Staggering Write-Down Forecast

From here, the news for U.S. banks can only get better, because right now looks like the worst.

An economist at the Royal Bank of Scotland Group is forecasting $250 to $500 billion in write-downs, in part because of their subprime mortgage exposure, but also because of a new accounting rule. I’ll let the folks at Bloomberg explain:

The Financial Accounting Standards Board’s rule 157 makes it more difficult for companies to avoid putting market prices on their hardest-to-value securities, known as Level 3 assets, Royal Bank chief credit strategist Bob Janjuah wrote in a note today. While the rule hasn’t gone into effect yet, the biggest U.S. lenders and brokerages have already begun reporting their Level 3 holdings.

“This credit crisis, when all is out, will see $250 billion to $500 billion of losses,” said Janjuah, who’s based in London. “The heat is on and it is inevitable that more players will have to revalue at least a decent portion” of assets they currently value using “mark-to-make believe.”

Great phrase. Something Lewis Carroll might have come up with if he stopped chasing rabbits and started chasing auditors.

Wall Street’s biggest firms have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley has 251 percent of its equity in Level 3 assets,

How can they have more than 100 percent? This can’t be good.

making it the most vulnerable to writedowns, followed by Goldman Sachs Group Inc. at 185 percent, according to Janjuah. Goldman, the biggest U.S. securities firm, fell 4 percent in New York trading today.

Dana Cimilluca, who writes the Deal Journal blog at, tries to make everyone feel better by pointing out a time when even worse things happened.

Big as those numbers are, they still don’t come close to the last major crop of write-downs, when another accounting change prompted eye-popping losses at companies including AT&T and AOL Time Warner in 2002. The media-and-Internet conglomerate had write-downs that year for goodwill and soured Internet assets of roughly $100 billion.

But then, just when you start to relax a little…

Still, Janjuah’s number is in a league by itself. Not only is the upper end of his range roughly what the U.S. has spent on the Iraq War, it is about equal to the market caps of the three largest U.S. banks, Citigroup, J.P. Morgan Chase and Bank of America, combined.

As Chris Farley used to say, “Holy Schnikes!”

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