I'm glad I missed this piece when it aired. You are not serving your listeners' interest by "decoding" an issue in this manner. You correctly identified, in accounting terms, what a write-down is. But you failed miserably to square that definition with what banks have been forced to do, because you imply that banks are simply writing down their mortgage assets to what they're "worth" (who could be agaist that?). The entire issue at hand in this drama is determining what bank assets are worth.
The accountants want to say that the worth of securities backed by mortgage loans is dependent primarily upon how much those securities could be sold for in the "market" (I use quotes because there is no market for these securities at present). Banks, on the other hand, want to model the value of the securities based on traditional valuation techniques for securities used by educated investors- future cash flow and reasonable discount rates.
If you want to give your listeners a much better analogy to explain what is going on, tell them that their own mortgage loan is probably held on some bank's balance sheet at $.60 on the dollar, or so. In other words, if said listener owes $200,000 on his/her mortgage, the bank has had to write-down that mortgage to, say, $120,000, so they have had to write-off $80,000, regardless of whether or not the loan is paying on time and adequately secured. If you ask your listeners if that approach to valuing assets is reasonable or rational, I think the overwhelming response would be "no"...in fact, I think people would be outraged if they understood the issue in this manner, and further understood that these so-called "fair value" accounting requirements are largely to blame for the banking sector crisis. But unfortunately, you continue to miss opportunities to explain the issue this way. You can do better.
Wish the accounting prof was able to explain this back during the MBA I think my classmates missed the basic idea without your clarity. My classmates thought infinity was the only way to go. Market value seemed to be the projection not the reality of value.
Question (not a comment) Help me please. I am 77, my IRA, $89,000 is slowly melting. Should I put it into a 3.5 CD for 5 years. I own my home, annual Income $20,000, $20,000 in CDs,car pmt. $240.month 14 more months.I have been taking $400. monthly from IRA.Having hip replacement in 3 days and am really stressed about what to do.I don't want to lose my life savings. Your program is wonderful. June Noble
These are both excellent points. Thank you both! paddy
I appreciate the clarity of the analysis, but one additional point to make would be that the write-downs of assets impact the stockholders' equity of the companies. If a company writes down its assets, this must be reported as a loss on their P&L statement, which thereby reduces not only current earnings, but also the company's equity on their balance sheet.
Just wanted to point out that once goodwill is impaired it cannot be recovered.
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