Corporate leverage puzzle
I hope I’m giving enough disclaimers so that no one can possibly be fooled into thinking I actually know what I’m talking about, but I continue trying to absorb as much as I can as events unfold.
I know very little about financial statements and most of my comments on the subject of corporate leverage have been guided by simplistically thinking about basic human nature. For example, in this post
I stated (emphasis added in bold)
I’ve heard economists blabber about how strong corporate balance sheets are as they have decreased leverage since 2000-2001, but these same economists have absolutely no clue about CDOs and other avenues for off balance sheet implied leverage. In my opinion, the only thing holding default rates down was the availability of easy credit, not some increased sense of corporate responsibility. I think we will find that most corporations are more highly leveraged than balance sheets would suggest.
And in this comment, I said:
What you say about FAS 140 and particularly securitized mortgage products makes perfect sense. I don’t disagree, but my thinking is that there is something else less obvious related to FAS 140 (or at least off-balance sheet exposures) that will crop up once default rates pickup again. We’ll see. Like I said, I don’t have anything more to support the idea than basic human greed on the part of corporate executives during a period of easy credit.
Maybe I was looking in the wrong place, but my instinct may not have been too far off. Here is a very interesting article via Portfolio.com
Maybe instead of looking for sneaky off-balance sheet stuff, maybe it is right there in front of our eyes. “Fair value accounting” seems quite amenable to “asset price inflation”. If asset prices are inflated, this would make corporate leverage seem muted. A situation that could be quickly reversed. Hmm…