http://www.creditwritedowns.com/2008/06/marc-faber-says-avoid-financials-and.html
Q: On the financial sector, part of the reason why we saw the sell-down in the US overnight was because of a downgrade for some of the brokers there. There are still lingering concerns about the impact on the financials, not just in the US but Europe as well. You expect about 150 bank failures in the next 12 months. Can you explain this?
A: A lot of banks are already bankrupt. A lot of monoline insurance companies are bankrupt and financial institutions hide their rotten assets in level three asset categories where you don’t really need to value them. But, if you have stock prices like the monoline insurance Ambac and MBIA dropped 95% and then some rating agencies until last week were still carrying a AAA rating. It is a total joke.These companies are basically out of business. So, the financial sector by and large has much larger problems than is perceived by the investment community. The stock market to some extent is telling you that. It is giving you the price, market signals. It is quite funny that one financial firm downgrades another financial firm and another financial firm begins to downgrade a financial firm that was downgrading themselves. It is kind of a domino effect. It is actually quite amusing to watch it all.
This leads to a discussion of what are called Level 3 Assets.
Here's a good discussion of Level 3 Assets:
http://www.themoneyblogs.com/urbandigs/my.blog/level-3-assets-credits-next-concern.html
Level 3 Assets: Credit's Next Concern
Posted on 11/04/2007 06:26:00
A: I want to discuss what will soon be in the media alot, as round 2 of the credit crunch already is underway! First off, I don't care what CEO's get fired or how many rate cuts printing press Ben Bernanke does, the credit crisis problems lie so deep that these actions will not cure the disease; it will only provide some temporary relief as the problem phases itself out. What we need to look out for now, is what round 3 of the credit crunch may be caused by. I think it will be lowered valuations for Level 3 Assets. On November 15th, a new accounting rule will require the disclosure of these assets whose market valuations were assigned by in-house models, as the market where they trade in are illiquid and in distress.
LEVEL 3 ASSETS (via Marketwatch.com) -
Level 3 assets are those that trade so infrequently that there is virtually no reliable market price for them, and valuations for these assets are based on management assumptions.
Problems people! I've discussed many times in the past few months how the markets for these CDO's, CMO's, and other mortgage backed securities have seized up. There are just no bids and no volume, making no market!
Now, what we do know is that brokerages, banks, hedge funds, and other institutions are holding very complicated assets whose actual value has virtually vanished. The key word here is actual, or real market value. But these level 3 assets are NOT being marketed to the real market! They are being held, hidden on the books of major corporations and institutions, as management places their best-guess valuations that are almost always grossly overvalued!
Round 3 of the credit crunch will be the 'coming out' of sorts of the adjusted valuations of these level 3 assets leading to the uncovering of major losses to the most exposed corporations and institutions. I think this process will take months to play out and we are heading right into the heart of storm as November 15th approaches.
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Ok, so now we've got an idea of what Level 3 Assets are (the toxic mortgage paper that nobody wants), now let's see who's holding the most of this stuff.
As a percentage of equity, Freddie Mac holds the top spot. Not good.If you're wondering why Indymac went out of business, take a look at the top of the two charts above. If you're wondering why it's going to take a government bailoout to prevent Freddie Mac from going out of business, take a look at the two charts above.
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