Readers Question: How does a Corp. dismiss (writedown) a huge sum ($24 billion) and still stay in bussiness? And still pay “investors” a handsome dividend?
In the current credit crisis, many banks are writing off large sums of bad debt. Even though these sums are very large, they are still only a percentage of their total assets. Although they have areas of bad debt, their core business often retains a profitability. Therefore, they pay dividends on their current level of profit (which excludes the writedown).
However, the write off’s have reduced the value of these companies share prices. It also depends on whether they can attract enough investment to tidy up their balance sheets. Some companies have been issuing share issues to make up the short fall.
However, I have to say, my knowledge here is a little sketchy; perhaps someone else could give you a better answer.
2 comments ↓
I also am a bit sketchy here, though I find this subject to be especially interesting.
I guess another way to look at this is to consider how these banks may not need to remain very profitable to stay in business anyway!
Sovereign wealth funds are huge state-owned collections of cash, financial ‘instruments’ (stocks, bonds etc.) and property with trillions of dollars to invest, with the aim of making profit from their investments in future. These funds have provided billions of dollars to many of the large investment banks damaged by the credit crunch (wikipedia mentions Citigroup, Morgan Stanley and Merrill Lynch), in return for a share of ownership of the company involved.
I suppose this shows that these firms may only need to attract large investors to stay in business, at least in the short-term. And considering that these banks are likely to receive government support to prevent their collapse anyway (as the financial system is essential to the economy, by allowing people to have access to credit and thus investment) I suspect they will be very able to attract investors, now that their share price has fallen and they perhaps become a bit of a ‘bargain’ in the eyes of some.
Further reading: http://www.economist.com/opinion/displaystory.cfm?story_id=10533866 The Economist, “The invasion of the sovereign-wealth funds”, Jan 17th 2008 (quite an old article though; there will be newer ones out there).
Thanks for helpful comment James
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