accounting loophole / creative accounting

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Global Financial Crisis by Noah Berlatsky

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accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, mass immigration, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

The government runs something called the Foreign Military Financing programme, which gives money to other countries to purchase weaponry from US corporations. It doles out grants to airports for building runways and to fishing companies to help them wipe out endangered stocks. But the Cato Institute’s report has exposed only part of the corporate welfare scandal. A new paper by the US Institute for Policy Studies shows that, through a series of cunning tax and accounting loopholes, the US spends $20bn a year subsidising executive pay. By disguising their professional fees as 203 The Global Financial Crisis capital gains rather than income for example, the managers of hedge funds and private equity companies pay lower rates of tax than the people who clean their offices. A year ago, the House of Representatives tried to close this loophole, but the bill was blocked in the Senate after a lobbying campaign by some of the richest men in America.


pages: 423 words: 118,002

The Boom: How Fracking Ignited the American Energy Revolution and Changed the World by Russell Gold

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, American energy revolution, Bakken shale, Bernie Sanders, Buckminster Fuller, clean water, corporate governance, corporate raider, energy security, energy transition, hydraulic fracturing, Intergovernmental Panel on Climate Change (IPCC), margin call, market fundamentalism, Mason jar, North Sea oil, oil shale / tar sands, oil shock, peak oil, Project Plowshare, risk tolerance, Ronald Reagan, shareholder value, Silicon Valley, Upton Sinclair

As Chesapeake did more VPPs, the amount of gas it promised to deliver grew—as did its obligation to pay to pump this gas and deliver it without getting any money. Few paid attention to these deals. One exception was Pawel Rajszel, a young security analyst in Toronto, who issued a scathing report to his clients in April 2010, arguing that these deals put the company in significantly more debt than it cared to acknowledge. Pointing out that Enron had pioneered the VPPs a decade earlier, he wrote, “Due to what we consider an accounting loophole, Chesapeake is effectively able to hide its VPP liabilities from its balance sheet—something even Enron Oil and Gas Company did not do.” While investment professionals didn’t pay much attention to Rajszel’s prescient warning, Chesapeake’s debt-rating agencies agreed these deals should be accounted for as debt. McClendon spent considerable time trying to change their minds. When he didn’t, he told investors these debt watchdogs were wrong.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

It is only by being fully informed that we can ascertain risk, identify opportunity, and enact appropriate rules that are upstanding to the purpose of regulation. It does not work the other way around. 105 Chapter 3 ■ Innovating Capitalism Accounting Jiggery Pokery Recent times have been peppered with a number of financial scandals caused by “cooking the books” and inefficient business control systems. A prime example of this was the 2001 Enron scandal, where company executives and managers, in a blatant display of rule-flouting, used accounting loopholes, special purpose entities, and false financial reporting to hide billions of dollars of debt incurred by botched deals and projects. The Enron scandal had two primary outcomes. First, it led to the passing of the Sarbanes Oxley Act (refer to Notes at the end of this chapter). Second, it showed us the difference between the reliability and the relevance of financial data. Financial data is important to investors, as it allows them to make decisions.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Many of the dubiously financed ventures turned out to be disastrous. Fastow’s job at first was to find new ways to finance these investments, but then he was forced to find ways to plug the holes as these companies ate up cash, produced business losses, and created rising, unsustainable levels of debt. At this task, Fastow was a charming wizard. He established partnerships (special purpose entities) with outside investors, which, through accounting loopholes, enabled Enron to sell bad assets into these partnerships. The partners participated only because their investments were collateralized by soaring Enron stock. Legally, the partnerships were supposed to be managed independently of Enron, but Fastow often ran them. The sales to the partnerships were recorded as Enron profits, even though it controlled the partnerships and determined what they would buy.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

“investment”) bankers that the Keynesian commitment to full employment had “prevented London from re-establishing its position as the world’s international financial centre.”17 But when sterling was made convertible in the mid 1950s, and its weakness was fully exposed after the Suez debacle (a run on the British pound was aggravated by the US preventing the IMF from lending to the UK, leading to the temporary closure of the City’s external sterling loan market), London’s merchant bankers—the financial praetorian guard of the old empire—made a bold move to switch allegiance to the US dollar. Employing an accounting loophole in the exchange control regulations, and facilitated by the Bank of England without either approval or oversight by the UK Treasury, the City created a completely unregulated international market for the dollar.18 London’s Eurodollar market exploded at a time when capital controls were being eased in Western Europe, when the need for financing of increased trade and FDI was becoming pressing, and when the dollar famine in Europe was turning into a dollar glut.19 For its part, the US government, in the face of its new balance-of-payments problem, was increasingly reluctant to accept the massive outflow of dollars that resulted from foreigners borrowing on Wall Street.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

Stiglitz lobbied against the loophole in meetings with Rubin (who declined to be interviewed for this book) and other Clinton officials, but to no avail. “It just opened up this huge span of bonus pay which was not for performance. I had written a lot about this before, that it was largely phony,” Stiglitz says. “I argued very strongly during the 1990s that the whole stock option pay trend caused a lot of incentives for nontransparency, and that it was directly responsible for what I call creative accounting. The financial sector used this creative accounting not just to deceive the market but also to avoid paying the taxes that they should have paid.” This view is backed by economists like Thomas Piketty and Emmanuel Saez, who’ve tallied the massive increase in pretax personal income claimed by the top 1 percent since then.44 That increase, their research shows, is linked to growing inequality (which requires greater government payouts to the poor) and slower economic growth, thanks to flat salaries for the majority of Americans.

