November 16, 2007

$43 Billion in write downs and counting for Banks

So far financials have written down about $43 billion dollars in assets related to sub-prime crises. The number is expected to grow in the next quarter as more banks report write downs and revalue their portfolios. I am expecting that even those that reported already to disclose more exposure and add additional write downs. I have talked about the likelihood of this scenario in a previous post. This is a self feeding cycle, the more write downs the lower the asset prices will be. The more information given about the deteriorating shape of asset backed securities the more the selling will intensify or the more risk premium and higher yield investors will demand. So we will have to see what will be in store next quarter.

The $43 billion in write downs represent a loss of about 5.5% of equity book value of those financial institutions affected. I have tallied up all write downs and book values of banks reporting write downs, you can see the spread sheet here.

attributed to the amount of write downs.In the chart below you can see that price decline correlated well to the amount of write downs by financial The group suffered a 18% decline in market price over the last six months since the credit and sub-prime debacle began. The price decline represents three fold to the the amount of write downs reported, write downs represent only 6% decline in equity book value for those banks reported write downs. Investors, although, have punished the entire sector, it seems that price declines are proportionately correlated to the magnitude of the write down institutions reported.
I do not think the market have overdone the selling of financials in this case. Investors are anticipating even more bad news from the sector and this have a high probability chance of occurring, particularly in an environment of slowing economic activity and deteriorating housing industry.

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