Writedowns may be masking some good news

Here come more financiers' writedowns

Another day, another prediction of red ink for banks and financial firms. But some analysts caution against taking these numbers at face value.

By Colin Barr, senior writer

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NEW YORK (Fortune) -- Another winter writedown storm hit Wall Street Monday. Shares in Citi, Fannie Mae and Freddie Mac sank after analysts predicted another round of multibillion-dollar losses at the struggling financial firms.

The expected writedowns, which reflect rising loan defaults and sharp declines in indexes tracking debt-related securities, come as falling house prices and a slow economy weigh on U.S. consumers. Shares in Citi (C, Fortune 500) dropped 2% after Oppenheimer analyst Meredith Whitney slashed her full-year earnings forecast to 75 cents a share from $2.70 previously.

Whitney, who made headlines late last year by being the first analyst to predict Citi would cut its dividend - which it soon did - said the bank's profits will be hammered by Citi's need to reduce the value of loans and bonds on its balance sheet. The analyst, who rates the stock the equivalent of sell, predicts "further writedowns to their carrying values of [collateralized debt obligations] related to sub-prime mortgages, further writedowns from leverage lending commitments, and further writedowns associated with on balance sheet consumer loans."

That's a lot of writedowns, but Citi isn't alone in facing big hits to its earnings. Goldman Sachs downgraded Fannie (FNM) and Freddie (FRE, Fortune 500) to sell from neutral, saying it expects $4.2 billion of writedowns at Freddie and $2.6 billion worth at Fannie when the government-sponsored enterprises report fourth-quarter earnings this week. The downgrade comes on the heels of a similar move Friday by analysts at Merrill Lynch. Goldman even recommended that investors short Freddie Mac shares ahead of Thursday morning's expected earnings release. And it also significantly reduced earnings predictions for other Wall Street giants, including Bear Stearns, Morgan Stanley, Merrill Lynch and Lehman Brothers.

By now, huge writedowns are old hat for investors in the financial sector. In just the past two months, Citi took an $8.1 billion writedown of its mortgage-securities holdings, UBS (UBS) took $13.7 billion in mortgage-related writedowns and AIG (AIG, Fortune 500) took a $4.9 billion hit to its credit derivatives portfolio. The river of red ink comes as no surprise, as banks and brokerage firms find themselves carrying billions of dollars of loans and mortgage-related securities whose value has declined along with a sharp slowdown in the debt markets.

The mysteries of 'mark-to-market'

But some skeptics say writedowns may in some cases overstate the extent of problems at financial firms. Many writedowns result from the need to "mark-to-market" the value of illiquid securities - such as CDOs and leveraged loans - or the debt that banks took on to finance the recent private equity buyout boom. Because many of these securities rarely trade, managers are left looking to market indexes for guidance on the size of the appropriate writedown - as Whitney noted Monday in a discussion of the recent 6% drop in the leveraged loan index, or LCDX.

"The decline of the price of the LCDX reflects the markets' priced perception of increased credit risk of leveraged loans, causing a sharp pullback in investors' demand for these types of loans and has caused a backup of the leveraged loan pipeline and assets to build up on balance sheets of banks," she wrote in Monday's report on Citi. "As banks and brokers are required to use these indexes and other market data to 'mark to market' their outstanding loan commitments, we expect banks to be forced to reflect such market declines in their 1st quarter 2008 results further hampering results already hampered from the most challenging market environment most have ever seen."

While no one doubts that the market environment is challenging, some observers say the mark-to-market writedowns don't always help investors seeking to accurately assess a firm's health. For one thing, the writedowns generally don't reflect actual cash losses. In the case of Fannie and Freddie, Goldman sees more writedowns ahead in part because declining interest rates reduce the value of the hedges the firms use to protect the value of their mortgage portfolios - even though the declining rates don't cause Fannie and Freddie to lose actual money during the period.

Similarly, many of the leveraged loans now trading at a discount continue to perform; the drop in the index partly reflects investors' fear that debt-burdened companies will go bankrupt if the economy heads into recession. Similarly, the bonds underlying many illiquid securities such as CDOs continue to pay interest on time, even as related indexes show readings that would suggest widespread default.

Assessing management

That's why Christopher Whalen, managing director of Institutional Risk Analytics, calls fair-value markdowns "madness," saying they tell investors nothing about the economic value of a business. Jeffrey Miller, CEO of investment adviser NewArc Investments in Naperville, Ill., tells investors to delve into the details of writedowns rather than being scared away from possibly attractive investing situations by scary headlines. He says the fact that the banks are keeping loans and bonds on their books rather than selling at fire-sale prices indicates the value of the underlying assets may well climb.

