Vinny’s Blog

OK..guys so it has been a while since I have written. Well, everyone needs a break once in a while and so did I. I guess my break was just a tad bit longer. I got buys with lot of other stuff which was all happening at the same time.

Family wanted to go on vacation to India, same time I was busy with one of my projects in office and then relatives came from India so had to take them around. Etc. etc. etc though I wasn’t writing anything I was reading a lot , habit I guess.

Anyway so what do I have for you now after all these days. I have a few but this seems to be right at the top. This is another marvelous fine example of our cutting edge banking practices.

So bear with mebecause it’s all about mathno don’t worry it’s not like you will be solving some NASA grade math equation. It’s a simple one you have done it in lower KG and even your kids can do this in their head they don’t even have to write it down. Enough said so what is this math problem. Well.worry no more..

Here it is..

How much is 2+2 obviously 4 now that wasn’t so difficult was it ? Well, let us put a twist to it..how much is (-2) + (-2) obviously -4 correct ?

Wrong ! if you totaled -4 = (-2)+ (-2) not only you’re wrong but now you have lost all your chances to become a wall street banker ever in your life and you wonder why you

did not get that promotion last year or why your bonus was less.

As per Wall Street 2+2 = 4 and -2 + -2 is also equal to 4. If it becomes -4 how can they book profits ? so for their convenience it’s good to treat -2+-2 = 4. This way all can be happy.

This is prime example of how some of our banks workand mind you some of these are world’s biggest banks and you my dear should feel very comfortable knowing these are the kind of math skills your banker has and you trust him with all your money.

Below extract is from the article.

Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math

By Bradley Keoun

June 2 (Bloomberg) — Leave it to Wall Street to profit from its own distress.

Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the “mark-to- market” accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall.

The new math, while legal, defies common sense. Merrill, the third-biggest U.S. securities firm, added $4 billion of revenue during the past three quarters as the market value of its debt fell. That was the result of higher yields demanded by investors spooked by the New York-based company’s $37 billion of writedowns from assets hurt by the collapse of the subprime mortgage market.

“They can post substantial gains as a result of a decline in their own creditworthiness,” said James Cataldo, a former director of treasury risk management for the Federal Home Loan Bank of Boston and now an assistant professor of accounting at Suffolk University in Boston. “It’s completely legitimate, but it doesn’t make sense by any way we currently have of thinking of net income.”

The paper profits have helped offset more than $160 billion of writedowns taken by U.S. financial-services companies during the past year. Now some investors and analysts say the winnings are illusory and may have to be reversed.

Get it ? This new math has helped in offsetting $160 billon worth of writedowns which other wise banks will have to declare and who knows may be more banks could have gone bank corrupt.

So how does this new math technique works. (from the article)..

Here’s how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the “presumed savings that you have on your liabilities,” Bove said.

“In the real world you didn’t save a dime,” he said. “You still owe the $100 million. It’s another one of these accounting rules that basically takes you further and further away from reality.”

Well, I am no pundit but if I understand what is written above this is how it is.in a simpler example of my own.

Let us say you borrowed $100 from me and now you have problems paying it back. So I come to you and say OK I understand you have a problem give me $80 instead. I will forget about that 20$…….so now instead of you looking at $80 as liability (which is the money that you still need to pay me back) you go back and tell your family that you have made profit of or saved $20. Isn’t that wonderful if we all did that repeatedly we will all be rich.

This actually remind me a very good joke a friend of my father told him way back when I was a kid and for some reason because of the humor involved in it. It is stuck in my head since then. But from last 30+ odd years I could not find a suitable occasion to play it back until now.

So, there were these 2 very poor and un-educated friends in India, they had tried everything but they just could not come out of the poverty they were in. Suddenly one day one person tells the other that he has discovered a fantastic way of making/saving money soon he will be very rich. Curios the other person asked how he come across such a scheme ? simple the first person says. There is this park I go to in the evening there is a board that says if you were caught picking rose flowers from the tree. You will be fined 10Rupees. But then he said I wait till dark and pick one flower each day and have not been caught you see I am saving 10 Rupees each day pretty soon I will be rich.

Little those 2 poor innocent people knew.if they were in US they would have been one of the Wall Street’s very successful bankers..and we would be trusting them with all our money..

I have a growing feeling that fairy tale days of these banks are coming to an endI just don’t know when..but does not look like with math like this the end is too farevery other country has worked hard to build their economy where as we have discovered new math to support our economy.

Please go ahead read this article yourself and build your own view about this Mickey Mouse economy..mine you just read.

Click here to read