Under FASB terminology, Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to- model, an estimate based on observable inputs and used when there aren't any quoted prices available. Level 3 values are based on ``unobservable'' inputs reflecting companies' ``own assumptions'' about the way assets would be priced.
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!
The Financial Accounting Standards Board's rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets.
The new rule is effective Nov. 15
Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets. Goldman Sachs Group Inc. has 185 percent, Lehman Brothers Holdings Inc. has 159 percent and Citigroup Inc. has 105 percent.
It looks like Merrill Lynch & Co. will come out the best in all of this. They "only" wrote down $8.4 billion of subprime mortgage debt and related securities, has Level 3 assets equal to 38 percent of its equity.
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