[ by Howard Haykin ] Or, 'The Dark Nooks in JPMorgan’s Fortress Balance Sheet'. JPMorgan's Q2 financial statements will be a highly sought after document, as regulators and analysts alike seek to learn how the bank's trading losses, estimated to be in the range of $2 and $5 billion, will show up in crucial areas of JPMorgan's self-proclaimed "fortress balance sheet."  [C-I Note: Although, it's very possible that the bank took some loss reserves in earlier financial periods.] According to Dealbook reporter Peter Eavis, here are some of the places that interested parties will focus on. 1.  Disclosures for the bank’s "Level 3" assets. That’s the accounting designation given to assets that don’t trade much.  Banks set the value of these assets - which can be bonds, loans, stocks or derivatives - mostly according to their own models. Level 3 assets became a problem during the financial crisis because, when markets dried p, banks no longer had reliable prices for many assets.  This prompted fears that bank balance sheets were getting weighed down with hard-to-sell positions of questionable value. At the end of 2008, Citigroup had $146 billion of Level 3 assets - equivalent to 455% of Citigroup’s tangible common equity, a conservative measure of a bank’s capital.  By comparison, Bank of America was at 121%, and JPMorgan was at 164%. Oh, How the Numbers Have Changed. Fast forward to Q1 of 2012. Citigroup's most recent quarterly Level 3 assets were the equivalent of only 39% of its tangible common equity, while BofA's were equivalent to 33%.  However, JPMorgan's numbers were somewhat elevated - its $109.2 billion of Level 3 assets were 84% of its tangible common equity.   [C-I Note: Again, one needs to anticipate that some transactions, or trading losses, were recorded prior to the current quarter of 2012.]  JPM's botched trade, which involves credit derivatives, raises even more red flags about the hard-to-value assets on the bank's books. Bank's Level 2 Assets. Right now, the vast majority of JPMorgan's $252 billion of credit derivatives are classified as Level 2, which may still involve some guesswork by banks.  But the bet is so big that it’s reportedly skewing the indicated market prices of such credit derivatives.  Does JPMorgan rely heavily on those prices? Or will valuing the trade place more emphasis on what it thinks prices should be? Possible Shifts of Positions between Levels 3 and 2. Mr. Eavis notes that this needs to be reviewed area needs to be examined in the financials for Q2 of 2012  - because any indication that JPMorgan has shifted a large amount of credit derivatives to Level 3 from Level 2 would likely signal the loss-making trade is drying up the markets in which it’s located, making it even harder to exit.  Hardly fun and games.   [Dealbook, 5/25/12]