posting email i received from Larry Levin who sells trading workshops in Chicago.

part 1 of 2

Larry Levin's Nightly Newsletter & Trading Signals

Marked-to-Myth Assets

The first half of today's email was written by me nearly a year ago but is equally relevant today, especially in light of a recent Bloomberg article that ran this past weekend and is the latter half of today's email.





Speaking of bankers and their inability to tell the truth, they are now piling on more lies to their already massive piles of Level III assets (read: lies).



Level I assets are assets where there is a market price; it is easily tradable. They are referred to as marked-to-market. Level II assets are those where there may not be much of a market, but they can nevertheless be priced in reference to similar assets that have a market price, and may be referred to as marked-to-model. Level III assets are a joke and are referred to as marked-to-myth.



What's more, Level III assets are off the books. This garbage isn't counted in the bank's balance sheets - it's essentially make-believe. Does Enron accounting come to mind? But guess what - it's legal. That's right; the idiots in congress say it's OK for the government (there are nearly $60 TRILLION in unfunded "off the books" liabilities), and the banks to play this game. But you? Not so much. If you try it, the IRS will throw you in jail!



Why do I, and even Wall Street itself, say that Level III assets are marked-to-myth, or marked-to-make believe? Because these assets are priced using unobservable inputs. What? Is that a joke you ask? No - and it's legal! I have never understood this concept because the use of sunspots, skirt lengths, the Mayan calendar, or a model using, say, a ratio of bullish versus bearish stories on Bloomberg would be an observable input. So what the hell is an unobservable input? We'll never know because much like the Federal Reserve printing money up out of thin air, the values are simply made up.



In the first quarter of 2007, Wells Fargo created $1.21 billion of Level III gains. Without them, it would have posted a loss. Lehman Brother's added more assets to the Level III category at a time when better trading conditions said it should have been lowering them!



But that was a long time ago and the bankers have surely come clean - right? They have learned that playing fast and loose with leverage and the truth was bad and now they want to help the economy get on its feet as fast as possible by having balance sheets as clear as glass - right? Haaaahahahahahaaaa! If you believe that, you better get off the dope Johnny Boy!



What do we see now? The financial services industry has a world-class bad quarter and instead of having a kitchen sink, come-to-Jesus type of quarterly release (divulging everything), they INCREASE the amount of bull$#*! assets it considers to be Level III so that they can assign them more favorable prices. Did I mention this is legal? Moreover, year end financials are audited and accountants have been much less accommodating of late. Moving a lot of assets into the Level III puke-bucket right before your auditor walks in might not pass the smell test, but it's better to do it at least a quarter in advance. The smell isn't so rank then.



My friends, this is a MAJOR reason why the credit markets are so tight. All of the banks know what toxic sludge is in their own Level III asset account, so do you think they want to lend to another bank or commercial institution with a huge & hidden Level III asset account? And what if these BS assets are growing? Hell no - and no loans for you either! The rotten politicians on TV have never mentioned this once, and probably never will.



Yes, these banks are becoming LESS transparent and truthful, and more opaque.