Buoyed by his successes, Wriston told the Street that he wanted his bank’s earnings to grow at 15 percent a year, rather than the usual single digits; this would necessitate keeping less capital on hand and taking on more leverage.46 To encourage employees to do whatever it took to hit that target, Citi also changed its compensation structure and began awarding stock options based on the value of its shares (which of course encouraged even greater risk taking and creative accounting to hide bad assets on income statements).47 None of it worried Wall Street’s million-dollar banker. Wriston had a dream—one that Sandy Weill would realize many years later. He wanted his institution to become a one-stop shop that would supply any financial product—from mortgages to securities to deposit accounts to trading platforms—to businesses and individuals. That goal would come with many unintended consequences.

“Financialization has polluted the entire physical investment process, the labor markets, and the innovation cycle of firms,” says Andrew Haldane, the chief economist of the Bank of England and one of the deepest thinkers on the topic of financialization today. “The damage it inflicts on investments in physical and human capital [meaning factories and workers] is hugely important, because that’s what slows down growth.”14 THE RISE OF CREATIVE ACCOUNTING Shareholder activism by people like Carl Icahn and the sort of buybacks being done by Apple and other large public firms are currently one of the best windows into the rise of finance. Back in the 1960s and ’70s, companies invested about 40 percent of each additional earned or borrowed dollar into the real economy.15 All that changed in the Reagan era. “Since the mid-1980s, in aggregate, corporations have funded the stock market rather than vice versa,” says William Lazonick, a University of Massachusetts Lowell professor who has done extensive research on buybacks.16 The legislative change that allowed this destructive shift happened in 1982, which was a crucial year for all kinds of market deregulation.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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3Com Palm IPO, accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

The stories of unpredictable events affecting earnings are endless. 2. The Production of Dubious Reported Earnings through “Creative” Accounting Procedures A firm’s income statement may be likened to a bikini—what it reveals is interesting but what it conceals is vital. Enron, one of the most ingeniously corrupt companies I have come across, led the beauty parade in this regard. Alas, Enron was far from unique. During the great bull market of the late 1990s, companies increasingly used aggressive fictions to report the soaring sales and earnings needed to propel their stock prices upward. In the hit musical The Producers, Leo Bloom decides he can make more money from a flop than from a hit. He says, “It’s all a matter of creative accounting.” Bloom’s client Max Bialystock sees the potential immediately. Max fleeces buckets of money from rich widows to finance a Broadway musical, Springtime for Hitler.

Some More Elaborate Technical Systems The Filter System The Dow Theory The Relative-Strength System Price-Volume Systems Reading Chart Patterns Randomness Is Hard to Accept A Gaggle of Other Technical Theories to Help You Lose Money The Hemline Indicator The Super Bowl Indicator The Odd-Lot Theory A Few More Systems Technical Market Gurus Why Are Technicians Still Hired? Appraising the Counterattack Implications for Investors 7. HOW GOOD IS FUNDAMENTAL ANALYSIS? The Views from Wall Street and Academia Are Security Analysts Fundamentally Clairvoyant? Why the Crystal Ball Is Clouded 1. The Influence of Random Events 2. The Production of Dubious Reported Earnings through “Creative” Accounting Procedures 3. Errors Made by the Analysts Themselves 4. The Loss of the Best Analysts to the Sales Desk, to Portfolio Management, or to Hedge Funds 5. The Conflicts of Interest between Research and Investment Banking Departments Do Security Analysts Pick Winners?—The Performance of the Mutual Funds Can Any Fundamental System Pick Winners? The Verdict on Market Timing The Semi-Strong and Strong Forms of the Efficient-Market Theory The Middle of the Road: A Personal Viewpoint Part Three THE NEW INVESTMENT TECHNOLOGY 8.

