Will E*Trade Deal Cause More Write-Downs?


Earlier today we pointed out that the seventy-four percent discount on the asset backed securities Citadel has acquired from E*Trade will likely trigger a good deal of consternation on Wall Street. For the past few months banks and brokerages have been struggling to re-asses their credit portfolios. Even after a series of write-downs on those assets, many investors and market watchers remain unconvinced that the best and the brightest of the financial world understand the extent of their losses or are willing to be forthcoming about them.
The reason why Citadel's discount may have the bean-counters scrambling is that under new accounting standards—referred by those who enjoy talking in word and number jumbles as FAS 157 and FAS 159—companies are required to take into account easily available information about the market prices for their assets. With the Citadel trade blasted across Bloomberg screens and newspaper headlines, it's hard to argue that the information is not available.
What's more, one standard excuse for not writing-down assets should be unavailable. Under older standards, companies could claim that the assets had more value than could be achieved in a current market sale. No longer. These days companies are required to value even lightly traded assets in terms of the values they could achieve by selling or transferring the position. And that should mean they cannot blithely ignore the pricing of E*Trade's ABS portfolio.
It's still possible that other holders of asset backed securities on Wall Street will claim that E*Trades portfolio was especially weak or that they may continue to value the components of their own ABS portfolio as individual units rather than attempt to estimate the losses that would be incurred if a huge part of the portfolio was sold. This may provide some cover for the banks but it is not at all reassuring. We're told constantly that this latest round of write-downs has been the last, that the banks and brokerages are writing-down more than they need to because they have suddenly become conservative about such things. But if they put their heads in the sand—or, other dark places—and ignore E*Trade, we'll have to view these claims of a new conservatism on Wall Street with even more skepticism usual.