New Bank Write-Down From Auction-Rates (C)(WB)(MER)

The auction-rate fiasco is not over for banks. Having bought back about $55 billion of the paper, they are now faced with the reality that the bonds are only worth about $.80 on a dollar. The means the firms who were forced to take them off shareholder hands will probably have to account for $10 billion in losses.

According to Reuters, "The timing is not ideal given the balance sheets of a lot of these companies," said Walter Todd, portfolio manager at Greenwood Capital.

Investors will have to watch for charges later this year and early next. Citigroup (C), Wachovia (WB), and Merrill Lynch (MER) could take the lion’s share of the trouble. More write-downs usually means raising more capital. That, in turn, means more dilution of the current shareholder base.

Otherwise, everything is fine.

Douglas A. McIntyre