Mark to Fantasy

(Hard to value has to be the greatest con in the history of the organized confidence game that is the Street. Everything has a price you just might not like it. Perhaps the Masters of the Universe could Google 'Price discovery mechanism'. It involves a buyer and a seller, it is symmetrical and it works. We are how long into the crisis and we're still blathering out the narrative about hidden dangers? How in the world can someone say that banks should have more confidence in a model used for valuations that is premised on mark-to-fantasy? - AM)


By Aline van Duyn and Francesco Guerrera in New York
Wednesday Dec 10 2008 19:00
FT.com
The biggest US financial institutions reported a sharp increase to $610bn (£413bn) in so-called hard-to-value assets during the third quarter, raising concerns about the hidden dangers lurking on banks' balance sheets.

So-called level-three assets, which are classified as hard to value and hard to sell, rose 15.5 per cent from the second quarter, according to analysis by the Market, Credit and Risk Strategies group of Standard & Poor's.

Level-three assets have risen all year for most banks as they have found it virtually impossible to sell mortgage-backed securities and collateralised debt obligations, pools of assets sold in tranches to investors and which often contain mortgages.

"A lot of banks are saying: 'I am going to move securities to level-three assets because I have more control over, and confidence in, the model used for their valuations,' " said Gregg Berman, head of the risk management unit at Risk Metrics.

The study is based on regulatory filings by the biggest underwriters and traders of mortgage-backed securities and CDOs - asset classes that have plunged in value amid a wave of house price falls and foreclosures and which are at the centre of the financial crisis.

Next week, Goldman Sachs and Morgan Stanley will be the first banks to report fourth-quarter results, which are likely to be scrutinised for information about their holdings of opaque assets.

Michael Thompson, managing director of MCRS, said he would be "surprised if we did not see writedowns of these level-three assets" in the fourth quarter.

"Between June and December, the economic fundamentals that are directly impacting the assumptions underlying many of these assets have degenerated significantly."

The original analysis by MCRS centred on 12 banks. This group has now shrunk after the bankruptcy of Lehman Brothers and includes Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Wells Fargo and Wachovia.