No. You've got that wrong. There are 3 types of valuations for assets: "Level 1" which means that there is an observable price (a market and price) for this as

No. You've got that wrong. There are 3 types of valuations for assets: "Level 1" which means that there is an observable price (a market and price) for this asset - such as a stock market. This is called "mark to market." "Level 2" which means that there is no observable price. It takes an observable price and uses it as an input to some formula to produce a value. This is commonly called "mark to model" and derivatives are the most widely known products in this area. "Level 3" asset valuation is where the asset holder makes up a value. Many call this "mark to make believe." Most of the profits in the past couple years in the financial industry were "level 3 profits." The FASB's view on valuing the balance sheet of companies is to use "level 1" (if it exists), before using the other valuation methods. If there are enough CDOs sold that there is now a price for that CDO, then the only rational thing is to use that price - not the one that was made up. Until FASB 157 came out, if a company wanted to claim that their level 3 assets were worth what they said they were worth, then they could. Now, if there is a "street price" for the assests, then you have to use "mark to market." http://www.fasb.org/pdf/fas157.pdf http://www.fasb.org/pdf/fas157.pdf