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Merril Lynch Write Downs - What Are They?


ezekiel
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So Merril Lynch (and others) have found their CDO's are worth less than they thought (Merril's are down £8billion). So my question is, what is a write down and how does it work? Its clearly not a straightforward loss otherwise they wouldn't describe it differently.

I'd like to understand how long this works for and what impact's it has on a business (does it make their shares go down and if so why).

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So Merril Lynch (and others) have found their CDO's are worth less than they thought (Merril's are down £8billion). So my question is, what is a write down and how does it work? Its clearly not a straightforward loss otherwise they wouldn't describe it differently.

I'd like to understand how long this works for and what impact's it has on a business (does it make their shares go down and if so why).

http://en.wikipedia.org/wiki/Tulipmania

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So Merril Lynch (and others) have found their CDO's are worth less than they thought (Merril's are down £8billion). So my question is, what is a write down and how does it work? Its clearly not a straightforward loss otherwise they wouldn't describe it differently.

I'd like to understand how long this works for and what impact's it has on a business (does it make their shares go down and if so why).

It's a 'mark to market' or 'unrealised' loss. The firm estimates how much it could sell its portfolios for, based on some estimate of the current market price. Then it subtracts from that the amount it valued the securities at the previous quarter (or whenever the accounting period is) and gives that as the 'write down'.

Nothing to stop them making all that money back, if the value of the securities bounces back. However, looking at the value of the ABX indices, which plummeted just after Q3 end, and are plummeting as we speak, seems little chance of that.

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CDO stands for collaterised debt obligations.

Very simply an entity will be set up and it will acquire some type of asset (over the last few years a lot of risky cr*p that banks do not want to hold ontheir own balance sheets).

The entity will then issue tranches of notes (to pay for the assets) to investors which pay out a return based on the income stream of the assets less a spread. There will be different tranches the most risky being the ones which suffer losses first.

As most of these entities are opaque and no one really knows how the banks have diced their cr*p assets up investors do not really know the quality of the assets backing their notes. As the US subprime has hit the fan the value of these assets has gone through the floor as the entities will hold a fair chunkof sub prime mortgages.

Now the reason the banks are taking a hit is because they have given these entitites guaranteed funding lines (they thought they would never be used). As no investors are willing to roll over their funding i.e. purchase new short term notes the banks have to step in and either take the cr*p assets back on their balance sheet or fund the entities via buying notes.

As no one will touch these types of assets at the moment the value of them has gone through the floor. Thus the banks are having to write down the values of these assets.

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I liked the guy who was responsible for losing reportedly $4bn (£2bn). He got a almost 200m pay off for losing them not a small sum of money.

Can I have that job? I could have not turned up ever and got a better result than him!

interesting, it seems HPC regs who bring up this point also make this mistake:

"Mackay omitted mentioning that during 1636-37, the Netherlands suffered from an epidemic of bubonic plague, and severe setbacks in the Thirty Years War. [1]. Modern scholars (e.g. Garber) consider the event much less extraordinary than did Mackay"

But lets not reality get in the way of a good spin ;)

Edited by Orbital
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