Banks Want Their Earnings Back

One of the nice things about writing down assets is that they often get to be written up later. Big banks and insurance companies have something to look forward to beyond these dismal days of low stock prices and sacked CEOs.

Since much of what financial companies hold cannot be valued exactly, there is no telling what the benefit might be if the holdings come back to their par value sometime down the road.

According to The Wall Street Journal "In the big picture the key question, of course, is when the drops in value might reverse if firms are correct in their predictions that there will be minimal actual losses on the instruments they have sold."

The benefit of this is dubious, but it does exist. A bank which has written down $15 billion in subprime mortgage paper and LBO loans may get say $5 billion of that back if and when the value of these securities recovers.

This dynamic leads to a perverse reason to own or buy financial stocks at their current lows. These shares may not recover for a year or two, but write-ups in assets in the mid-term future could make earnings appear to be unusually robust.

It is not a game for the weak of heart, but the odds are that banks, brokerages, and insurance firms will get a pop in earnings a few quarters out, the harvest of a black period when they could do nothing right.

Douglas A. McIntyre