Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

Opaque Level 3 Assets Mysteriously Rose In Value 20% For Major Banks During COVID Crisis

Courtesy of ZeroHedge View original post here.

The most difficult to value opaque assets on a bank's books – called Level 3 assets – rose by more than 20% for lenders like Barclays Plc, Citigroup Inc., BNP Paribas SA and Societe Generale SA during the first half of 2020.

These sometimes illiquid and difficult to value trades are now worth a cumulative $250 billion, according to Bloomberg. Level 3 assets can include distressed debt, some mortgage backed bonds, high risk loans and derivatives linked to things like interest rates and corporate debt. 

Even better? Nobody can explain the jump in the value of assets, which are marked to market using discretionary estimates that have been, in the past, at the center of several fraud stories (like Allied Capital). Banks value these assets "based on historical trends and their own risk assumptions" which has, naturally, given the category the label of "mark to myth". 

Some are explaining the rise as "a natural consequence of pandemic turmoil" while others state that the assets may have been added to by banks "after seeing the potential for a windfall in the chaos" that arised during the pandemic.

Jerome Legras, managing partner at Axiom Alternative Investments, said: “Banks need a little bit of complexity to actually make a lot of money. Clearly, there is a link with record profits.”

The increase is hard to ignore: it was the largest increase in the value of these assets in a half decade. 

As Bloomberg notes, these assets are greater than 30% of the common equity Tier 1 capital at banks like Deutsche Bank AG, Credit Suisse Group AG, Barclays, Societe Generale and Credit Agricole SA.

Michael Huenseler, who helps oversee 28 billion euros at Assenagon Asset Management in Munich, said: “Level 3 assets have a reputation as toxic, loss-prone assets which are hidden to the public.”

Level 3 assets played a major role in the Great Recession, where banks were have found to assigned unrealistic valuations to billions in investments. 

Kathryn Judge, a law professor focused on finance at Columbia University, commented: "This year’s increase means banks’ Level 3 assets are almost the same size as the gross domestic product of Finland — if their valuations are accurate. The gains are troubling."

She continued: “There is far more wiggle room in the pricing process and more room for errors. Regulators should be paying close attention to the valuation techniques banks are using, particularly for those banks that have substantial pools of Level 3 assets relative to CET1.”

Legras concluded: “Bigger Level 3 means bigger investment-bank profits, and this means they can take bigger loan losses without hitting capital too hard. This always raises the risk that there has been a mispricing somewhere, that risk management has been deficient — and that those assets will translate into losses.”

Per Bloomberg's analysis:

  • Citigroup had the biggest Level 3 increase since December among 13 banks analyzed by Bloomberg — up about 80% to $14.5 billion.
  • Goldman Sachs Group Inc.’s 28% increase to $29.4 billion makes it the second-biggest holder. The majority of its Level 3 holdings are merchant-banking investments, which also became harder to value.
  • Deutsche Bank holds more than any other firm, even as it struggles to shrink; Level 3 assets are greater than half its CET1 capital — also the most of any bank.
  • Barclays, whose investment bank has been repeatedly criticized by an activist investor, reported an increase of about 40%.
  • SocGen, which has ousted executives amid trading losses, reported a 53% jump.
  • Credit Suisse’s Level 3 assets have declined since the first quarter, spokesman James Quinn said in a statement. The bank’s turnover of the securities — meaning how quickly it buys and sells them — is the highest in the industry, he said.

Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!





You must be logged in to make a comment.
You can sign up for a membership or get a FREE Daily News membership or log in

Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!