Subprime Woes Just Beginning, PwC Chief Warns

Nonfinancial companies will be hit next, says DiPiazza. And some, like Bristol-Myers, Ciena, and Lawson, are proving his point.
Stephen TaubFebruary 6, 2008

The next wave from the subprime mortgage crisis will flow past lenders and homebuilders and strike nonfinancial U.S. companies with forced write-downs, the chief executive of PricewaterhouseCoopers warned.

Samuel DiPiazza, chief executive of the Big Four accounting firm, pointed out that many nonfinancial companies were exposed through securities in their own investment portfolios, according to a Reuters report.

“It’s not just in banks,” DiPiazza said. “These securities sit in cash equivalent accounts of industrials; they sit in investment portfolios of pensions. We are having to deal with this with thousands of companies, not just a handful of big banks.”

Indeed, Bristol-Myers Squibb recently said that in the fourth quarter it took an impairment charge of $275 million on investments in auction rate securities (ARS), partially consisting of subprime mortgages. The company said it had $811 million of principal invested in ARS at year-end. Its estimated market value, however, was $419 million, reflecting a $392 million adjustment to the principal value.

Bristol-Myers said the ARS continue to pay interest according to their stated terms, based on third-party valuation models and an analysis of other-than-temporary impairment factors.

However, the impairment charge reflects the portion of ARS holdings that the company has concluded have an “other-than-temporary decline in value.”

The company’s investments in ARS represent interests in collateralized debt obligations supported by pools of residential and commercial mortgages or credit cards, insurance securitizations and other structured credits, including corporate bonds. Some of the underlying collateral for the ARS held by the company consists of subprime mortgages, the company said.

Other nonfinancial companies reporting write-downs related to the credit crunch and the housing collapse include networking-equipment maker Ciena and software company Lawson.

“I will not underestimate the challenge we have working through a lot of complex securities and getting them valued,” said DiPiazza. “We have to ask the question: What’s under the surface?”

Meanwhile, financial operations continue to be hurt severely, as well. Barry Diller’s IAC/InterActiveCorp, owner of Ticketmaster and the HSN home-shopping channel, posted an unexpected fourth-quarter operating loss of $508.1 million today, Bloomberg News reported. The loss reflected a write-down of the value of its LendingTree mortgage broker. IAC’s $369.9 million net loss compared with a $15.3-million profit in the year-earlier quarter.