complicated QOD

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1. Rebecca says:

   July 17, 2008 at 2:57 pm

   It was never there in the first place, just on paper. Part of the fans, feathers, and balloons that the banking industry thrives on while ripping off their depositors.

2. Disbelief says:

   July 17, 2008 at 3:12 pm

   It is debt that can’t be collected, or investments that went bust. The banks show that money as a loss, which reduces equity. If the bank is public, its shares are worth less now.

   If a buddy owes you money and doesn’t pay, you can ‘write-off’ the bad debt on your taxes. It is a loss, plain and simple. If he pays you back later, you better damn sure acknowledge it on a subsequent tax return.

3. Disbelief says:

   July 17, 2008 at 3:33 pm

   When its ‘debt’, its an asset: accounts receivable. Bitches owe you money, it almost counts as if you had the money in hand, at least on a balance sheet. If the debt ‘ages’ beyond a certain point (which is accountant speak for “I broke his legs and he still won’t pay), it can no longer be counted as an asset. The asset is reduced by the amount of the ‘bad debt’, and the corresponding post is a reduction to equity. Egro, a ‘write-off’.

4. RSmitty says:

   July 17, 2008 at 3:44 pm

   C’mon DH(T)B/DV, you and I both had to get through accounting for that mail-order degree!

   Dis covered it well, particularly the Bitches owe you money… part. That’s why a lot of larger organizations will maintain a balance sheet category for this with a paper-balance to absorb these losses (a contra-asset to categorize the future loss, I am not speaking of the A/R Dis correctly references). It allows them to declare them ahead of time, in anticipation of future bad debt, when times are good (write-off, baby), or sometimes when things are already horribly bleak (already taking it on the chin, so we may as well take the punch with a bag full of horseshoes instead of a sneaker-kick).

   As far as “who gets it,” the person/organization that received goods or money that stopped paying it back – they get it, or more accurately, they got it, whenever the transaction had taken place.

5. liberalgeek says:

   July 17, 2008 at 3:46 pm

   And I suppose we all pay it to some degree, as tax revenues are reduced.

6. RSmitty says:

   July 17, 2008 at 3:51 pm

   Yes, but I think (but am not 100%) that carrying over these paper-balances (to cover future losses) is not allowable by GAAP. I think it’s OK to do so quarterly, but EOY, they must be closed. The impact of less tax rev, by my weak-brained response, could be felt quarterly, but would be evened-out EOY. This, of course, pertains only to this category of financials. There are plenty of other tricks out there to play.

   Again, I am not 100% on this, but I believe I am correctly recalling that these categories must be closed out at the end-of-reporting-year.

7. Delaware's Toughest Blogger says:

   July 17, 2008 at 3:54 pm

   so….

   yes, but the money didn’t disappear altogether out of the thin air is my point.

   I guess I am asking about the lifecycle of the actual dollar.

   it vanishes into thin air? It was never there to begin with until the money was paid? if it isn’t paid the bank eats the loss b/c they agreed that the value of the home was X and since I couldn’t repay X then the money I didn’t pay never existed….

   I just confused myself

8. RSmitty says:

   July 17, 2008 at 4:13 pm

   Dude, it’s virtual. There is so much money “authorized” that never physically sees the light of day. The days of the FED passing around notes in $1,000+ increments is long past. That’s why they don’t exist anymore.

