Why is Wall Street rewarding write-offs?

Posted Oct 9th 2007 2:25PM by Zac Bissonnette
Filed under: Scandals, Citigroup Inc. (C), Merrill Lynch (MER), Morgan Stanley (MS), Housing

MarketWatch's David Weidner got a nice quote from Punk Ziegal & Co.'s Dick Bove that pretty much sums up my reaction to the recent round of subprime write-offs, and Wall Street's reaction:

"This is a reason to sell not buy. The theory that if the company writes off $2 billion it should see its stock price up $1 and if it writes off $6 billion the stock should jump $3 is not one I can embrace."

Yes! Exactly! Another thing that investors should be wary of is the possibility that some of these firms are engaging in cookie jar accounting: taking aggressive write-offs so that they can book windfall profits when the securities in question rebound. Given that Wall Street is rewarding terrible results from the big banks this quarter, this would have to be tempting.

In just a few months, an interesting shift has taken place in terms of how investors are viewing these write-offs. First, everyone was whispering that the banks weren't going to take big enough write-downs for fear of seeing their stocks get pummeled by big losses. Then, when this rumor had circulated, the banks responded with huge write-offs -- and the the Street cheered their honesty. But now we're wondering just how honest they were really being.

Tags: banks, David Weidner, DavidWeidner, subprime, write downs, write-offs, WriteDowns