How did the recent subprime crisis result in major writedowns for investment banks?

Investment banks invested in mortgage-related securities have the assets sitting on their balance sheets. As more and more homeowners defaulted, the value of these securities continued to drop, forcing the investment banks to write down the value of the asset on their balance sheets. The corresponding entry is a reduction in net income (shareholder’s equity) on the balance sheet.

Example:

XYZ Bank’s mortgage securities drop in value by $5 billion.

A = L + OE
($5B) = L + ($5B)

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