Thursday, October 18, 2007

Tier and Capital level

I expect that the shorts will start talking about brokerage firms and asset pricing. In the example below, of Joe Sixpack, on a level 3 asset, his house is worth $300,000. (You could call this mark to myth.) That's the price it was purchased at. Level 2 pricing on this house would be what it is worth today, $225,000. (You could call this mark to model). Level 1 pricing is what it would sell for or $175,000. (You could call it mark to market.)

Why is this important? Because you have certain tiers in Capital that banks need-Tier's 1, 2,and 3, and these are substantially different than the levels that brokerage firms price their assets. Today, you make hear whispering by the bears about Goldman Sachs (GS 227.62) and their asset level pricing. From their latest 10Q, (from memory) they had $73 billion of level 3 assets, and a $2.98 billion gain on it.

Maybe Goldman has their own SIV. Or at least, that's the whispers you may hear. So read their 10Q so you'll know how to answers the whispering bears.