Felix Salmon at Portfolio.com dug up the ratios for level 3 assets at each major Wall Street broker. This ratio is seen by some to be "scary." I don't find it as scary as some. The assets in Level 3 are mark-to-model. Some of these could include complex derivatives for which there is no market that exactly hedges assets, hence the high risk in panic liquidation but not so much in cash flow. Their markets are worried about some of those with the highest ratios of Level 3 assets to capital. Personally, I trust the risk managers at firms like Goldman Sachs (GS – $212.89), Morgan Stanley (MS – $50.88) and Lehman Brother (LEH – $63.03) to be able to correctly value these situations. I do believe the market will continue to focus on this ratio, which will encourage firms to try to move more assets out of this category.
Disclosure: I own GS, MS and LEH. I am vested in the executive compensation plans, executive option and pension plans at Morgan Stanley and Lehman. I am a former managing director at Morgan Stanley and Lehman. I have traded (bought and sold) GS, MS and LEH in the past year.
Morgan Stanley Photo by L.X. Fringe via Flickr
Goldman Sach Building Jersey City by Wally Koscielny via Flickr
