Banks Face $100 Billion of Writedowns on Level 3 Rule

[Bloomberg]

Banks Face $100 Billion of Writedowns on Level 3 Rule (Update3)

By John Glover

Nov. 7 (Bloomberg) -- U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.

Morgan Stanley, the second-largest U.S. securities firm, fell for a fifth-straight day, dropping 6 percent to $51.19 in New York Stock Exchange composite trading. Lehman Brothers Holdings Inc. and Bear Stearns Cos., the No. 1 and No. 2 underwriters of U.S. mortgage bonds, each declined more than 5 percent. All three firms are based in New York.

The Financial Accounting Standards Board's rule 157 makes it more difficult for companies to avoid putting market prices on their hardest-to-value securities, known as Level 3 assets, Royal Bank chief credit strategist Bob Janjuah wrote in a note today. While the rule hasn't gone into effect yet, the biggest U.S. lenders and brokerages have already begun reporting their Level 3 holdings.

``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' said Janjuah, who's based in London. ``The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ``mark-to-make believe.''

Wall Street's biggest firms have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley has 251 percent of its equity in Level 3 assets, making it the most vulnerable to writedowns, followed by Goldman Sachs Group Inc. at 185 percent, according to Janjuah. Goldman, the biggest U.S. securities firm, fell 4 percent in New York trading today.
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