Magazine article American Banker

Home Equity: Conseco's Accounting Plan Gets Cool Reception

Magazine article American Banker

Home Equity: Conseco's Accounting Plan Gets Cool Reception

Article excerpt

Conseco Inc. has yet to win many converts in the financial markets after announcing it would stop using gain-on-sale accounting.

The Carmel, Ind., insurance and finance company's stock has dropped 19% since it announced Sept. 8 that it would drop the controversial accounting method.

Gain-on-sale requires lenders to book profits on loan sales in advance. Many of Conseco's counterparts in subprime lending took hits last year when they were forced to change their gain-on-sale assumptions. In announcing the proposed accounting switch, chief financial officer Rollin Dick called it "an important step toward improved investor confidence in Conseco's future earnings quality and visibility. In addition, portfolio accounting is the method preferred by the credit rating agencies."

But the immediate effect of the move is to cancel an estimated $334.5 million Conseco would have booked as income this year under gain-on-sale accounting. It said it is reducing earnings projections by $1.01, to $2.95 a share, this year and by $1.57, to $3 a share, next year as a result of the switch.

What's more, some analysts question whether Conseco has the strength to carry off the switch to portfolio accounting.

"We're moving into an upward rate environment at the end of an economic cycle, and they're lending into the sub-subprime market. That's the one that's going to be hit first,'' said Colin Devine, an analyst at Citigroup Inc.'s Salomon Smith Barney unit. …

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