Merrill Says Level 3 Assets Jump 70% in First Quarter

Merrill Says Level 3 Assets Jump 70% in First Quarter

May 6 (Bloomberg) -- Merrill Lynch & Co. said so-called Level 3 assets climbed 70 percent in the first quarter, as the largest U.S. brokerage reclassified commercial mortgages and other assets as hard to value.

Merrill's Level 3 assets, the firm's most difficult to value, rose to $82.4 billion as of March 28 from $48.6 billion at the end of December, according to a regulatory filing today. The New York-based company's ratio of Level 3 to total assets rose to 8 percent from 5 percent.

While many subprime-related assets that lost almost 100 percent of their value since July were categorized in Level 3, other holdings such as private-equity stakes, real estate and rarely traded corporate debt are also included because market prices for them aren't available. More assets have become difficult to value in the last three months as investors shunned a wider array of credit, freezing the trading of securities.

``The additional disclosure relating to Level 3 assets, and its steep increase, reflects the ongoing weakness in the credit markets,'' said Deutsche Bank AG analyst Mike Mayo.

Merrill fell 56 cents, or 1.1 percent, to $50.84 at 12:01 p.m. in New York Stock Exchange composite trading.

``Valuation-related issues confronted by ourselves and market participants since the second half of 2007 include uncertainty resulting from a drastic decline in market activity for certain credit products,'' Merrill said in the filing.

Mortgages, Credit Derivatives

The company transferred $5.6 billion of European commercial mortgages and $12.2 billion of credit derivative assets to Level 3 from Level 2, the filing showed.

Merrill's Level 3 assets include mortgage-related holdings within trading assets of $9.3 billion, according to the filing. Derivative assets accounted for $20.6 billion, loans measured at fair value for $12.5 billion, credit derivatives for $18 billion and private equity and principal investments for $4.3 billion.

Merrill's figures include assets valued at a so-called non- recurring basis. Without the non-recurring assets, Merrill's Level 3 total was $69.9 billion, up 69 percent from $41.5 billion.

Goldman, Morgan Stanley

Other New York-based securities firms have also had a rise in Level 3 assets. Goldman Sachs Group Inc.'s holdings of the assets surged 39 percent to $96.4 billion in the fiscal quarter ending in February. Morgan Stanley reported a 6.1 percent increase to $78.2 billion.

Citigroup Inc., the biggest U.S. bank, yesterday said Level 3 assets rose by 20 percent in the first quarter to $160.3 billion. Goldman, Morgan Stanley and Citigroup numbers don't include assets valued on non-recurring basis.

Merrill also said it received requests from government departments for information on auction rate securities and the recent failure of auctions, according to the filing. The firm said it is cooperating.

Merrill is a passive 20 percent investor in Bloomberg LP, the parent of Bloomberg News.

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