The Level 3 Bomb

Today, the Dow Jones dropped by 2.6% (or 360 points), so you'll have the usual talk about volatile markets, and the just as usual dismissals that the Dow is just a few percent off its all time high. But what's happening in the credit markets, and on the balance sheets of the banks is in fact a lot more worrying. In particular, smart players are now focusing on so-called 'Level 3' assets. And they are, there is no other word for it, panicking. Let me take you through it.
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Financials Drag on Markets

Banks and Wall Street brokerage stocks once again dragged the broader stock market lower Wednesday, in a reflection of how credit-market concerns are still driving markets as investors also cope with a weak dollar and record oil prices. Stocks started the day weak, but selling accelerated around midday, and major benchmarks finished near their lows for the session. The Dow Jones Industrial Average tumbled 360.92 points to 13300.02, wiping out all the gains since the Fed's first rate cut September 18. The S&P 500 sagged 44.65 points to 1475.62, while the Nasdaq Composite Index shed 76.42 points to slide to 2748.76. 'There is nowhere to hide,' says Jack Ablin, chief investment officer at Harris N.A. He said that the sell-off of the financials reflects a 'continual spiraling of the credit crisis' due to lack of adequate disclosure. 'We are facing a tropical storm: we know it will hit, but nobody knows how serious it will be,' he said.
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Banks Face $100 Billion of Writedowns on Level 3 Rule

"(Bloomberg) -- 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. 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, Royal Bank's chief credit strategist Bob Janjuah in London wrote in a note today. The new rule is effective Nov. 15. ``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' 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.'"
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