Posts Tagged ‘economic crisis’

How A Bunch Of Really Smart Kids Ruined Everything (Volume 1)

Wednesday, December 22nd, 2010

“Repo 105″ – like Four Loko, but more dangerous to the health of your company.

Ever wonder how enormous old financial firms suddenly bite the dust? Well, the answer (according to the man suing Ernst & Young for civil fraud)  is that they do stupid things with the help of accountants.

According to New York Attorney General Andrew Cuomo, giant accounting firm Ernst & Young helped their client Lehman Brothers hide billions of dollars in debt so that it would look like a healthier company than it really was. For seven years. Until (surprise!) Lehman went bankrupt in 2008.

Lehman owed a lot of people a lot of money (like, billions of dollars). But they didn’t want to go around telling people about it.

mathemagician-by-kf6gpe.jpg

credit: kf6gpe

So (according to the lawsuit) Ernst & Young helped them hide their little debt problem with a ninja accounting tactic called “Repo 105.” Basically, Lehman would sell off a bunch of their assets and use the money to pay off some debt. That day was a good day, because when they had to show their financial reports to the world, it looked like they didn’t owe billions of dollars.

But – here’s the genius part – the next day, they would buy back the assets they sold at an even higher price, taking on more debt than they had before.

In exchange for its creative accounting services, Ernst & Young received $150 million in fees from Lehman between 2001 and 2008. Ernst says it was just using “generally accepted accounting principles,” which makes you wonder what other firms have been drinking. Cuomo says it will be paying those fees back to the State of New York by the time he’s done with them.

U.S. Taxpayers Actually Profit From TARP

Friday, October 22nd, 2010

The mere mention of TARP sends many people into grumble-mode, but the emergency measure to bail out large financial institutions has actually turned the government a profit.

  • The Troubled Asset Relief Program traded banks much-needed capital in exchange for partial government ownership.
  • Now that two-thirds of TARP recipients have paid the money back, the government has seen a profit of about 8.2%. That’s more than the return on any U.S. Treasury bond, high-yield savings account, money-market fund, or CD.
  • Despite the return on investment, the public is not happy about TARP. Several politicians have lost primary elections this year because they voted in favor of the program, and authorities say the return rate is misleading because it doesn’t take into account the other costs of the bailouts.

Facts & Figures

  • The government has earned about $25.2 billion so far on $309 billion in TARP investments.
  • The return rate on 30-year Treasury bonds averaged 4.1% during the last two years.
  • Over the same period of time, high-yield savings rates averaged 0.36% – 0.92%.

Best Quote

“From the perspective of the taxpayers getting their money back, TARP has been a great success. But there are other costs as the government made it possible for the banks to pay back TARP. Those costs can turn out to be larger, and their legacy could last longer.” – Todd Petzel, Chief Investment Officer at Offit Capital Advisors LLC

UK Tackles National Debt By Taking An Axe To The Budget

Wednesday, October 20th, 2010

It’s bold, it’s risky, it’s the 2011 United Kingdom budget!

  • Britain has been hit as hard as the rest of the world by the global economic crisis. Now it’s following the lead of some other European nations by tightening the tap of government spending.
  • The spending plan, unveiled today by Britain’s top finance minister, represents the deepest reduction in public spending since WWII. It’s a much more serious spending reduction than any other Western nations have attempted so far.
  • Groups opposed to the plan say it is too severe and will interfere with employment and stunt growth. But the budget deficit facing British lawmakers is too big to ignore.

Facts & Figures

  • Britain’s deficit is 11.5% of its economy. The U.S. deficit is 10.7%, and the German deficit is 5.4%.
  • The plan involves significant cuts to welfare, public sector jobs, and local government budgets. The retirement age will also be raised from 65 to 66 four years earlier than planned.
  • The average reduction of each government department’s budget will be around 19%

Best Quote

“We have had to make choices, choices in the things we support. We have taken our country back from the brink of bankruptcy.” – George Osborne, Chancellor of the Exchequer

The Point Of No Return

Monday, July 19th, 2010

It seems that no funds are consistent enough to weather the worst economies, no matter how reliable they seem.

  • In the wake of the economic crisis, more people are investing in “absolute return” funds - portfolios that supposedly deliver gains in any kind of market.
  • Firms advertise these funds as low-risk investments because they focus on short duration and high quality securities.
  • It seems, however, that the name of these funds might be misleading. In recent months they have been gaining little, and in some cases even been posting losses.

Facts & Figures

  • The Aston/New Century Absolute Return exchange-traded fund lost 9.51% in June

Best Quote

“You just have to be careful that absolute return doesn’t turn into no return.” – Mr. Tuttle, Financial adviser

Strikes In Greece And Spain Indicate A Shaky Economy

Friday, July 2nd, 2010

Stress in southern Europe reaches a high as citizens protest continued economic blows.

  • Strikes raged in Greece and Spain as governments desperately tried to revitalize the tumbling Euro by cutting pension plans and public sector pay.
  • The European Central Bank, in a one year cash injection strategy to get Spanish banks back on their feet, has reported that their bailout strategy will not roll over into the following year, leaving shaky Spanish banks furious.
  • Investors fear that the rising stress caused by widespread strikes, coupled with the weak condition of the Euro, could hurt European economic recovery.

Facts & Figures

  • The Euro has been pushed to a lifetime low against the Swiss franc.
  • European shares fell to their lowest in nearly three weeks, dropping -1.7%.

Best Quote

“Sentiment appears fragile and significant downside risks remain to already pretty muted euro zone economic recovery.” – Howard Archer, Chief EuropeanEconomist, IHS Global Insight