Write-downs to Write-ups
It’s so odd how today’s write-downs can be tomorrow’s write-ups. The difficulty lies in part in the increasing use of “market values” to determine prices for assets that companies aren’t necessarily selling. This has become especially tough since the debt crisis has caused large parts of markets to seize up, meaning there often aren’t any prices to use as reference points.
An alternative is to allow management to use modelled ”long-term values” instead. However this is easily abused. In fact, this practice allowed Enron Corp. to book profits that didn’t exist.
Thus, today’s write-downs can be tomorrow’s write-ups if “market values” change when renewed demand stimulates the assets’ values. It’s as if an item you own is worth 1$ when it’s unpopular and 5$ when it comes back into style.