Monday, March 3, 2008

What Are These Mad Losses?

UBS analysts predict financial firms' losses to hit $600B
UBS AG analysts are predicting that financial firms, including brokers, banks and insurers, will experiences losses of $600 billion or more in the crisis stemming from the subprime mortgage market meltdown. So far, financial institutions have revealed write-downs and credit losses of more than $181 billion. Bloomberg (29 Feb.)

Seane Lynch says, that's another $419 billion (2.3 times more!) from how much financial institutions have revealed so far. These numbers are analysts' expectations but in view of the more conservative approach that auditors might adopt, the amount could be worst come the audit on the financial numbers of the affected companies. Audited figures are expected to be released by mid to end March itself.

But but but, most of us, the people on the streets are confused with what these losses are. The write-downs and credit losses madness are basically paper/unrealised losses that arose due to mark to market valuation of the instruments. In layman term, there are no one in the market that would like to buy these investments, hence the market value is marked down tremendously based on a very steep discount. Fair to do so? Accountants called it the "fair value accounting", hence it is supposed to be fair and reflect the most accurate valuation of these instruments. Again, accounting can and will always strive to provide the best valuation but most of the time can be challenged.

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