UPDATE: Financials Weigh Dow Market

It’s always fun to get wrapped up in a mystery. That is, unless you’re reading the books kept by America’s banks.

That’s a mystery that you don’t want to get caught up in. Because it involves Level 3 assets and the increasingly opaque nature of our financial firms.

Unfortunately it might be too late for all of us. According to reports in the Financial Times banks have reported a sharp increase in Level 3 assets (or so-called hard-to-value assets) during the third quarter, “raising concerns about the hidden dangers on balance sheets.”

Level 3 Or Hard-To Value Assets

Increases in Level 3 “have prompted concern that banks are going to report even larger write-downs than expected,” adds The New York Times.

As you might know the value of level three assets can not be determined using observable measures. Typically they are difficult to value and trade.

News that banks had increased levels of Level 3 assets sent the financial services sector tumbling on Thursday.

“The banks have a whole big stack of ugly out there and they’re going to dump it into Level 3 assets and classify it as garbage,” bristles Jeff Macke on CNBC's Closing Bell.

The Trades

If that's the case then what should you expect when Goldman and Morgan report earnings next week?

“I expect to hear bad news from Goldman and Morgan and it could be crushing to the market," Macke responds.

What's his advice? "Stay liquid and stay nimble and when we get big rallies reduce your position.”

Karen Finerman concurs. On Fast Money she tells the gang, “there are probably more bad things to come.”

As for other banks Guy Adami says he’s surprised US Bancorp is caught up in this Level 3 mess. “I had thought they were above it.”

If things get bad for the banks, however, Pete Najarian sees a play. “It could create a little buying opportunity in early 2009.”

And if you’re curious about the difference between Level 1, 2 and 3, it’s perhaps best explained by the website NakedCapitalism.

“Level 1 are ones where there is a market price. Level 2 are those where there may not be much of a market, but they can nevertheless be priced in reference to similar assets that have a market price. Then we have Level 3… colloquially called mark to make believe.”

Got something to to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap. If you'd prefer to make a comment but not have it published on our website send your e-mail to fastmoney@cnbc.com.

Trader disclosure: On Dec. 11th, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Macke Owns (MSFT), (WMT), (MCD); Pete Najarian Owns (NUE), (FCX); Pete Najarian Owns (DRYS) And Is Short (DRYS) Calls; Pete Najarian Owns (SBUX) Calls; Pete Najarian Owns (UYG) Calls; Pete Najarian Owns (XHB) Calls; Finerman Owns (SRS), (MSFT); Finerman's Firm Owns (OIH) Puts; Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM), (BBT), (VNO), (SPG), (FCE.A), (COF), (USO)