Phorgy Phynance

Archive for the ‘Corporate Leverage’ Category

Another proponent of economic Darwinism

with 2 comments

Just a quick note from MarketWatch before I hit the sack…

17 reasons America needs a recession

Here are some of my thoughts on the subject.

Good night and have a Happy Thanksgiving!

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Written by Eric

November 21, 2007 at 10:28 pm

More on the corporate leverage puzzle

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Just a few days ago, I pointed out a nice article by Yves Smith from naked capitalism indicating that corporate balance sheets may not be as healthy as most economists and analysts have been claiming them to be for the past several years. As the credit cycle turns, it wouldn’t surprise me at all to see more articles like that coming out. Here is another from FT:

Why balance sheets are not in good shape

Greed will always find a way. That is one clear lesson I’ve learned so far.

Written by Eric

September 1, 2007 at 9:21 pm

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…

Written by Eric

August 28, 2007 at 9:36 pm