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Three Levels of Assets; Radiohead's Happy Tune

Thu, 8 Nov 2007
updated Mon, 19 Nov 2007 at 10:01 AM

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$100 BILLION WRITE-DOWN

Nouriel Roubini writes in his blog.rgemonitor.com, that the once obscure FASB 157 regulation is now turning heads. The rule, which is set to be implemented on November 15, will require that companies — especially investment banks — clarify the value of their assets and liabilities.

The rule also will require that companies value their assets according to three buckets: Level 1 is for assets with prices quoted in active markets, Level 2 is for more obscure and less-traded assets, and Level 3 is for assets whose value is not easily discernable, like CDOs.

"Suddenly markets and investors are discovering that many financial institutions were parking a large fraction of their assets in the level 3 bucket where they avoid using market prices to evaluate such assets but rather rely on 'model valuations' and 'unobservable inputs,'" Mr. Roubini writes. "New reliable estimates suggest that using these market prices — rather than level 3 model gimmicks — will lead to losses of another $100 billion on top of hundreds of billions of subprime losses. And some market participants are already talking — quite realistically — about total losses from this credit disaster in the $500 billion range."

Mr. Roubini calls the $500 billion estimate, which was calculated by the chief strategist at the Royal Bank of Scotland, Bob Janjuah, "quite reasonable and likely once you account for all the losses from subprime, near-prime, prime mortgages, CDOs, CLOs, failed LBOs, auto loans, credit cards and other consumer credit, commercial real estate loans, a variety of asset backed securities, level 3 asset value recognition at market values, and other financial market losses."

RADIOHEAD A WINNER

The BBC reported that the strategy employed by the band Radiohead to release its album online and let fans decide how much to pay was a failure, with 62% opting to pay nothing. But John Irons at argmax.com writes that it was a huge success. Of those who did pay for the album, the average price was $6. "So if my math is right, this means that the average across all downloaders is $2.28. Now, I don't know what the industry standard is for the per CD royalties that the band collects (vs. what the record company keeps), but I wouldn't be surprised if this is not too far off." Plus, Mr. Irons notes, Radiohead's strategy "probably introduced thousands of people to the band and will help expand their fan base for future releases and concerts."

SMALL TRUMPS BIG IN GOVERNMENT

Brianna Cardiff discusses in Government Bytes (blog.ntu.org) a Wall Street Journal opinion piece on the tensions between big government and small government.

"The article is full of insightful jewels, such as the note that 'conservatism in practice has been hemmed in constantly by the fact that the people insist that promises made to them, vulgar or not, must be kept,'" she writes.

Ms. Cardiff continues: "It seems that arguing over small issues and minor concessions does not achieve the goal of limited government (though small victories should not be lightly tossed aside). After all, small changes by themselves are small. It is by putting them together and taking a look at the whole picture and overall destination that can raise concerns. Limited government will not be achieved simply by eliminating waste and unpopular programs. Big changes need to be made. Programs that are entrenched and supported will have to be rooted out. But canceling some programs while leaving others results in severe discontent."

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