The write downs continue
February 26, 2008
On the 25th of February the Wall Street took another hit of write downs. After the analysts predicted that the struggling financial firms are going to go through another round of multi billion dollar losses the shares of Fannie Mae, Citi, and Freddie Mac went down heavily.
These write downs are coming at a time when the falling economy and crashing house prices are weighing heavily on the shoulders of the Americans. The write downs are actually reflecting the increasing loan defaults as well as the steep declines in the indexes which track the safety related to the securities.
Shares of Citi went down by 2 percent on the 25th of February after an Oppenheimer analyst cut the full year earning prediction from the previous prediction of $2.70 to almost 75 cents per share. The person also went on to say that the bank’s profits are going to be thrashed by the group’s need to decrease the values of bonds and loans in its balance-sheet. Citi however is not the only group that is facing trouble at the moment. There are many other companies as well that are taking major hits to their earnings. It is expected that Fannie is going to announce a $4.2 billion and Freddie a write-down worth $2.6 billion later this week when the organizations which are sponsored by the government report their earnings in the fourth quarter. The experts are saying that it would be better for people to get rid of Freddie Mac shares before Thursday’s expected earnings report.
The experts are also reducing the predicted earnings for quite a lot of Wall Street companies as well. These giants include Bear Stearns, Morgan Stanley, Merrill Lynch and Lehman Brothers. But the fact is that most of the investors who have been there long enough are finding the huge write downs as a part of the game. The best example for that is that in the last 2 months Citi took a write down worth $8.1 billion of its securities holdings on mortgage. UBS is another group which took write-downs of almost $13.7 billion. These write-downs are mostly mortgage related. The massive list in red ink is now no big surprise for the people as the banks and other brokerage firms now realize that they are hauling loans and securities related to mortgages which are worth billions. These loans are actually those whose worth has declined sharply along with the sudden slow down in the arrears markets.
Some people, however, are of the opinion that these write downs in most cases exaggerate the degree of troubles in financial firms. Most of the write downs that happen are as a result of need to ‘mark-to-market’. Because most of the securities never trade the managers start looking at the various market indexes to get help on the enormity of the writes down which would be appropriate.
Since most of the brokers and banks need to make use of such indexes as well as other such market information to ‘mark-to-market’ their existing loan commitments, the banks have no other option but to replicate these market turn downs.
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