   I see your confusion, tho. In your example there, here is how I see it:
   -1) Joe-Wanna B. Houseowner approaches IndyMAC for a mortgage.
   -2) IndyMAC approves Joe-Wanna B. Houseowner well over his head for a 3000+ sq ft home on his $40k per year income.
   -3) JwBH never actually sees the money, but it is virtually loaned to him so he can buy the house.
   -4) IndyMAC electronically (or in check-form) passes the sale of the house to the sellers (real estate company, lawyer, whomever is representing seller).
   -5) Seller and seller’s reps just received virtual cash
   -6) JwBH receives the “good” (house) and becomes JoeHomeowner.
   -7) IndyMAC holds the NOTE (the debt instrument representing the loan) that obligates JH to pay back the money over time.
   -8) Uh oh…IndyMAC jacks the rates and JoeH is all messed up and can’t pay.
   -9) Joe is now JoeForeclosedHomeowner and IndyMAC is the unwanting homeowner
   -10) IndyMAC sells the home at auction for maybe 20 cents on the dollar.
   -11) The remaining 80 cents on the dollar (forget what Joe already paid into it, too complicated for this) is forever *poof* gone in IndyMAC’s eyes.
   -12) IndyMAC must balance their books, so the 20-cent part comes off of A/R, but what about the other 80-cent part?
   -13) 80-cents comes off of A/R, but is subsequently debited (left-side on the T-acct) on the contra-asset balance for future-bad-debts.

   So, in your example, the sellers and reps got the cash. Done. The buyers were ultimately IndyMAC, but with a promise-to-pay from Joe. Joe bolted and IndyMAC has a dead, but pricey asset in the house. They have no choice but to liquidate it at a huge disadvantage.

   Crap, that is confusing. I am right, but I don’t know how to make it work in English. Screw it. Pick up a book. Bastard.

9. Delaware's Toughest Blogger says:

   July 17, 2008 at 4:16 pm

   thanks

   now get to work

10. Disbelief says:

    July 17, 2008 at 4:48 pm

    In other words, the original debt is bought and sold many times. Unfortunately, a lot of the investors buying these mortgages are foreign countries and foreign investors who rely on the sound banking practices customarily found in the United States. Unfortunately, under the Bush administration, federal oversight of banks and mortgage-lending was ignored so that the huge bonfire of economic prosperity could keep being fueled by lots of real estate being purchased and appreciating in value. So now, when you go to a foreign country and they spit on you because you’re American, check to see what the spitter is wearing. If the spitter is wearing jeans and a T-shirt, its because of the war. If the spitter is wearing a 3-piece suit, its because of the Bush administration oversight of our banking industry.

11. Tom S. says:

    July 18, 2008 at 4:16 am

    when it is lost the bank is out money

    I’m pretty sure when it is “written off” the tax payer is out money

12. Brian says:

    July 18, 2008 at 5:04 am

    There is a market for this bad written off debt?

13. RSmitty says:

    July 18, 2008 at 8:21 am

    Brian – Junk bonds. Granted, they aren’t written off at that point (nor would you want them to be), but it’s a market where you pay less at huge risk and a sweet potential payoff (in relative, bond terms) that the note holder (IndyMAC in my example) will be able to convert that junk into liquid. If they do, you win. Bottom line, you voluntarily give them money in an attempt to hedge their risky note for a potentially sweet payback.

    To Tom S, yes, when it is officially written off, it becomes a deductible transaction. Much like an individual’s investment loss at time of sale. In spite of that, it’s still not an action taken with wanton intention. Where I think that intention played out was making these loans available in the first place.

14. Disbelief says:

    July 18, 2008 at 8:44 am

    When a financial institution incurs a lot of debt, such as an insurance company’s risk of future claims they are obligated to pay or a bank’s loan portfolio, the state and federal governments are supposed to watch the quality and amount of the debt so the financial institution does not become overextended. Overextended means that they have taken on more obligations, and crappier obligations than they have cash to pay for.

    This overextention is what happened to the mortgage industry. They made more and more loans to greater credit risks and reached a point where the money going out (the loans) was much greater than the money coming in (people paying back the loans).

    Presidential candidates have talked recently about reforms in government oversight to avoid ‘overextenstion’. THESE RULES ALREADY EXIST, AND MOST OF THEM, WITH SOME MODIFICATION, HAVE BEEN IN PLACE SINCE THE GREAT DEPRESSION.

    The problem with the modern mortgage crisis is that these rules simply weren’t enforced. And, it appears that the rules weren’t enforced in order to promote political agendas.

15. Art Downs says:

    July 20, 2008 at 11:23 am

    Did that skank in Newcastle County ever pay back the loan to the old rich bitch?

    This must be the Delaware Way.