This was reported on CNN yesterday, but it’s worth mentioning here. There has been a recent trend of Wall Street firms increasing their exposure to hard-to-value assets, such as those backed by mortgages, which raises concerns about the accuracy of their balance sheets.

It might sound like an increase in assets is a positive thing for a bank. But no financial institution wants to record a big increase in illiquid assets, because pricing and selling them is difficult and, if the credit crunch persists, many of them could be a source of large losses in coming quarters.

To get a better grip on how level three assets might affect a bank, it makes sense to look at what exactly makes up level three assets, though this can be hard because of banks’ limited disclosure. In the case of Merrill, for example, we know that a sizable share of level three assets are distressed mortgages and CDOs, which are likely to be subject to further losses in the fourth quarter.

In defense of the banks, not all of these assets are backed by CDOs and subprime mortgages. Some of them are invested heavily in leveraged loans.

But even a well-resourced auditor can’t be expected to properly scrutinize the huge amount of level two and three assets sitting on banks’ balance sheets. For the seven banks Fortune surveyed, level three assets totaled over $430 billion, equivalent to 110% of the banks’ combined equity. That number will likely increase in the fourth quarter, making bank balance sheets even harder to read. Yes, that’s right: Wall Street’s black hole is getting bigger.

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Bloomberg is reporting that the US dollar fell to a record low against the Euro, which may prompt the Fed to lower interest rates again.

“The dollar will continue to weaken because the rate differentials move against the dollar,” said Marcus Hettinger, a currency strategist at Credit Suisse Group in Zurich. The subprime issue is negative because it increases the probability that the Fed will ease again.”

The U.S. currency dropped to an all-time low of $1.4556 per euro before trading at $1.4547 as of 7:03 a.m. in New York, from $1.4469 late yesterday. The dollar may fall to $1.46 in the coming days, Hettinger said.

Despite the negative news, market cheerleaders in the United States are saying there’s not much to worry about:

The falling dollar isn’t cause for alarm, according to David Rosenberg, chief North American economist at Merrill Lynch & Co. in New York.

“The dollar is no lower today than it was in 1997,” Rosenberg wrote in a Nov. 2 research note. “We don’t remember that being a particular Armageddon-type time period.”

Mr. Rosenberg, would you please share some of that Kool-Aid with the rest of the world? Let’s not forget that back in 1997:

• Oil wasn’t $90 $98 per barrel
• There was no ‘credit crunch’ or ’subprime mess’
• US Financial Firms weren’t struggling and writing off major losses

The dollar will slide further as the prospect of lower Fed rates prompts investors to shift assets into higher-yielding currencies, according to BNP Paribas SA.

“People no longer see the U.S. dollar as a high-yielding currency,” said Sharada Selvanathan, currency strategist in Hong Kong at BNP Paribas, the largest French bank. “They’d rather switch into other currencies where the economic fundamentals are better and where they can also gain higher yield,” such as Australia’s dollar.

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The Financial Times is reporting that Citibank has to write off more losses due to heavy subprime mortgage exposure.

The bank is taking another $8 billion to $11 billion hit to revenues because of “significant” declines in the $55 billion or so in U.S. subprime mortgage exposure it has in its securities business. That adds up to a profit cut of $5 billion to $7 billion.

As a result, Charles Prince decided to step down as Citibank CEO (though his compensation package is probably nothing to complain about).

In a statement Sunday night, Prince said “it is my judgment that given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down. This is what I advised the board.”

Just a few short months ago, Federal Reserve Chairman Ben Bernanke claimed that the mortgage mess is contained. $11B in losses due to bad subprime mortgages by a major bank hardly seems like a ‘contained’ problem.

At Drinking Is Believing, we’re not here to make predictions or give any advice, however it’s difficult to see how the Real Estate market will get better any time soon.

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Reuters is reporting that a major brokerage, CIBC World Markets, downgraded Citibank and Bank of America based on concerns regarding their revenue outlooks.

A CIBC World Markets analyst downgraded Citigroup to “sector underperformer,” citing capital concerns for the biggest U.S. bank. The CIBC analyst wrote she expects Citi to be forced to sell assets, raise capital or cut its dividend to improve its capital ratios.

CIBC also downgraded Bank of America (BAC.N), saying it sees a diminished revenue outlook for the bank. In addition, Credit Suisse cut its rating for Citigroup.

“Let’s face it, we got a pretty big downgrade on the banks by CIBC. We know there’s more to come there,” said Tim Smalls, head of U.S. stock trading at brokerage firm Execution LLC in Greenwich, Connecticut.

The problems in the markets are starting to spread, almost like a snowball effect. Was the Fed’s recent rate-cut decision a smart move? The mess in mortgage and credit markets was caused by too much easy money, so the Fed’s solution is to make more easy money?

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