Nice comment from Rick Bookstaber on how amateur-hour behavior in marking to market leads to unnecessary credit market alarmism:
I have seen a number of sources extrapolate the E-Trade transaction, asking what would happen if all the Level 3 positions of banks and investment banks were to be remarked based on this transaction. This seems to be a variation on the game that started a month or so ago of assessing the prospects of a bank staying in business based on the ratio of Level 3 assets to capital. I think this is an exercise that is alarmist. Level 3 positions are not all sub-prime or even all CDO. There may be Level 3 positions that are good as gold, but simply do not have comparables or models that can provide adequate marking. And it is no surprise that these institutions are highly leveraged â€“ they typically might have a balance sheet that is twenty times their capital. So with that sort of leverage, and with the sorts of businesses they are in (remember, they tend to make markets in things that you canâ€™t just run out and buy on an exchange), it is not surprising to me that they will have Level 3 assets that are greater than their capital. But again, â€œLevel 3â€ does not mean â€œworthlessâ€.
A few people singing over-loud praises of today’s Federal bailout might give this a second read.