A decade ago the phrase “level-three assets” made bankers wince. The reason? Back then it referred to an accounting category of securities so fiendishly hard to value with mark-to-market metrics that bankers were in effect allowed to create their own valuations.
No one cared about this oddity when times were good. But when the credit crisis exploded, investors realised that the valuations of those pesky level-three assets, which included products such as collateralised debt obligations, could vary wildly and could prove to be hopelessly wrong. So confidence crumbled — and with it the banks’ share prices.
Some of that opacity and anxiety has since been reduced at the US banks, at least in relation to items such as mortgage securities.
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