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Thinking About Write-offs

by Fred Cederholm

The “politics of panic control” is the biggest reason for spoon feeding this debacle to the public in bite-sized billions. While this slow approach may unnerve the public, at least there is a perception that panic is not called for and the problem is being addressed and dealt with.
I’ve been thinking about write-offs. Actually I’ve been thinking about BILLIONS, Sub-prime/Alt A mortgages, banks, the former S& Ls crisis, and déjà vu. The late Illinois Senator Everett Dirksen, a great orator, is perhaps most frequently remembered for his quip: “A BILLION here, a BILLION there and pretty soon you’re talking real money.” Dirksen was playing on the fact that you reach a point where dollar amounts become so large, they have little relevance or meaning - unless they are broken down, pro-rated, and allocated to where they impact individual or household levels.

You see last week saw more headlines involving the write-offs of investments in mortgage derivatives in the TENS of BILLIONS by still more banks and brokerage houses. In the US, front page ink shifted from Citibank to Wachovia, our seventh largest banking group. Be (un)rest assured, there will be far more ten, eleven, or twelve figure hits to yet other banks, pension funds, mutual funds, and insurance company portfolios! Huge losses to date haven’t scratched the surface, trust me on this.

There are a couple reasons for delaying/breaking-up the announcements into bite sized billion chunks. First, there is identifying the investments. These were packaged in all shapes, sizes, and formats. One may TH*NK they don’t have any exposure, but as analysts (and auditors) dig deeper; these surface in hedge funds, mutual funds, money market funds, insurance company portfolios - you name it. Second, even if identified as CDO based, debates wrangle over valuation. Since most of them appear to be “amorphous globs of anonymous fungible debt” - NOT identified to specific properties or mortgages which might have some residual or cadaver value – the valuation becomes an all (par) or nothing (zero) proposition. Besides, nobody wants to acknowledge such a hit until they absolutely have to do it.

The “politics of panic control” is the biggest reason for spoon feeding this debacle to the public in bite sized billions. If they could quantify the ultimate total losses (I’m certain some super-dome-ball-park figure is being bantered about behind closed doors), the global public just couldn’t deal with it, the equity markets would tank, and the world’s intertwined banking/financial systems would collapse. The bite sized billions approach may unnerve the public, but at least there is a perception that the problem is being addressed and dealt with. And... nobody has been forced out of business, into receivership, insolvency, or liquidation – not yet anyway. Bite sized billions in write-offs just can work miracles.

When I worked on the last bank and S&L debacle now 20 years ago, I saw first hand the games played in delaying the inevitable. That crisis was swept under the rug during the early 1980’s for at least 4 to 5 years. The regulatory bodies knew the S&Ls were hemorghing. They had lent money long term at fixed rates, and funded those loans with short term deposits that ended up costing them more than the loans generated - a negative spread. You almost knew to the day/hour when insolvency would hit. To buy time, the S&L’s were deregulated and got into lending beyond their mission or understanding. Such loans went bad from the get go and should have been written off, but write-offs accelerated insolvencies.

I reviewed examinations where hundreds of “sub-standard, doubtful, or loss” loans were actually classified “special mention,” the highest (most negative) classification not requiring any write-off. When I pursued the WHY behind this anomaly, I was told again and again “there was to be no classification of assets that would adversely affect capital.” Institutions were only “required” to write-off only what they could afford to do without hitting insolvency, a mandated take over, or liquidation. Delaying problem resolution ends in upping the final costs. I can see the same misguided propaganda approach being used now with these CDO write-offs. “A billion here a billion there... not to worry. These bite size billions we can swallow... no problem!” (That is... until somebody finally chokes and the whole system croaks.)

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at

Copyright © 2007 The Baltimore Chronicle. All rights reserved.

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This story was published on November 13, 2007.