Wall Street -- They Make the Rules, so You Lose

[Original March 18, 2008; updates inserted into the original -- a Congressional Hearing is going on today, 11/16-17, 2009 that is supporting things I post here.]

"It is very difficult for inaccurate mark to model valuations to remain a secret," Hintz said. "And if I get my marks wrong, everything else is messed up in the firm. They may want to play games with valuations, but doing so would mean everything else was wrong too." [Brad Hintz, an analyst at Bernstein Research and former chief financial officer at Lehman.

Above is from article by Alistair Barr, MarketWatch 7:57 PM ET Sep 7, 2007]

This comment is about how banks and investment firms [Lehman, Bear Stearns and others] value their assets and debts. It is figured not just by putting the values into a spreadsheet as you and I do for household finances, letting the income from every source balance against every bill, and hoping that there is money left in the bank at the end of the week. Institutions are allowed to estimate the risk of a debt and hedge the value {like saying I loaned a friend 500 dollars, but the chance he won't pay it back is really small, so I'll put only $100 into the 'out-lays' column} so the true debt is not on the books. Now if I get paid, all is fine - and maybe I list it as "extra income"; but if I don't get paid back, the loss is suddenly FIVE TIMES what was on the books.

Another way they do this is, when they BUY a company, they will falsely overvalue it, using a procedure called "good will accounting" -- the company has $1B in buildings, products, and all other "hard assets", but they will place an extra value of 20% to 200% on the company based on "valued employees", "expected contracts", and many other guesses and will even add in "brand name recognition" [isn't the name, the company, what they are buying?].

And there lies the crutch of the problem - American [and world-wide?] companies don't have to put the real value of anything into the account ledgers, so they can make themselves look more profitable than they really are - until some one calls their bluff. [Umm, the collapse of Sept 2008, which was 'predicted' by the above quote.]

They also divide up companies to sell off the "unproductive" parts, and load them with debt from the parent company. They do this so that the parent will look healthy, but it almost assures that the new entity will fold - putting it on you to back it up through bankruptcy procedures. [See SPE's, etc -- this is how Enron and others "looked good".]