Now, a quarter century later, the regulators are catching up to this. It is possible that changes will be made. If they do, it will have very significant implications. The Economist has an article that sums things up pretty well. Here is the link, some sections of the report:
This new rule, proposed on August 17th by the two regulators (IASB and FASB), has shocked companies everywhere.
The change will make a lot of firms look wobblier: a survey by PricewaterhouseCoopers, an accounting firm, found that it would add about 58% to the average company’s interest-bearing debt.
Many companies are close to their maximum debt limits, and the new rules could push them over the edge. Small wonder they are howling.
Other companies will see their apparent return on capital plunge. Many firms will see their debt-to-equity ratio rise and their ability to borrow fall.
You can look at each company's BS and estimate what the impact of the new rules will be. The article suggests that airlines and retailers will be hard hit. The list of companies with Operating Leases is endless. I would imagine that most of the S&P 500 will be impacted one way or the other. I did look for macro information on total outstanding operating leases and did not find a source. I think we are talking a trillion or so. Does anyone have a source for the big picture?
Watch for a big fight over this issue. Look for GE to be the biggest opponent to any changes. I think they have the most to lose in this.
It makes me laugh/cry to see that it took them 25 years to come to the conclusion that lease accounting was being abused.
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thanks for posting this and I look forward to hearing about any other disappearing "accounting tricks" your friend alluded to a couple days ago.
ReplyDeleteHey Bruce, I've been curious about this since I read your profile, and since you mention working at Drexel in this post, I have to ask. What do you think of Milken? The reason I ask is that in my mind Milken stands as a watermark in our society. That is to say, I think he is a crook and a liar and a thief, and his "rehabilitation" makes a strong statement that being a "successful" crook outweighs all of the moral issues with the thing; that in America, it really doesn't matter how you get your money as long as you get a lot of it. Now, a drug dealer can expect to get the best table in the restaurant cause having the green is all that matters. Thing is, I could be dead wrong about Milken. I got my impressions from the media coverage at the time you know. You seem to be a straight shooter, and you knew the guy. I can certainly understand that you might be reluctant to comment about this, but I sure would like to have your opinion on it. Thanks. By the way, I've been reading all your stuff at zero hedge for awhile, and you never disappoint. Now if I can figure out how to post this comment.
ReplyDeleteI did work for Milken. But I was in NY at 55 Broad. I was not part of his inner circle on the X desk in LA. But I was there a week a month for years.
ReplyDeleteThe guy was an absolute genius. He had a photographic mind. He was an insatiable reader. He had a big staff that did nothing but write up ideas for deals. Extremely detailed information. Hundreds of pages. He would be in a room of 30 people and talk about this stuff and remember every detail. He put it in context and set directions. That was at 5AM LA time.
In my opinion he was not a crook. In spite of evidence to the contrary. He tried to take on Fred Hartley, then CEO of very powerful UNICAL. Mike backed Boone Pickens for this deal. It was like a fly going after an elephant. But it scared the establishment and the justice department was told to shut it down. They succeeded. This was done by Rudy Giuliani, who was looking to make a name for himself. He succeeded too.
There was one time, pretty late in the game, that he told me that he was not dirty and would fight to the end. A few months later he copped a pleas and did time. I think he was looking at a trial that he would lose. Everyone hated the Junk Bond King. So he took a plea and sank Drexel. The way it goes.
I have not talked to him since late in 89...
Thanks so much for responding. Its been bugging me because several other people whose opinion I respect do not think he is a crook either. But I had kind of developed this internal roadmap of how we got to where we are, and have always used Milken as the signpost of that point where white collar crime stopped really being crime, and I guess I just did not want to re-think it.
ReplyDeleteYou should know, that question was my first comment on the web, and I have been reading these financial and economic blogs daily for about a year. I'm blown away to get an honest response on the same day.