Who are the winners in the mortgage mess?

What does "write-down" mean?
— Rod Vancouver, WA

Accountants who are concerned with tracking how much a company’s assets are worth often have to face up to the fact that things aren’t worth what they thought they were the last time they looked at the books. To reflect the change, they have to “write down” the lost value of that asset on the books. Companies that sell shares to the public are required to ’fess up once every three months in a financial statement that lays out how things are going since the last filling. There are all kinds of reasons why companies write down assets.

Sometimes the falling value of an asset is expected. A piece of equipment loses value over time, and there are rules for how quickly its value depreciates. (That lost value often can be deducted from income, helping to reduce taxes.)

Other write downs are unexpected. Unsold inventory that includes outdated technology or designs won’t get the retail price for this year’s model. If a company closes down a store or a factory that isn’t profitable, the hard assets (real estate, machine tools, etc.) may be sold for a fraction of the value they hold as a profitable business. So the books have to reflect that lost value. (If the asset is worth nothing, the accountants may decide to write it off the books completely and take a “write-off.”)

Write-downs aren’t necessarily a bad thing: a lot depends on the reason the company gives for taking the write-down. When General Motors recently took a $38 billion write-down for tax credits it said it could no longer use, some GM watchers were left wondering: why are they now worthless? Was it because GM was too optimistic in claiming the tax credits in the first place? Or because the company doesn’t expect to have enough future profit to be able to take advantage of them?

Banks and other lenders have been taking billions in write downs lately because of losses on the value of bonds backed by mortgage loans — no that some of those loans are going bad. Part of the problems is that the value of these securities was originally calculated from a computer model — not from an actual market price from a real buyer or seller. It turns out the computers didn’t count on a market panic; some of these bonds now can’t find buyers at any price.

What’s got Wall Street so rattled these days is that companies only have to fess up to writedowns once every three months. No one is really sure if or when there are more shoes to drop from losses on these mortgage bonds. So it may take awhile before the financial markets are convinced the worst of the mortgage writedowns is over.

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