Level 3 With Me

I have a 1969 Volkswagen Van that I am in love with. The van is really just an old bucket of rust, but I tell people it’s worth a million bucks to me. Sometimes to impress someone, I’ll actually say I’m a millionaire because I have that van. So, what do you think happened when I put an ad up to sell a “brand old” rusted-out 1969 VW van for only $1,000,000?  Well,  you know you didn’t call me, and I still have the van.  I thought about dropping the price to $500,000 (a “write-down”), but I would not be a millionaire anymore, so I keep it priced at a cool million and drive it when it’s not too windy, raining or just when the damn thing will run.

Other than my Volkswagen the only property I own is a t.v. and a six pack of beer, all free and clear. Now do I have any creditworthiness? I am a millionaire after all, and you won’t let the fact that almost all of my assets are in the van worry you right?

Why not? Well, all the big banks are allowed to do it.  In that vernacular the van is a “level three asset,” it would most likely correspond to a mortgage-backed bond (commercial or residential) on which a scary fraction of mortgage payers are in real risk of defaulting before paying it down. When that happens (or when it is realized), the bond is worth less than the face value–like my van.

The banks can’t sell the bond for face value so they do what I did, hold on to it and tell everyone that it’s “worth” what they want it to be worth. The government lets them get away with it, as long as they account for it as a “level three asset,” and just like me, some of these banks have more assets in fantasy valued level three assets than they have capital.

In fact my capital has just been decreased by a six pack.  But it’s ok, I’ve still got my “level three van.”