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DOW Industrials hit new highs; Earning’s season starts; brokers have higher earnings with smaller write-downs

There’s a new term I learned this week, one of which we should all be aware:

Level 3 assets.

Level 3 assets “are those that trade so infrequently that there are no reliable market prices for them”.  These assets include securitized packages of subprime mortgages, buyout loans and other debt that are not set by market prices but rather are carried on the trader’s books by internal spreadsheet calculated prices.  The “prices” are subject to management’s discretion.  The stock market indices continue to hit daily new highs of late.  Google broke out above 600 and Apple has no brakes, both hitting not just a 52 week highs, but all time highs.  This recent rally after the initial credit calamity seems to have started when Lehman Brothers reported “better than expected” results on September 18.  In this environment, how did Lehman do it while others are crashing and burning?

The smallest number to deal with is $700 million (no small number).  That’s how much Lehman took as a loss in the third quarter on its portfolio of loan commitments and investments backed by residential mortgages.

$6.3 Billion is the amount of subprime mortgage owned by Lehman at the end of its last quarter.  The write-down amounts to just 11% of an asset that is plagued by rising delinquencies and defaults of payment challenged homeowners.

Here’s the biggest number: $22 Billion.  This is the size of Lehman’s Level 3 assets at the end of its second quarter.  Some of these assets have plunged by 20% or more in a month.  The previously announced $700 million write down amounts to only 3.29% of the total of these assets.

It may have been a valid decision by Lehman to not have written off more.  Prices of these assets may bounce back more than anyone could expect.  Of course, by not writing off more the price of their stock jumped 10% the following day.  But since then the stock has given it all back and then some.  If any of you heard an “all clear” these past few weeks it’s still not time to throw caution to the wind.

Don’t chase prices, eliminate your non-tax deductible debt, pay attention to your budget and save for retirement.  Keep liquid, reduce stress, stay healthy.


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