Investment Bank Writedowns?

Question

When banks write down their assets do they normally pay back any corresponding liabilities?

If not, how does a write-down effect the bank's cash position? Does it only do so over time as the debt used to finance that asset becomes due, or does the bank have to set a side the cash in reserve...

Answer 1

It is similar to when the stock in your portfolio goes down.  You buy a stock for $100 and it goes to $200, you tell everyone you have $200.  If the price goes back down to $150, you only have $150.  Now picture it is a stock that does not trade every day, maybe only once a month.  How do you know how much money you have?  Well it is only what someone is willing to pay for it, but since no one wants it, what is it worth?  It is hard to say, but you can guess.

Now this is what the investment banks have to do.  They have all of these products that no one wants that at one time traded for $1B.  Now no one wants it so it is hard to say what it is worth.  But by law, they have to "Mark to Market" their holdings.  So they say the thing is now worth $700M, and they take a $300M write down.  No money changes hand, just the company now is worth $300M less.  There is no direct affect to the cash position.  It is a product that you already owned, you just are saying it is now worth less than the last time you priced it.