The "Level Three" dustbin – hazardous waste? Not to be opened until reporting season is over.

Third hand, through the blog-o-sphere, here are a few little ratios (click to see) that might make you think that the market’s current whipping boys, Merrills and Citigroup, have been relatively conservative in their exposure to the problem asset classes (CDOs, loans, SIVs etc). Somebody has calculated the extent that the US investment banks have categorised these instruments as “Level Three” for accounting purposes, and compared this to their equity bases as a ratio. “Level Three” assets do not have to be marked-to-market, and the banks themselves can estimate fair value – a cause of much eyebrow raising amongst independent analysts. You can see that Citigroup’s ratio is 105% ($135 bn of level three assets, $128 bn of equity), whilst Merrill’s is just 38%. Compare these numbers to Goldman Sachs (185%) or Morgan Stanley (251%) and you can see why some of us fear that when the price discovery process really starts to happen in the illiquid instruments, some banks will have to declare bigger writedowns than they’ve admitted so far.

As an aside, the Financial Times’s Alphaville website referenced above is one of the most informative places for up to date views on the credit crisis. It’s well worth registering to sign up for their daily email, the 6.00am Cut.