Finance Weblog: Write offs - Instituto de Empresa Business School

Noviembre 06, 2007

Write offs

Juan Toro

Rumours abounded last week in relation to write offs of the main investment banks.
Main economic news were put aside by the rumourology on new write offs and unknown exposures of investment banks to murky assets. The Fed’s comment signalled balance risks on growth and inflation, the GDP number came in better than expected and the employment number in the US was much better than predicted. However all these good news were not enough to brighten market views.

The main worry that keeps market nervous is the true balance of banks. Every day a new rumour appears on potential write offs by the main investment banks. Last weeks rumors were heard on Goldman taking a 13bln dollars write down whereas Royal Bank of Scotland Group Plc and Barclays Plc were among U.K. banks that may post ``major trading losses'' amid the global decline in credit-securities prices, according to analysts. On the same issue, the Security and Exchange Commission (SEC) in the US is looking into how some Wall Street firms have been valuing, or "marking," its mortgage securities. The SEC seems to be investigating the off-loading of important chunk of mortgage related securities onto hedge funds by Merril Lynch. The issue is whether this strategy is just postponing the reckoning of some write downs.

From November 15, there will be a new tool in the US to figure out the state of investment banks' balance sheets. The new accounting rule SFAS157 demand banks to divide their tradable assets into three "levels" according to its possibility of marking them to market prices. On the one hand level 1 assets need to have quoted prices in active markets, whereas on the other hand Level 3 assets have only assets that have to be valued according to the bank´s model (mark them to models instead of marking them to prices). Most recent talks on bad assets in banks’ balance sheets has focussed on sub prime related assets but the assets that populate Level 3 (or will end up there soon if credit deteriorates) extend far beyond sub prime related assets. This is probably the origin of so many new rumours. Among these assets we can find the following: a) Mortgages other than subprime mortgages; b) securitized credit card obligations; c) leveraged buyout bridge loans; d) asset backed commercial paper; e) complex derivatives contracts or f) Credit Default Swaps.

Rumours will abound till the credit squeeze settles down. And as long as large part of the banks balance sheet valuation depend on the banks own pricing models, contradictory views on the health of the financial system will prevail. At least till the storm is over.

Posted on 6 Noviembre 2007 in Financial Markets

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La gran duda que tengo, es si las provisiones que están realizando los bancos derivadas de las crisis de las subprime, son más bien una especie de provisión "técnica" de un activo al que no pueden asignarle un precio ya que se ha quedado sin liquidez o corresponden a default reales de gente que ha dejado de pagar la hipoteca. Entiendo que si fueran por el primero de los casos lo más probable es que no se tornen en una pérdida real y definitiva. Creo que la diferencia es muy importante y la verdad es que no tengo nada claro si las provisiones y pérdidas que anuncian corresponden a un tipo o otro.

Posted by: Gurusblog at Noviembre 7, 2007 06:40 PM

Las provisiones dotadas o pérdidas reconocidas son posiciones marcadas a mercado o "a modelos". El problema es mayor si están marcadas a modelos porque hay más discrecionalidad.

Gran parte de lo que han llamado toxic waste que esta en capital tipo 3 son marcadas a modelos por su falta de liquidez.

Lo importante es el valor liquidativo.

Posted by: Juan Toro at Noviembre 8, 2007 12:20 PM

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