In line with the magic Fitch just performed by transforming AAA into JUNK, the investment banks have been shifting assets down into the Level 3 category, where valuations are made by the very same programs that said that the sub-prime collapse was a 25-standard deviation event, i.e., it would happen once since the Big Bang.
Wall Street playing with more funny money
The increase in 'Level 3' assets among big Wall Street banks is an ominous trend, argues Fortune's Peter Eavis.
By Peter Eavis, Fortune senior writer
November 12 2007: 12:44 PM EST
NEW YORK (Fortune) -- Banks' exposure to illiquid, hard-to-value assets jumped sharply higher in the third quarter, a development that deepens concerns about the transparency and strength of bank balance sheets.
Recently, banks have been required to show in financial statements which of their assets and liabilities rarely trade and are therefore valued according to in-house estimates.
Much hope has been placed on banks' auditors making sure that assets are properly valued, especially those marked according to internal guesstimates. In October, the Center for Audit Quality, which represents the auditors, warned brokerage managers and company directors that they had no choice but to abide by a recently introduced accounting rule for valuing illiquid assets.
But even a well-resourced auditor can't be expected to properly scrutinize the huge amount of level two and three assets sitting on banks' balance sheets.
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