Financial groups' problem assets hit $610bn

Financial Times
Financial groups’ problem assets hit $610bn
By Aline van Duyn and Francesco Guerrera in New York
Published: December 10 2008 23:32 | Last updated: December 10 2008 23:32

The biggest US financial institutions reported a sharp increase to $610bn in so-called hard-to-value assets during the third quarter, raising concerns about the hidden dangers on balance sheets.

So-called level-three assets, classified as hard to value and hard to sell, rose 15.5 per cent from the second quarter, according to analysis by the Market, Credit and Risk Strategies group of Standard & Poor’s.

Level-three assets have risen all year for most banks as they have found it virtually impossible to sell mortgage-backed securities and collateralised debt obligations.

“A lot of banks are saying: ‘I am going to move securities to level-three assets because I have more control over, and confidence in, the model used for their valuations’,” said Gregg Berman, head of the risk management unit at Risk Metrics.

The study is based on regulatory filings by the biggest underwriters and traders of mortgage-backed securities and CDOs. These asset classes have plunged in value amid a wave of house price falls and foreclosures and are at the centre of the crisis.

Next week, Goldman Sachs and Morgan Stanley will be the first banks to report fourth quarter results, which are likely to be scrutinised for information about their holdings of opaque assets.

Michael Thompson, managing director of MCRS, said he would be “surprised if we did not see writedowns of these level-three assets” in the fourth quarter.

Already, level-three assets are many times bigger than the market cap of the banks. The US Treasury had planned to buy these using the $700bn troubled asset relief programme but changed tack and has used some funds for capital injections.

Mr Thompson said it was hard to imagine banks would not have to take further writedowns.

Copyright The Financial Times Limited 2008