Could you explain it to me in kid's terms because I am not getting it from all of the internet sites I read. Is it like losing value from your personal portfolio and then claiming it as a tax write off or something.

Thanks!!!!!!

By the way, all this foreign investment into our banking institutions cannot be a good thing. We will pay for it somewhere down the road.

Usually it refers to the practice of recording assets on a companies books at the lower of cost or market. If you purchase an asset for $100, you record it at that price and dont increase it based on market value. But if you market value dips below $100, you record the new value and record the loss of value as a expense against income in the year you realize the change in value.

OK, to not put it in accounting terms

Suppose you have your net worth statement (balance sheet) and you have cash, stocks and a house as your assets. Cash is what it is, stocks have a market price by the minute, but your house doesn't have a regularly updated quote, so you book it at what you paid, 300k. One year later, you are developing another net worth statement, only this time the real estate market has fallen and you feel there is no way your house would ever fetch 300k, so it is permanently impaired (key distinction is that it is permanently impaired, not just temporarily impaired - accountants will argue you to death on timing of recoverability). Based on the information you have, you believe 200k is the fair price, so you write it down from 300k to 200k, and recognize your loss. The loss then runs through your income statement for that year, reducing your taxable income.

On your second point, pay a known price now or an uknown price later...pick your poison. You'd be surprised at how much a credit rating and all their risk based capital measurements mean to these big banks. Stumble there and you are no longer an independent institution anyway.

Thanks guys

I forgot all about this post until reading up on Bank of America. So you are saying, that it is possible that BoA could recoup some of the money that it wrote down if the mortgage industry came back strong? If you are saying that then, I feel better about the leadership there. But if then again, if BoA did something with the mortgage backed securities (like sold them low) then BoA would eventually record those write downs as losses?
Is that right?

In the above examples, in theory you could recoup the money that you lost, if the value returned while you were still holding on to the assets – correct?

Cliff - this was our most useful exchange ever

You only write down what you still hold. If you already sold them, than they are gone and you have realized your loss or gain. You only write down because you don't believe it possible to recoup. Yes, there could be some changing circumstances that allow you to recoup, but there is probably a higher chance that you write it down again. That's one reason why you see these banks announcing write downs in successive quarters. They claim they didn't realize it was that bad a couple of months ago.

quote:

Originally posted by lil_rattler:
You only write down what you still hold. If you already sold them, than they are gone and you have realized your loss or gain.

You said it before I could.