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Suddenly markets and investors are discovering that many financial institutions were parking a large fraction of their asset in the level 3 bucket where they avoid using market prices to evaluate such assets but rather rely on “model valuations” and “unobservable inputs”. But now the forthcoming FASB 157 <http://www.rgemonitor.com/blog/roubini/224871> regulation will prevent them (unless heavy political lobby leads to a postponement of its implementation on November 15^th ) from playing such accounting tricks and force them to use market prices – when available even in illiquid market conditions – to price these assets.
And guess what now? 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.
Indeed, losses of the order of $500 billion are actually 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. Subprime alone is now estimated to lead to losses as high as $238 billion <http://www.ft.com/cms/s/1/16e6c4e8-8c4a-11dc-b887-0000779fd2ac.html> based on a mark to market analysis.
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