Charles R. Morris — Wed, 13 Feb 2008 22:10:15 GMT

Writedowns “And what caused the assumption the bond is risky in the first place”

Many bonds were sold backed by, eg, risky home mortgages, but with credit ratings that suggested that default rates would be near-zero. They paid interest only slightly higher than a risk-free Treasury bond. Now that we know that actual default rates are much higher, traders require much higher yields (= lower prices) to purchase those bonds. The lower price incorporates the information that the $50 payment is very much in doubt, even tho it’s still being paid. Almost all the writedowns are based on some sort of a market test. There is a fair amount of evidence that banks haven’t been writing down enough, altho that may now be changing because of criticisms from accounting standards bodies.

The Washington Independent - U.S. news and politics - washingtonindependent.com: Comments by Charles R. Morris