Worse yet, a WSJ article last week pointed out that the banks’ internal models for valuing these non-traded securities rely heavily upon credit ratings, so, when the agencies downgrade, the banks must take additional writedowns on these securities, even if nothing material has changed except the ratings agencies’ recognition of risk after the fact.
Oh man! Dang, that is important in this whole mess. Never thought of that, but you’re right, that will make the value fall like a rock, especially with credit spreads widening like crzy...
Those are Level III assets. They are valued on a wing and a prayer.