I’ve spent the last several days discussing how government actions could potentially cause banks to write down the values of two significant asset categories: commercial real estate loans and home equity loans.  The thing is, those writedowns have not occured.  Because of accounting rule changes last year, the banks are able to keep many of the assets marked at relatively high levels, even though, as Congressman Frank indelicately said, they “have no real economic value”.

The thing is, while the assets may be marked-to-make-believe, there is an interesting provision in many mortgage derivatives based on those assets that causes the derivatives to experience losses, even though assets have not dropped in value.  It’s called ”implied writedown”.  Basically what it means is that even though the asset itself hasn’t been written down for whatever reason, the derivative based on the asset behaves as if it was written down.

What’s new news on this is the fact that implied writedowns have finally hit the AAA-rated home-equity-based derivatives!  Seems as though the derivatives are realizing what’s going on in the real world even if the banks holding the actual assets are valuing their holdings at unrealistic levels.  For instance … and remember, this is what’s in the AAA-rated bond … also remember, even Berkshire Hathaway is not considered safe enough to warrant a AAA rating … one of the loan packages upon which the AAA derivative is based “has almost 65% of collateral more than 60 days delinquent, and almost 23% of those have already been foreclosed.”  Yikes!!

For the full story, read the article at FT Alphaville, which has been all over the writedown stories.

– Don