Posted on April 6th, 2008 in Daily Stock Market / Economic News - The Real Story
This is the same story in as my original Lehman video…maybe a Barron’s writer actually saw the damn thing. – Best, Mr Mortgage
Wall Street’s Latest Illusion
Turning Losses into Paper Profits
ALTHOUGH WALL STREET PROFITS ARE
under pressure by a host of forces, the tough times also have provided
a little-known financial benefit: Some Wall Street titans have been
able to book gains from the declining value of their own debt.
These non-cash gains bolstered the bottom lines of Morgan Stanley (ticker: MS), Goldman Sachs (GS) and Lehman Brothers
(LEH) in their first fiscal quarters, ended Feb. 29, helping them beat
consensus earnings estimates. They had reported the same type of gains
in 2007, mostly in the fourth quarter, as credit markets worsened.
Investors, however, should take
little comfort from these accounting gains, for two reasons. They
provide no cash benefit and, more important, merely reflect investors’
growing concerns about the companies’ financial health.
Here’s how the accounting works: When
a company’s credit weakens and the yield on its debt rises relative to
risk-free Treasuries, the debt becomes worth less to the holder. The
financial company, which is the debt issuer, then takes a gain, because
theoretically it could buy back its debt below face value.