No More Phony Accounting: Cooked Books Helped Produce the Collapse-And the Fakery Continues

By Partnoy, Frank | The American Prospect, June 2010 | Go to article overview

No More Phony Accounting: Cooked Books Helped Produce the Collapse-And the Fakery Continues


Partnoy, Frank, The American Prospect


Phony books played a central role in the financial crisis, but recent financial-reform proposals say virtually nothing about accounting. This omission is shocking. Simply put, the balance sheets of major banks were, and still are, fiction. Financial institutions did not, and still do not, disclose their true liabilities and true risks. If they had, we might have averted this crisis. Until Congress adds accounting to its agenda, and until financial statements reflect reality, financial reform will not work.

Accounting can be boring, so let me begin with a startling illustration. Below is a balance sheet, a real balance sheet, of a real company. Look at the numbers and try to guess which company it might be. While you are doing so, remember that the market declined sharply in 2007, crashed in 2008, and recovered by more than half in 2009. For most companies, the previous four years were a roller-coaster ride in which they soared, plunged, collapsed, and finally recovered (some). Now here's that actual balance sheet:

               2006     2007     2008     2009

ASSETS        $1,884   $2,188   $1,938   $1,857
LIABILITIES   $1,765   $2,074   $1,797   $1,702
EQUITY          $120     $114     $142     $155

These numbers look rock solid. Assets declined a bit since 2007, but so did liabilities. Overall, the net equity of this company has been rising steadily, apart from a minor blip in 2007. If these numbers are accurate, they represent a conservative and steady company, one that miraculously weathered the recent financial storm. Who might it be? Perhaps Starbucks? Or Wal-Mart?

In fact, this is the balance sheet of Citigroup. Yes, Citigroup. These numbers do not even hint that the value of Citigroup's business went from a quarter of a trillion dollars to nearly zero during this time. There is no indication that Citigroup suffered massive losses in 2007 and 2008 and then a major post-rescue recovery in 2009. There is no suggestion that Citigroup was insolvent, or close to insolvent, until the federal government promised to guarantee more than $300 billion of its debts. Instead, this balance sheet depicts an illusion of Citigroup as consistently healthy for all four years. The accuracy hasn't improved recently, either: The latest numbers in the chart are from a financial filing dated Feb. 26, 2010, just a few weeks ago.

[ILLUSTRATION OMITTED]

This balance sheet is fiction.

And Citigroup is not alone. The balance sheets of every major Wall Street bank are just as fictitious. They do not reflect trillions of dollars of swaps. They do not include many subsidiaries, which banks use to avoid recording risks. Instead, the banks' exposure is off-balance sheet. Their financial statements do not show many of their actual liabilities. The dirty secret of the markets is that the financial statements of major Wall Street banks are false.

Consider the recent revelations about Lehman Brothers. Before its collapse, Lehman not only hid its derivatives liabilities from view but also used a scheme known as "Repo 105" to remove tens of billions of dollars of debt from its balance sheet. In March, after the Lehman bankruptcy examiner revealed some details about the scheme, members of Congress finally promised hearings into these false financial statements. Yet the legislative financial-reform proposals still do not require that balance sheets reflect reality. Indeed, they do not address balance sheets at all.

Some industry insiders will tell you that a formal balance sheet is no big deal. Supposedly, sophisticated analysts can uncover the data that is missing from the balance sheet, in footnotes to the financial statements. But even an investor who waded through the hundreds of pages of footnotes in a corporate filing would not have found deals like Repo 105 or the real exposure of swap liabilities at any major bank.

More important, the balance sheet remains a crucial document for financial regulation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

No More Phony Accounting: Cooked Books Helped Produce the Collapse-And the Fakery Continues
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.