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post #41 of 43 (permalink) Old 04-19-2009, 12:52 PM
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Where there's smoke ...
There may be other folks burning.

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There are no allegations of wrongdoing by Rattner or his former company, Quadrangle Group.

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Being smart is knowing the difference, in a sticky situation between a well delivered anecdote and a well delivered antidote - bear.
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post #42 of 43 (permalink) Old 04-19-2009, 08:25 PM
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Denninger again



Oh by the way, here's another reason that Citigroup posted these numbers:

"Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain. The rule reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit."

If you want to talk about obscene, that is obscene balance sheet game-playing. What this means is that a firm that has its credit quality decrease, and therefore the trading price of its bonds go down (meaning the market thinks the firm is more likely to default) is able to claim that change as a profit!

Why? Because the firm could "buy back its own debt" at a discount.

Note carefully - the firm doesn't actually have to buy it back (that would be reasonable - book the profit from an actual realized gain) but because it could it gets to book that as a paper "profit" on its financials.

This is the sort of outright in "accounting" that makes market analysts and investors like me grab for the blood-pressure cuff to see if we're about to have a CVA. See, a firm that is in distress like this is extremely unlikely to buy back its own debt because the reason it is in distress is that the market believes it lacks sufficient cash earnings power to cover its liabilities! That is, the market is discounting the probability of bankruptcy by trading its debt at a significant discount - and this gets counted as a profit?

This sort of nonsense isn't new; in point of fact the banks have been doing this all through this downturn! But this is a particularly-egregious example, so here's the white-hot spotlight Mr. Pandit.

Hope you've got some SPF-200 suntan lotion handy.

The Market Ticker
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post #43 of 43 (permalink) Old 04-19-2009, 08:32 PM Thread Starter
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There may be other folks burning.
Indeed, Rattner has the presidential cloak of immunity.
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