With this morning's market rising in spite of news of Credit Suisse (NYSE: CS)'s $2.8 billion write-down and the potential for $203 billion worth of additional Wall Street write-downs on various "structured investments", I began to wonder whether investors have already discounted all the bad news and the market will start to rise.
The Credit Suisse write-downs drew praise from analysts for their reflection of the strength of its risk management but they also shocked investors who sliced 9% of its stock. Credit Suisse took "fair-value" reductions -- an estimated price when no market price is readily available -- of its "structured credit trading positions" of about $2.85 billion. I am not sure why analysts praised Credit Suisse because it's not all that different from any firm struggling with how to value illiquid securities.
Meanwhile, UBS estimated that the world's largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles (SIVs), leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail -- and this assumption will soon be tested.
One of the latest areas to come under pressure is the leveraged loan market -- these are loans for leveraged buyouts. In recent weeks prices on leveraged loans have fallen as low as 88 cents on the dollar, levels not seen since 2002, when default rates were more than 8%.
But the markets are looking up this morning. Is this a 'dead cat bounce' or a sign that Wall Street has moved beyond all the bad news and is already focusing on the recovery? What do you think?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
2-19-2008 @ 12:14PM
jrullman said...
What do I think? I think the market is in a state of total denial simply because the outlook is too grim to be acknowledged.
2-19-2008 @ 1:26PM
william lindblad said...
I agree. It is either denial or a desire to remain optimistic. It is much like living in a row house concept and being on the opposite end of a house fire and thinking that the fire will be put out before it gets to you.