What are write-downs, pertaining to financial institutions?

Question

You keep hearing about financial institutions making write-downs or write-offs or whatever the hell they're talking about.

What does that mean?

Answer 1

Imagine that you believed that your house was worth $250,000. Then suddenly, you realized that it was only worth $150,000...you would "write-down" it's value by $100,000...resulting in a loss of $100,000.

As well, imagine that your alcoholic uncle owed you $10 and you knew that he would never repay it...you would "write-off" that loan...meaning eliminate it as an asset...resulting in a loss of $10.

Financial Institutions are doing this except they are sub-prime mortgages. Once they realize that these mortgages are likely to not be fully repaid in a timely manner, they have to "write-down" the value of the mortgages. For instance, if they sold the mortgage, they would no longer get the full value for it since it is likely to go into default.

GM recently wrote-off $38.6billion in "Deferred Tax Credits". This is because they are of no value unless the company is making money. That is a more complicated issue, but essentially, the company said that $38.6billion in assets on their books were actually worthless.

Answer 2

Taking losses against earnings. Writing off a bad debt or writing down the cost of closing unprofitable stores are just a few examples.