What are credit writedowns in banking ?

[Diver]

These days they think of a large figure, write it down, and tell the shareholders and press "That's how much we lost" so we're putting up the interest rates again. Bonuses and trebles all round.

I stand corrected

[NotAllThere]

These days they think of a large figure, write it down, and tell the shareholders and press "That's how much we lost" so we're putting up the interest rates again. Bonuses and trebles all round.

[Diver]

http://news.bbc.co.uk/2/hi/business/7540404.stm

How exactly banks make losses from credit writedowns ? What exactly is meant ?

These days they think of a large figure, write it down, and tell the shareholders and press "That's how much we lost" so we're putting up the interest rates again.

HTH

[meridian]

http://news.bbc.co.uk/2/hi/business/7540404.stm

How exactly banks make losses from credit writedowns ? What exactly is meant ?

Most of these writedowns relate directly to the US housing market. Basically, US credit institutions bundle hundreds of millions worth of US mortgages into financial instruments called CDOs and they were then sold as packages to investors (including other financial institutions) around the world. They were rated by Moody's and S&P according to their risk and priced accordingly.

A lot of investors are now finding that these CDOs aren't worth as much as they thought, and they are being constantly revalued by the holders and any difference in value between the last valuation and this one is written off as a "credit writedown".

For example, last week Merril Lynch sold some of their post-1996 CDOs for only 22c on the dollar, with the balance being written off.

The point to note is that these aren't bad debts that the investing banks hold, they are investment bonds that are not worth as much as before - the risk of the US mortgages defaulting has been sold to investors but not the right to reclaim the underlying assets (e.g. the house). It's a bad investment, not a bad debt.

[IR35FanClub]

A write down is another term for writing off a bad debt. Essentially the bank involved has around 3 billion in bad loans on it's books that it no longer expects to recover, as a result it has to allocate cash from the business to cover the value of these loans as they can no longer be listed as an asset. This has an effect on the final profits of the co. In this case the value of the bad loans they had to write down exceeded the profits for that quater, hence they mad a loss.

At least I *think* thats what it;s all about. I'm not an accountant and quite frankly a lot of this stuff just makes my head spin.

The extra bits I would add is the loans typically go to a "bad debt" reserve account first - before finally being written off. It means the company has to allocate cash from the main reserves to cover the losses. So bang go the profits. Sometimes the loans can be sold to a recovery agency for a lot less than they were worth - about 80% being the max - 20% at the other end of the scale if the loan is small. It's typically when a CCJ has established the debtor actaully has no money to pay off the loan with and it's too expensive for the bank to chase £1 a month for 40 years on a £300 loan/credit card bill which is what the judgement was made for in court. Mortgages are a different kettle of fish - in that case you do have something of value, and the bank usually has an insuarance policy (which you paid for) to get their money back.

I guess commercial lending is similar in that some loans will be secured against assets and some are plain cash advances. A friend of mine went bust - his assests were seized (catering equipment) and sold at auction for 1/10 of what they were worth. So I guess the rest of his £40,000 business overdraft was written off! Yikes.

[BrilloPad]

A write down is another term for writing off a bad debt. Essentially the bank involved has around 3 billion in bad loans on it's books that it no longer expects to recover, as a result it has to allocate cash from the business to cover the value of these loans as they can no longer be listed as an asset. This has an effect on the final profits of the co. In this case the value of the bad loans they had to write down exceeded the profits for that quater, hence they mad a loss.

At least I *think* thats what it;s all about. I'm not an accountant and quite frankly a lot of this stuff just makes my head spin.

The plan is making things so complicated to get big bonuses has worked then...

[DaveB]

A write down is another term for writing off a bad debt. Essentially the bank involved has around 3 billion in bad loans on it's books that it no longer expects to recover, as a result it has to allocate cash from the business to cover the value of these loans as they can no longer be listed as an asset. This has an effect on the final profits of the co. In this case the value of the bad loans they had to write down exceeded the profits for that quater, hence they mad a loss.

At least I *think* thats what it;s all about. I'm not an accountant and quite frankly a lot of this stuff just makes my head spin.

[BrilloPad]

http://news.bbc.co.uk/2/hi/business/7540404.stm

How exactly banks make losses from credit writedowns ? What exactly is meant ?

The credit department said their pile of poo was worth $100bn - and got bonuses on it. bank announced profits. Now pile of poo worth alot less. credit department gets sacked but keeps bonuses.

HTH

[Likely]

http://news.bbc.co.uk/2/hi/business/7540404.stm

How exactly banks make losses from credit writedowns ? What exactly is meant ?