Finding it too easy to sleep well at night?

The U.S. Securities and Exchange Commission is investigating how the biggest brokerage firms [which, due to consolidation, also means the biggest banks] priced securities caught up in the subprime meltdown as their values collapsed…

[By “priced” he means “mark to market”: when you have a financial instrument in your possession, and it doesn’t trade very often in an open market, you have — let’s just say — considerable latitude in what value you assign to it when you file quarterly financial reports with the SEC.]

What happens if the SEC discovers that different units of a single bank assign different values to identical securities? That seems like a viable scenario for what might happen when a complex market of infrequently traded securities whose prices are dependent on a series of assumptions hits trouble.

And what happens if the SEC finds that banks marked the securities they owned at high prices, while attributing much lower values to identical securities offered by their hedge-fund clients as collateral? Again, that seems like a plausible strategy for a bank concerned about the longevity and liquidity of its customers.

[Hypothetically, if you own a security, you want to mark it at as high a price as you can justify. But if you are loaning money to a hedge fund that is using that same security as collateral for the loan, you want to mark it — the exact same security — as low as you can. Purely hypothetically, of course.]

Suppose regulators decide to play hardball on how the financial community marks to market, imposing rules that outlaw the existing freewheeling approach to how over-the-counter derivatives are assayed.

Moreover, suppose those new decrees come just as much of the underlying collateral is so tarnished as to be almost worthless compared with its initial valuation.

The ensuing carnage in the balance sheets of every financial-services company in the world would dwarf the damage wrought in the securities industry by the subprime crisis so far.

From that incredibly sensationalistic tabloid journalism purveyor Bloomberg.