Friday, February 27, 2009


Jonathan Weil is a great writer over at bloomberg news. He knows how to go into a companies quarterly report and dig up the numbers that matter to show if the company is full of bs. This month he writes about 2 government rules that allow the bs to spread.

Many large banks have taken government loans to help out in these tough times. Most consider a loan to be debt. If we went into a bank for a loan they would ask about our credit card debt(loans from credit cards), and any mortgage debt(loans). No way the bank would view 10,000 dollars owed on our best buy card, the same as having 10,000 dollars in the bank.

So why is this the case for banks who took bailout money.
The loans the banks took are not being called debt on the banks quartely reports. They are allowed to be called equity, which sounds a lot like profits.
Most average people buying stocks would not notice this but it is a highly shady tactic. If we cant do it why can they.

Than there is the issue of mark to market. The idea that right now when companies have investments listed on their balance sheet they are allowed to list what the possible future value is of that investment. But many are pushing for mark to market rules where current values would be listed instead of future possibilities.

Makes sense to me. We can use my earlier analogy, if you go to the bank for a loan and they want collateral, you cannot give them something worth a little now that you expect to be worth a million dollars in ten years. They would laugh at you. Yet companies are allowed to play by these rules. Seems unfair and pretty damn sneeky.

The good news is that in one quarterly report a year companies have to list how they value their investments along with the current fair market value. This is one of Jonathan Wiels trade secrets. He goes through a companies quarterly reports to find these numbers.

For example a few companies he currently talks about value their investments much higher than the current fair value. One company claims its investment will one day be worth 94 billion while current fair value is valued at 79 billion. A 15 billion dollar difference.

Jonathan than goes into current stock value of the company being 2.6 billion while the total value of the companies assets is 13.5 billion. So taking the stock value and asset value minus the 15 billion in accounting fudging to bring investment back to current fair value and this company is basically bankrupt.

Thanks accounting rule that lets companies value investments at future value and not current one's.

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