Phorgy Phynance

Corporate leverage puzzle

with one comment

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

More on CDS, implied corporate leverage, and default rates

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

Corporate Deleveraging May Be Overstated

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…

Advertisements

Written by Eric

August 28, 2007 at 9:36 pm

One Response

Subscribe to comments with RSS.

  1. […] September 1st, 2007 Corporate Leverage , Fair Value Accounting , Credit Just a few days ago, I pointed out a nice article by Yves Smith from naked capitalism indicating that corporate balance sheets may not […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: