The derivative write downs only reflect one side of the economics due to GAAP accounting. In other words, GAAP requires a write down on the derivative instruments but does not allow a write up on the assets (or write down on liabiltiies)that were hedged. Very significant issue in interpreting the results.
There is a lot of hidden value in many of these companies taking writedowns. Often the writedowns are due to pricing of an illiquid market. People are scared and that perception has shown up on balance sheets. In effect, perception has become reality.
Be sure the written down assets have real value. If you find that value and couple it with a company producing positive cashflow, I believe you have a good investment which may look very smart down the road.
The question then is: How long till the storm blows over? I estimate 2-3 years out. As for myself, I'm content to be paid to wait.
I am very long CSE but this really is not a significant issue since the adjusted earnings reverses this one sided writedown for GAAP accounting. The more important point is that Delaney confirmed his commitment to the $.60 dividend today for all of 2008. He said that the 4th quarter was difficult as they de-levered the B/S and secured addtional financing at slightly higher rates. He is confident that in 2008 CSE will be able to earn it's dividend as the year progresses. He cited less competition, better loans at higher spreads etc. etc. .
wps, since I like your style on this board (which is always refreshing in the face of a bunch of other recent posters who are obviously shorts / bashers who should get a life), and from one cse long to another, I thought that you and other longs might be interested in this excerpt from an article in The American Banker Feb. 20th issue:
<<<<American Banker TIERONE DROPS ON DEAL’S UNCERTAIN FATE
* * * * “Capital Source initially agreed to pay….$34.46 per share, cash and stock….for TierOne. The deal is awaiting approval from the Office of Thrift Supervision. TierOne’s shares fell 12.8% Tuesday, to $15.17, while Capital Source rose 2.7%....
David Chiaverina, an equity analyst with Bank of Montreal’s BMO Capital Markets said some of Capital Source’s uptick was driven by general market conditions, though shareholders cheered the announcement that it would “pay less or scrap the deal altogether.”
Jeff K. Davis, a senior research analyst at First Horizon National Corp.’s FTN Midwest Securities Corp., said Capital Source investors likely have soured on the deal because TierOne is grappling with increases in nonperforming loans, particularly in Nevada and Florida. Capital Source could walk away and find another thrift to buy, whereas TierOne is unlikely to find another suitor, Mr. Davis said.
As a result, Capital Source has “TierOne over a barrel,” he said. “The issue is going to be how much of a haircut can TierOne take.” * * * *>>>>
I think it is significant in that the balance sheet is still sound and that soundness is not reflected. The other stuff is opinion (but also significant) which may turn out to be correct. I like the idea that there are increases in the value of assets on the balance sheet although not reflected.