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Saturday, August 21, 2010

Getting a grip on the cash loaden corps myth

Some more of the cheating techniques as the MSM as they keep reporting the big chunk of cash the corps are sitting on at record levels around 1.5 tril. roughly - well that matches their off the balance sheet debts in the best case.

Another one I have repeatedly mentioned is the corp retirement fund lie as they are allowed to assume that the retirement funds make a fake profit of lets say 10 % per year on money never paid in. Hence 2 fake parameters determine part of the profit reporting every year which is a fairy tale to put it diplomatically - which accounts for 10-15 % of the profits the corporations claim to have made. With interest rates at zero and stocks having lost ground in the last 10 years you can imagine what the real state might be.

This whole PE game is another deception tolerated by DC to put it mildly plus the totally fake bankster earnings. This market is overvalued by many angles but it gets worse by the hour.

Also read the comment segment as the add excellent information especially the graph at the end


How Much Debt Does the S&P 500 Have?

Bruce Krasting's picture

About 25 years ago I worked for a few months with a team of deep thinkers who were trying to convert Capital Leases into Operating Leases for tax and accounting purposes. The objective was to get the most optimal treatment; (1) tax deductible amortization of the asset and (2) keep it off the balance sheet so as to hide the true debt level and therefore improve balance sheet ratios. There were strict rules that were supposed to avoid this. But is was a goldmine idea if it could be done. This was early derivative days. Make something look different than what it actually was. I thought it was a dumb idea, so I quit and went to sell junk bonds at Drexel. Turns out the folks involved figured it out and made a bundle selling it. I am still glad I was not involved.

Now, a quarter century later, the regulators are catching up to this. It is possible that changes will be made. If they do, it will have very significant implications. The Economist has an article that sums things up pretty well. Here is the link, some sections of the report:

This new rule, proposed on August 17th by the two regulators (IASB and FASB), has shocked companies everywhere.

The change will make a lot of firms look wobblier: a survey by PricewaterhouseCoopers, an accounting firm, found that it would add about 58% to the average company’s interest-bearing debt.

Many companies are close to their maximum debt limits, and the new rules could push them over the edge. Small wonder they are howling.

Other companies will see their apparent return on capital plunge. Many firms will see their debt-to-equity ratio rise and their ability to borrow fall.

You can look at each company's BS and estimate what the impact of the new rules will be. The article suggests that airlines and retailers will be hard hit. The list of companies with Operating Leases is endless. I would imagine that most of the S&P 500 will be impacted one way or the other. I did look for macro information on total outstanding operating leases and did not find a source. I think we are talking a trillion or so. Does anyone have a source for the big picture?

Watch for a big fight over this issue. Look for GE to be the biggest opponent to any changes. I think they have the most to lose in this.

It makes me laugh/cry to see that it took them 25 years to come to the conclusion that lease accounting was being abused.

Your rating: None Average: 5 (17 votes)

by Mitchman
on Fri, 08/20/2010 - 09:13

Bruce, as someone who spent a great part of his career in the leasing business, I can tell you that about $1.3 trillion in leases is the going industry estimate for the amount of off-balance sheet obligations on listed companies. In my judgment, that number is low by a factor of 2.

by Bruce Krasting
on Fri, 08/20/2010 - 09:42

Thanks for this. 2.6 Trillion. Well that should sink the s&p by 20%. What a joke. The fact is this is already the case. It is just not being reported the right way.

by Mitchman
on Fri, 08/20/2010 - 10:23

Bruce, sorry if I am hogging the site. The implications for the revenue and ROE side are even more interesting for the likes of GECC.

by Bruce Krasting
on Fri, 08/20/2010 - 10:59

Actually I would like more info. Can you estimate a proforma BS for GECC?

Does it double? Triple? Quadruple?

by Mitchman
on Fri, 08/20/2010 - 11:46

I'm sorry. Their accounting is so opaque that it is literally impossible to estimate. Nine digits is a certainty and the only issue is the size of the first digit. I would be shocked if that first digit is less than 2.

by Mitchman
on Fri, 08/20/2010 - 11:56

Actually Bruce, let me recant. GECC is one of the largest lessors of rail cars in the world and GECAS one of the largest lessors of commercial aircraft in the world. So if the first number is a 3 or even a 4 I would not be shocked. For a good insight on GE's accounting practices, particularly as it realtes to their accounting for acquisitions in order to maintain their growth and margins, see the work of Charles Ortel who used to be a frequent guest (!) on CNBC. GE's AAaa rating is about as solid as the US's.

by sgt_doom
on Fri, 08/20/2010 - 13:18

Gee, I guess that explains why GE never pays any federal taxes, and paid exactly ZERO in 2009.

Gee? No, GE.....

by Mitchman
on Fri, 08/20/2010 - 13:27

Correct. As a point in what I believe is fact, the alternative minimum tax came about in a year when GE reported $6 billion in earnings but paid no Federal income taxes. That was due to their leasing activities. When a company buys an asset and leases it back like GECC does, they get to take accelerated tax depreciation on the asset and shelter their income tax liability with the depreciation. Under the AMT system, accelerated tax depreciation is a "preference item" which is normalized for computing what a corporation "should" have paid under the AMT system. That reduces the value of the tax shelter.

by tom
on Fri, 08/20/2010 - 09:53

The source on that is a 2005 SEC study. It estimated, by extrapolating from a sample, that "active U.S. issuers" had $1.25 trillion of off-balance-sheet obligations stemming from operating leases.

by Mitchman
on Fri, 08/20/2010 - 10:00

Thank you for that. The key to the new rules from a GE Capital perspective is that a great many of the transactions on which they act as lessors (not as lessees like the airlines) are "leveraged leases" where they only contributed about 20% of the cost of the asset and financed the rest of the asset cost with non-recourse debt. (The same is true for all of the bank-affiliated leasing companies). The new rules would force them to put this non-recourse debt on their balance sheets with a matching asset that reflects the fact that they have granted a lessee the right to "Use An Asset." You can see that there will be some gigantic balance sheet inflation throughout the S&P 500 and beyond if these proposals are adopted in their current form.

by Bruce Krasting
on Fri, 08/20/2010 - 10:56

You have to love the blogs. I pose a question and less than an hour later comes the answer with a source to prove it. Thanks Tom.

Note that the source is the SEC. I would double that number to $2T.

I found this graph. If you believe it then corporate debt = 50% of GDP or about $7t. Add in another 2T for this and you have a 30% increase. That is a very big change. A bit scarry.


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