http://www.atimes.com/atimes/Global_Economy/JD16Dj02.html

"...The second problem that has now emerged runs in the opposite direction. "Level 2" valuation techniques allow the institution to ignore prices received in a "distress sale". However, in a bear market almost all sales are distress sales; the asset holder is distressed that his asset has declined in value and is only selling it because he needs the cash.

Since the values of ABX indices on subprime mortgages have declined to a modest fraction of par, holders of this rubbish have decided that they do not represent the true market.

Consequently, in their view, there is no true market; consequently the assets are Level 3. It is notable for example that Goldman Sachs' Level 3 assets increased in the last quarter to $82.3 billion from $54.7 billion. Since it seems most unlikely that Goldman, a smart operator if ever there was one, has been deliberately loading up on $26.6 billion worth of illiquid rubbish, the change must result largely from strategic reclassification from Level 2 to Level 3. Indeed, Goldman's Level 3 asset-backed securities doubled during the quarter to $25 billion, presumably for precisely the reason that Goldman found unattractive the market prices prevailing for those securities.

At $82.3 billion, Goldman Sachs Level 3 assets are more than twice its capital. This is not therefore a peripheral problem, which can be allowed to remain hidden within the arcana of accounting conferences. The reality is that, as was demonstrated in the true recessions of 1973-74 and 1980-82 but not in the mere dips of 1990-92 and 2001-02, the value of highly illiquid Level 3 assets taken on at the peak of a bull market is pretty well a big fat zero."