BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow...

BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess. The investment bank said its total liabilities related to level 3 assets at quarter-end were $40.36 billion, according to the Form 10-Q. Citigroup said it often hedges its level 3 positions. Level 2: Quoted prices for similar instruments in active markets quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3: Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This is usually known as marked to model. MarketWatch called it 'Best Guess' accounting. Another terms frequently associated with Level 3 accounting is 'Marked to Fantasy'. Items valued using internally generated models are classified according to the lowest level input or value driver that is most significant to the valuation. Thus, an item may be classified in Level 3 even though there may be significant inputs that are readily observable. Read that last paragraph carefully. My interpretation is that if the most significant weighting of valuation is at say 35%, then even if 65% could be marked as level 1 or level 2, Citigroup may use level 3 accounting for valuing the asset. The same applies between level one and level 2 decisions. Rest assured there is no strong desire to use marked to market pricing for any assets that have declined in value. Assuming Citigroup has some hedges (somewhere on something) exactly who is on the other side of those hedges? It does matter. . Both articles raise the issue that 'guarantees' made by bond insurers Ambac (ABK) and MBIA Inc (MBI) might be worthless. Level 3 assets at Citigroup exceed shareholder equity. Now take a look at level 2 assets sitting at $939 billion dollars. A mere 10% haircut in the value of those assets would eat up 74% of working capital. A 10% haircut in Level 2 assets in conjunction with steeper losses in level 3 assets would make Citigroup insolvent. Those focusing on the dividend picture at Citigroup (especially those who do not think that dividend will be cut) are sure focusing on the wrong picture. Citigroup is fighting for its financial life. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.