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'Toxic' Assets Still Lurking at Banks

Toxic waste spill

... In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%, according to the Journal analysis. ...

... One problem centers largely on "Level 3" securities, illiquid investments that can't be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in "Level 3" securities. That amounts to 42.6% of the banks' shareholder equity, a pile of assets whose value is hard to verify.

To be sure, banks aren't quite as exposed to bad assets as they used to be. At the top 10 banks, Level 3 securities have declined 24% in the past two years, while Level 1 and Level 2 securities, which are much easier to value, rose. The amount fell as banks sold some Level 3 assets, switched them to Levels 1 or 2, or wrote some down. Unrealized losses also have declined. ...

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