Cdn Bank Writedowns

So this week CIBC, Royal, and then ScotiaBank wrote down some of their exposure related to the subprime mortgage debacle in the US. Specifically $463 million, $360 million, and $190 million. All three banks chose to announce on the same day one time gains because of the sale of VISA. Most of the gains from the sale of VISA conveniently 'offset' some of the one time writedowns. I'm not an accountant and when I read that none of these writedowns affect cash, I don't want to believe them. Last week GM wrote down $39 billion from their balance sheet of future tax credits that likely wouldn't be usable! Again this was non-cash so everything is OK right? I did a little sleuthing about what these write offs mean and here is a quote from someone more knowledgable than myself in these accounting matters:

Minyan Peter, a former treasurer at a very large US bank had this to say about the writeoffs:

Lost in all of yesterday's bank related news was General Motors' (GM) announcement that it was writing off $39 bln in deferred tax assets. For non-accountants (of which I am one), GM's deferred tax assets largely represented future tax benefits that the corporation had intended to apply as a credit against future income taxes.

In looking through GM's 2006 10-K, there does not appear to be any time limitations for these credits to be used. By writing off substantially all of these assets, GM (likely with encouragement from Deloitte) is effectively stating that its future earnings prospects are so uncertain that it may never have the opportunity to apply these tax credits against future taxable income.

While the corporation and the media would lead one to be believe that because this $39 bln write off is "non-cash", a deferred tax write-off it is about as clear a message about future earnings as you will ever see.

As I have previously written, the income statement is the past and the balance sheet is the future. When you see companies writing down balance sheet assets (which, by the way, will always be non-cash), they are telling the world that the future is not what they thought it would be. Whether the items are deferred tax assets, subprime CDO's, securitization gains, inventory, loans, securities or anything else on the asset side of the balance sheet, when they are written down (which, to be clear, an increase in loan loss provision is effectively doing), a corporation or bank is admitting that prior earnings were overstated and future earnings will be lower than they thought. Until the writedowns stop, it will only get worse.

There is also a good article about banks and the credit cycle here:
http://www.minyanville.com/articles/SKF-Texas+Commerce+Bank-banks-subprime-expectations/index/a/14058

So a hundred million or so here and there. The Cdn. banks are still well capitalized compared to some US banks. (and oh shit I didn't realize E-trade was a bank as well!) The yield on Citigroup is over 7% and the yield on Royal before today's spike was over 4%.

We live and work and spend money in Cdn. $ primarily so maybe sticking to home grown banks is the safest bet right now. Why speculate on the direction of the US/Cdn if you don't have to?