Mark-to-Model on Wall Street: The Numbers

Nouriel Roubini hoists a nice piece of detective work from his comments: Bernard has gone down the list of Wall Street banks, looking at how much they have in the way of level 3 ("mark to model") assets, compared to their total equity. This is a ratio I haven't seen before (update: actually it was in Jesse Eisinger's November cover story), but it's certainly fascinating. Here are the results:

Bank	Level 3 assets	Equity	Ratio
Morgan Stanley	$88 billion	$35 billion	2.51
Goldman Sachs	$72 billion	$39 billion	1.85
Lehman Brothers	$35 billion	$22 billion	1.59
Bear Stearns	$20 billion	$13 billion	1.54
Citigroup	$135 billion	$128 billion	1.05
Merrill Lynch	$16 billion	$42 billion	0.38

Says Bernard:

This becomes very interesting now, doesn't it?
Looks to me like Goldman Sachs and Morgan Stanley are by far in the WORST situation among the investment banks.
And yet the media is focusing all of their attention on Merrill Lynch---which actually has by far THE LEAST EXPOSURE of all of them.

Now Merrill Lynch and Citigroup were leaders when it came to structuring CDOs; Morgan Stanley and Goldman Sachs were not. So there's a good chance that the level-3 assets of Morgan Stanley and Goldman Sachs are not nuclear-waste CDOs but rather other products which might well have no impairment at all. Indeed, in the case of Goldman, there's a good chance that a large chunk of its level-3 assets represent short positions in the mortgage market, rather than the long positions which scuppered Merrill and Citi.

Meanwhile, if you're more interested in sheer magnitude than in the ratio, Citigroup has a crazily enormous total amount of level-3 assets: $135 billion. Has anybody bothered to chart that number over the past few years? I suspect it's much bigger now than it has been historically.

But if you're looking for the next shoe to drop, I think that it might well be Bear Stearns. If it wrote down anything like the proportion of level-3 assets that Merrill Lynch did, it could put a serious debt in its total equity. And Bear, of course, was a very big player in the mortgage market. Jimmy Cayne might have dodged a bullet when the WSJ accused him of playing too much golf and occasionally smoking a joint. But large fictional valuations on mortgage-backed securities? That's the kind of thing investors take seriously.

If I was running a Wall Street bank, then, I'd immediately come out and announce exactly what proportion of my level-3 assets had a mortgage-backed component to them. Unless and until that happens, questions will continue to surround these institutions.

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