There’s an art to the write-down. On the one hand, you don’t want to scare
people by writing down too much money unnecessarily. But on the other hand,
you want to be conservative, and you certainly don’t want to have to
take any subsequent write-downs because the first tranche wasn’t aggressive
enough. (Just ask Chuck Prince.) So I was heartened to see today that Lehman
Brothers seems to be getting it right: its fourth-quarter
profits included "$320 million of gains from the sale of leveraged
loans that were previously written down".
That’s the way it should be done: take a big-but-not-too-big writedown, and
then turn a profit during the following quarter when you sell those assets for
more than you wrote them down to. Let’s hope other banks will prove able to
pull off the same trick.