ItsJustMe

How Much Are Goldman's Level 3 Assets Worth?

Okay, I'll fall somewhere in the middle on this. The comparison of Goldman's level 3 assets to your home value is not a good example. There is ALWAYS a ready market for homes so if you can't sell your home, it means the market simply won't pay what you're asking and an immediate writedown is needed.

There is not a ready market for mortgages right now because none of the banks trust each other's valuation. In other words, Goldman's mortgage valuations could be just fine, but the market is "frozen" from mistrust. That doesn't happen in real estate markets.

Goldman also is not "giving" level 3 assets to the Fed. The Fed is allowing financial firms to use them as collateral in order to help "unfreeze" the market and rebuild trust. The level 3 assets are still on Goldman's books and any ultimate writedown will have to be absorbed by Goldman's capital.

In the interest of full disclosure, I have long-term puts on Goldman and the other investment banks, but it is not a big part of my portfolio. The Fed is buying time for the banks to raise capital and get their affairs in order so I think you'll see a gradual deterioration in their stock prices as they slowly come to grips with the real value of their level 3 assets and with the reality that they'll no longer be allowed to operate at a very profitable - but exceedingly risky - 30 and 40 to 1 leverage ratio going forward.

Combine those 2 factors with a recession their risky loan behavior has helped to create and you have a recipe for future stock declines...