Public companies with auction-rate securities on their balance sheets were, in many cases, forced to write-down the value of those assets because they have become illiquid. Firms took on the investments because they were considered as easy to buy and sell as cash, but offered better interest rates. Then the market for the securities stopped trading.
Under GAAP, the companies holding the auction-rate paper had to take a P&L charge.
According to The Wall Street Journal, "According to a study of earnings reports conducted by securities-valuation firm Pluris Valuation Advisors LLC, 402 public companies disclosed that they held variations of auction-rate securities. Half had written down the value of their holdings. Of those that did, the average markdown was 13.2%, the study shows."
What investors should watch for is the companies which have not acted, because they could face a significant hit in future quarters. That, in turn, could mean a sell-off in their shares. Some companies which do not have huge amounts of cash, could actually face a credit squeeze.
Several fairly big and, one would think smart, companies that took a haircut in Q1 include Google (NASDAQ: GOOG) and Starbucks (NASDAQ: SBUX).
Douglas A. McIntyre is an editor at 247wallst.com. He is also the author of the Ten Stocks Under $10 letter.
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Closing Bell: The recession is still over, still... do you feel it?
Reader Comments (Page 1 of 1)
5-27-2008 @ 10:18AM
buddha15 said...
It is not true that all write-downs hit the P&L. If the impairment to the securities is viewed as temporary, then they are written down directly against equity in a line called other comprehensive income without any P&L effect.
5-27-2008 @ 1:56PM
Kathy said...
Buddha15: Just to clarify, are you suggesting that the companies that DID take the write-down believe their ARS will redeem -- i.e. that this is not a temporary impairment, but a permanent one?