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Wishing away toxic assets

It wasn’t too long ago that there were worries on Wall Street, and presumably in Washington, about the rising tide of so-called Level 3 assets on bank balance sheets. That’s all those hard-to-trade and impossible-to-value securities that many like to call “toxic assets,” but that U.S. Treasury officials euphemistically refer to as “legacy assets”.

These days, however, Washington policymakers seem to have forgotten all about those concerns. How else can you explain the Treasury’s decision to allow 10 banks to repay $68 billion in TARP funds, even though the trash heap of ailing real estate-related securities and other troubled assets at many of these institutions has only grown since last summer.

That’s right. The percentage of assets that can’t be traded or valued on the open market is up at 6 of the 10 banks repaying money to the Treasury. And at some banks, the increase in the percentage of Level 3 assets from last summer is substantial, according to an analysis conducted by the Los Angeles-based research firm Audit Integrity. Bank of New York Mellon most recently described 7 percent of its assets as Level 3, compared with just 1 percent last August. The surge in the percentage of assets classified as Level 3 was even greater at U.S. Bancorp and State Street. Only JPMorgan Chase and Capital One reported a decline in the percent of financial assets they characterize as difficult to value with independent, or outside prices.

Now there are a number of factors that could be contributing to the rise in the percentage of Level 3 assets at institutions like State Street and US Bancorp – none particularly good.