Write ups: Are banks finally in write-up territory? With most markets rallying this quarter, it’s tempting to think so. And some firms should be able to show some gains. But these won’t be as easy to track as improvements in prices imply.
How so? After all, the major bond and leveraged loan indices on both sides of the Atlantic have jumped between 20% and 30% since March. And enthusiasm about the US Treasury’s Public-Private Investment Partnership, meant to dispose of banks’ bad assets, and Term Asset-Backed Loan Facility, designed to revive securitisations, have helped bolster residential and commercial mortgage bond indices, though these have given up some of their gains recently.
That won’t make much difference to Goldman Sachs and Morgan Stanley. They may get a boost because of the improvement in leveraged loan prices – though not huge since both have shrunk their portfolios to under $5bn. Nor do they have that many toxic mortgage securities left. And their hedges and other positions often alleviate any pain where they do. Last quarter, for example, Morgan Stanley’s $1.5bn of gains from taking new commercial mortgage bond positions and hedging old ones more than offset the $800m in losses on legacy assets.
It’s even less clear how commercial banks will fare. Sure, some, like Bank of America and Citigroup, may be able to show mark-ups on any dodgy mortgage bonds and CDOs they still hold that caused their multi-billion-dollar losses. But new accounting guidelines give banks more flexibility in how to price such assets. That means decisions about taking a gain or not for the second quarter may come down to whether they need help to hit earnings estimates or whether they reckon taking gains isn’t worth it if they’ll simply revert to losses again in the next few months.
What’s more, most banks don’t mark all their loan books to market; rather they take write-offs as actual losses occur – so they can’t benefit from rising valuations. In fact, with defaults increasing, problem loans may be the source of more write-offs. Even where they do peg values to the market, as with leveraged loans, it’ll hardly be gains all round: JPMorgan, for example, might be able to mark up its Alliance Boots loan but will probably have to register a loss on Chrysler.
And there’s another factor to remember: the US accounting quirk requiring all banks to mark their own debt to market, taking gains last year as debt prices fell and losses as they now recover. That may wipe almost $2bn off Morgan Stanley’s revenue this quarter, according to Barclays.
The good news is that widespread multi-billion-dollar losses may be on hiatus this quarter – and the markets’ rally has certainly helped foster new business. But for now at least, write-up estimates are a crapshoot.
