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Posts Tagged ‘smoothing out earnings’

Public Pension “Smoothies” Will Cost $2 Trillion

Posted by Larry Doyle on January 5th, 2010 11:11 AM |

Life will get increasingly expensive in America 2010.

Just because the calendar changed does not mean the smoke and mirrors disguising massive losses in banks, insurance companies, and federal and municipal operations have undergone some massive purging. If anything, the policies and programs developed in 2009 have likely only exacerbated the losses across a wide cross section of our economic landscape.

Our federal deficit obviously dwarfs all public and private deficits combined. That said, the obfuscation in other financial corners of our economic landscape are egregious. This obfuscation is often accomplished via an accounting practice known as smoothing. While this practice is not necessarily an indication of improper – if not illegal – financial chicanery, very often the two go hand in hand. Which financial institutions most seriously violated generally accepted accounting practices via smoothing? Hello Freddie. Hello Fannie. And we will pay.

Where else will American taxpayers pay? Public pensions. How much will the smoothie cost at the public pension Dairy Queen? How does $2 trillion sound, or a full four to five times the currently projected cost? (more…)

Smoothing Out Earnings is Finance-Speak for ‘Cooking the Books’

Posted by Larry Doyle on September 14th, 2009 2:41 PM |

When I hear financial industry insiders opine that they need vehicles and procedures which allow them to ‘smooth earnings,’ I get very suspicious. Why? That very thought process was the business model which led to the failures of Freddie Mac and Fannie Mae.

I witness it again in Bloomberg’s commentary, Beware Bankers Spinning Story of Smooth Results:

The financial results that companies give investors are supposed to paint a picture of how things are. Banks and their regulators want to turn that notion on its head so they can spin a smooth tale of how they would like things to be.

Sadly, some accounting rule makers may be ready to appease banks and the politicians who back them. If that happens, financial results will change from a vital tool for investors to a vehicle catering to managers, regulators and employees.

The practical result of such approaches would be to allow banks to report smoother results that supposedly reflect their long-term prospects. For banks, smoother profits would presumably lead to higher share prices. For regulators, less volatile results would supposedly make it easier to maintain financial stability.

Make no mistake, these accounting procedures are merely a formula for the continuation of a ‘heads we win, tails you lose’ approach which was so prevalent in causing this crisis in the first place.

Investors should not be so naive as to think otherwise. If these procedures are fully implemented, then rigorous risk management will go right out the window and prospects for real, long term economic prosperity along with it.

Regrettably, I have little confidence that the ‘wizards in Washington’ have the intellectual capacity, the moral fortitude and unquestioned integrity to take this issue on and truly protect the American public.


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