Issue of the week: Is the worst over for banks?

While banks have written down most of the losses incurred on subprime mortages, problems with other assets are showing up.

To get a sense of the ragged state of the U.S. banking industry, said David Enrich in The Wall Street Journal, consider what now passes for good news. When Citigroup, the largest U.S. bank, reported a $2.5 billion quarterly loss last week, analysts and investors actually “were encouraged.” And when Bank of America, the second largest bank, reported this week that its second-­quarter profits fell 44 percent from the same quarter last year, Wall Street greeted the announcement as a pleasant surprise. The reason for the surprisingly upbeat reaction to the apparently horrible news is that analysts can see that banks are facing reality and “writing down their piles of bad assets.” Write-downs occur when a bank’s assets—mostly loans, bonds, and other securities—are

worth less than the price the bank originally paid for them. Accounting rules require the bank to “write down” the value of the asset to its current price; the difference between the original price and its current value is deducted from the bank’s earnings. It’s a lengthy and painful process, but it’s better than the alternative. It may seem strange to put a positive spin on massive losses, but Wall Street’s optimists reason that “the moves reduce the odds of gigantic future write-downs.”

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