Just last week Credit Suisse (NYSE:CS) was the cock of the walk. It had been so well-run that its write-downs for mortgage-back securities were small. Unlike other banks in the US and Europe, it had dodged the bullet.
Today the bank said it would write-off $2.85 billion in asset-backed paper and cut its first quarter earnings by $1 billion. According to Reuters that bank said it had "found mismarking and pricing errors on its books."
The story sounds a little like the one which came out of AIG (NYSE: AIG) last week. Financial controls at the insurance company were weak so the true value of its assets were mismarked.
All of this leads to a simple conclusion. Banks and brokerage houses are not certain what they have on their books. The securities are complex. Their values change as the subprime market gets better or worse. Many of the securities do not trade at all because of a lock-up in the credit markets, The value of their paper is, in reality, an educated guess.
In all probability the banks have been optimistic about what they hold. If so, write-downs are just beginning.
Douglas A. McIntyre
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