A case in point comes from bond insurers Ambac and MBIA. Back on Jan. 16, Ambac posted a fourth-quarter loss of more than $32 a share, reflecting a $5.4 billion writedown of its CDO holdings. Ambac said about $1.1 billion of the writedown reflected credit impairment, but the rest was a mark-to-market loss tied to the declining value of its bond insurance contracts. "Ambac continues to believe that the balance of the mark-to-market losses taken to date are not predictive of future claims," its press release read, "and that, in the absence of further credit impairment, the cumulative marks would be expected to reverse over the remaining life of the insured transactions."

Similarly, MBIA last month posted a fourth-quarter loss of more than $18 a share, after a $3.5 billion writedown of its CDO holdings. The actual credit loss reflected in that giant writedown, the company said, was $200 million. If other financial firms have been involved in overstating potential losses out of a sense of diligence, that could lead to increased profits once markets stabilize.

The financial guarantors' situation illustrates the questions confronting investors in writedown-riddled companies: Is it fair to believe the portfolio will avoid further credit losses even as the economy slides toward recession? Is it reasonable to assume that the company is presenting a full and fair accounting of its situation?

David Merkel, chief economist at broker-dealer Finacorp Securities, urges caution. "It comes down to assessing management," says Merkel, not referring to any particular company. Though most execs surely make what they believe to be appropriate judgments, he says, "some are prone to fear and greed."

source : http://money.cnn.com/2008/02/25/markets/barr_writedowns.fortune/index.htm?postversion=2008022514

Don't Let Setbacks Stop Your Momentum

Don't Let Setbacks Stop Your Momentum

By Donald J. Trump

“The bigger your business, the bigger your life, the bigger your problems are likely to be. Being prepared for that will save you a lot of emotional turmoil . . .” - Donald J. Trump

I feel strongly about the importance of wholeness. It's a combination of all the components of life that make us healthy, happy, and productive. To my mind, the opposite of wholeness is failure. If it happens, and sometimes it does, the best remedy is to move forward, to realize that failure is not permanent, and to immediately focus in the right direction. Ultimately, a solution will show up.

I don't mean to sound like a faith healer, but there is something profound and yet simple about viewing failure as a lack of wholeness. I will also add that it's effective. Believing that a negative situation is temporary and wrong will give you the impetus to do something about it, to feel righteous and energetic about fixing it. Being unhappy and unproductive is simply not part of my game plan, and it shouldn't be part of yours, either. See a situation as unacceptable, as taking you away from wholeness, and you will be motivated to get out of it as quickly as possible.

When I had a financial setback in the early 1990s, I saw it more as an aberration from the norm than as a final sentence. I knew what it was like to be whole, and all I had to do was get back to that place. I felt that a comeback was what was expected of me, and I expected it of myself. All I had to do was take the next step and get my momentum going again, which is what I did. It didn't happen overnight, but eventually things started to sort themselves out.

I've seen some people get completely swallowed up by failures. The worst thing you can do to yourself is to believe that bad luck is your due. It isn't! It's not just intelligence or luck that gets us places, it's tenacity in the face of adversity. Some people see problems as bad luck, but I don't. Problems are a part of life and a big part of business. The bigger your business, the bigger your life, the bigger your problems are likely to be. Being prepared for that will save you a lot of emotional turmoil, unnecessary deliberating, and even illness.

I've known people who have come back not just from adversity but from tragedy. There's adversity and then there's tragedy. Thinking about both is a good way to get an objective view of what you may think your problems are. Your situation may be tough, but you can bet others have had far worse things to deal with. One way to pave your way for a comeback (or for a first victory) is to read about people who have been courageous against long odds. My guess is they felt they had an obligation to succeed, and in some cases, an obligation to survive. That's how I feel. I had the privilege of a great family and a great education, and I am serious about honoring those privileges -- which means expecting the best from myself.

You can have the same attitude, no matter what your situation or background. When failure comes your way, you must believe that you matter, that you can overcome it, and most importantly, that success is what is expected of you. You'd be surprised at what you can accomplish when that's your attitude. It's not just survival, it's not just success, it is your obligation. A sense of duty toward wholeness will go a long way toward your personal and professional success.

What I learned at the time of my worst financial problems is that I was resilient and that I had this indomitable sense of success that couldn't be taken from me no matter what the newspapers said. That brings me to another level of thought, which is faith. Faith is a bit like wisdom. People can help you along the way with it but above all you have to develop it yourself. Faith in yourself can prove to be a very powerful force. Work on it daily. Sometimes when you're fighting a lonely battle, keeping yourself company with positive reinforcement and faith in yourself can be the invisible power that separates the winners from the losers. Losers give up.

In summary . . .

Strive for wholeness, believe in yourself, keep your momentum at full throttle, and be strong and tough in your resilience. Don't expect anything less than that from yourself, and I can assure you that success will become a permanent situation for you, even when your external circumstances may not show it.

Never Give Up!