Last week, I did a blog entry warning that wall street faces a "level three storm" with a change in an accounting rule that will force banks to rate their assets according to how liquid they are. It ranges from "Level 1" to "Level 3". Assets at "Level 3" are based on "unobservable" inputs reflecting companies' "own assumptions" about the way assets would be priced. Translated into English, that means they do not get any value from objective sources, only from the model that the bank is using. Simply put, that means they are subject to the valuation of the institution holding them, which means their value could be written up in good times, delivering huge bonuses when there is an increase in capital value. It also means they could be overvalued in the event of a downturn, possibly even illiquid. This not only applies to subprime investments. It can cover the entire food chain of securitized assets.

Now, Bloomberg reports that Goldman Sachs is holding a bigger proportion of Level 3 assets than Citigroup and Merrill Lynch. Still, The Wall Street Journal reports that it doesn't seem to have had any impact on the investment bank. It's still a star, reports the WSJ, because it has gone short on mortgage-related investments and maintained relatively small holdings of collateralized debt obligations, or CDOs. Goldman Chief Executive Lloyd Blankfein insists the shorting strategy will continue, which means they will continue to take a bearish stance on the mortgage market, and there will be no writedowns. Still, the amount of Level 3 assets on its books suggests we need to watch this space.

And meanwhile, the subprime carnage continues to roll through Wall Street and global markets with the Bank of America announcing it will take a $3 billion writedown and Mizuho Financial Group, Japan's second-biggest bank, taking a hit. That's significant because until now, Japanese banks have been relatively unscathed by the subprime fallout.

Just another development confirming my view that if a financial adviser flaps his lips on Wall Street, it will send shock waves right around the world.