Banks rediscover the uses of the kitchen sink

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The W$J’s Heard on the Street column reports that people are thinking the big writedowns at the likes of Citi, UBS and Deutsche Bank may be bigger than the actual losses:

When valuing securities that have all but stopped trading, clarity is relative. Some investors say they fully expect banks and brokers to take the maximum possible losses while investors are in a mood to accept them, a practice known as the “big bath” or “kitchen sink” approach. Later, the logic goes, they can mark the value of securities back up and recognize profits.

“If you’re a smart CEO, you’re going to write off everything and then some, maybe even to below-market prices, because you’re going to be hidden in the woodshed with everybody else,” says Daniel Genter, chief executive and chief investment officer of RNC Genter Capital Management, a Los Angeles-based investment firm that manages about $3 billion in bonds and stocks, mostly for high-net-worth individuals. “They’ll make it look a lot worse than it is, but that’s the smart move, because you’ve got little to lose and you might get some of it back in a quarter or two.”

Analysts also expect banks to err on the side of taking as big a hit as possible. Only an “unwise” banker would do anything “other than take as much pain as possible,” Chris Wheeler, European banks and specialty finance analyst with Bear Stearns, told investors yesterday during a conference call.

This speaks for the argument that the market has bottomed, and good times and clear skies are ahead. Maybe, but if house prices keep dropping for years, as traders are betting on the Chicago Mercantile Exchange, aren’t mortgage default rates–and not just in subprime–going to get much worse? And might that not mean even more big losses at the banks?

I really don’t know the answer. It just feels like we’ve moved from a major financial crisis to everything being great again awfully quickly. Although, as writing about asset-backed securities really isn’t my strength, I guess I ought to be thrilled about this.