Merrill Lynch Level 3 assets increase through March

NEW YORK—Merrill Lynch & Co. disclosed Tuesday that highest-risk assets on its books rose 69 percent during the quarter ending March 28.

Merrill Lynch had $69.86 billion in so-called "Level 3" assets as of March 28, according to a filing with the Securities and Exchange Commission. Level 3 assets totaled $41.45 billion on Dec. 28.

Accounting standards require certain financial institutions to assess the fair value of assets on their books. Those assets are broken down into three levels, based on how easy they are to price.

At the lowest end, Level 3 assets are those whose valuation is essentially a best guess by the investor, because there is virtually no active trading market for the product to use as a pricing guide.

Level 3 assets accounted for 15.5 percent of total assets as of March 28 at Merrill Lynch, compared with 9.2 percent as of Dec. 28.

Level 3 assets as of March 28 included $9.3 billion of collateralized debt obligations, of which $9 billion were tied to subprime mortgages -- loans given to customers with poor credit history.

Another $20.6 billion of level 3 assets at Merrill Lynch are tied to derivatives of collateralized debt obligations. Within that $20.6 billion, $16.7 billion is related to subprime mortgages. About $18 billion are tied to credit derivatives from corporate and other non-mortgage debt.

Collateralized debt obligations, or CDOs, are complex financial instruments that combine other types of debt, which are then sliced up and sold to investors.

As mortgages, especially subprime mortgages, increasingly defaulted beginning in the middle of 2007, investors shied away from debt backed by the troubled loans. That has led to a nearly frozen market for products such as CDOs and made valuing them nearly impossible for investment banks.

Among the more than $200 billion in write-downs investment banks have taken since the middle of 2007, the majority have been tied to debt backed by subprime mortgages.