here in the UK have just taken our first tentative steps down that path.
Once the housing market starts to crash here, it is a fair bet that we will begin to hear quite a bit about the deteriorating asset quality of UK banks. Lest we forget, the first run on a major bank happened in the UK and not over in the States. Our housing market is more overvalued, with more deeply indebted consumers and more reckless banks. The buy-to-let speculative wheeze is British to the core.
When the brown stuff hits the fan, things will be worse here.