Let there be no mistake: It was the extraordinary New Economy mania that encouraged a string of business scandals that shook the capitalist system to its roots. Many businesses were managed not for the creation of long-run value but for the immediate gratification of speculators. When Wall Street’s conflicted sell-side analysts looked for high short-term forecasted earnings to justify outlandishly high stock prices, many corporate managers willingly obliged. And if aggressive earnings targets proved hard to meet, “creative accounting” could be used so that not only the published street estimates but even the “whisper numbers” could be surpassed. One spectacular example was the rise and subsequent bankruptcy of Enron—at one time the seventh-largest corporation in America. The collapse of Enron, where over $65 billion of market value was wiped out, can be understood only in the context of the enormous bubble in the New Economy part of the stock market.


pages: 306 words: 78,893

After the New Economy: The Binge . . . And the Hangover That Won't Go Away by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Asian financial crisis, barriers to entry, borderless world, Branko Milanovic, Bretton Woods, capital controls, corporate governance, corporate raider, correlation coefficient, credit crunch, deindustrialization, dematerialisation, deskilling, ending welfare as we know it, feminist movement, full employment, gender pay gap, George Gilder, glass ceiling, Gordon Gekko, greed is good, half of the world's population has never made a phone call, income inequality, indoor plumbing, intangible asset, Internet Archive, job satisfaction, joint-stock company, Kevin Kelly, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, manufacturing employment, means of production, minimum wage unemployment, Naomi Klein, new economy, occupational segregation, pets.com, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, statistical model, structural adjustment programs, Telecommunications Act of 1996, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, total factor productivity, union organizing, War on Poverty, women in the workforce, working poor, Y2K, zero-sum game

But from the point of view of the consumer, the $100 premium, say, over the price of a modest unbranded shoe is money that could have been spent on other goods or services. It seems like a massive waste of money, but any beHever in freedom of reHgion wouldn't want to gainsay the spiritual experience of purchasing and wearing cleverly branded footwear. Lev's point 3 is almost too insubstantial to refrite; how can even the most creative accountant put a monetary value on a "smarter" way of doing business? But point 4 is a beaut: monopoly is spun as something to celebrate, at least by the accountant's concept of celebration. No longer 20 After the New Economy would the claim of monopoly position attract the interest of regulators or the antitrust division of the Justice Department: it'd be something to boast about on the balance sheet.

And Enron's culture got more and more cultlike, styHng itself "the world's leading company," and aHenating even Wall Street bankers with its arrogance. But, fantasy aside, all the exotic instruments and strategies still depended on a troublesome physical world; to have the telecoms bandwidth to trade, Enron also built a big network to fulfill demand that was never demanded. It's not easy to overthrow matter if you're trying to make a profit. You can turn to creative accountants to help you out, but not forever. Almost the only real money Enron ever made was by manipulating California's electricity market during that state's 2001 blackout crisis, but that didn't last very long, and it wouldn't be a very inspiring case study for the Harvard Business School. Enron is also a fine illustration of the transformation over the last twenty years in how corporations are run.

Managers good and bad profited fi-om the bull market, which drove most share prices relentlessly higher with little distinction. Business Week's annual surveys of executive pay prove year after year that there's no relation at all between compensation and corporate performance. And in seriously troubled companies, where profits were invented by clever accountants, there was no incentive to blow the whistle. Instead, the incentive was the opposite, to experiment more aggressively with creative accounting and keep it quiet. Not that the options game was wholly without payoff. For companies, options have several charms: they substitute for cash salaries, offer big tax deductions, and allow heavy users to overstate their profits, since options need not be accounted for as an expense. Such 1990s highfliers as AOL, Viacom, Lucent, and Cisco would have reported earnings 25-75% lower than they did in the late 1990s had accounting standards required honesty And options helped reduce the IRS bill: Microsoft saved more than $2 billion on taxes in 2000 thanks to options; Cisco, $1.4 billion; Enron, $390 million (Henry and Conlin 2002).


pages: 270 words: 75,803

Wall Street Meat by Andy Kessler

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accounting loophole / creative accounting, Andy Kessler, automated trading system, banking crisis, Bob Noyce, George Gilder, index fund, Jeff Bezos, market bubble, Menlo Park, pets.com, Robert Metcalfe, rolodex, Sand Hill Road, Silicon Valley, Small Order Execution System, Steve Jobs, technology bubble, Y2K

They talked down their exposure to dotcom companies, and talked up their blue chip corporate customers. Worldcom, Global Crossing, and Qwest kept reporting decent revenues, and met analyst expectations. Their stocks were dropping, but not as fast as dotcoms, as telecom revenues provided a cushion to the downdraft. It turned out that many telecom companies were just lying through their teeth. They employed the worst form of creative accounting—they were just swapping revenues with each other. “I’ll buy $300 million of capacity from you if you buy $299 mil- Wall Street Meat lion of capacity from me. Investors will never know.” Despite a fancy name, Indefeasible Rights of Use or IRUs, they were pure bullshit. These swaps were fluff used to distract investors from what was really going on: prices were collapsing and analyst expectations were way too high.

You might say you heard Jack Grubman recommending it, but unless you met him and walked through the story with him face to face, you couldn’t blame Jack. You had to blame yourself. Gary Pilgrim showed the way, but the momo virus infected the entire market. Al Harrison, the “state your conclusions upfront” portfolio manager at Alliance Capital in Minneapolis, was someone whom I respected a lot. He fell under the spell and chased Enron shares, another company employing creative accounting, all the way down. Anyone who bought Global Crossing, or Drugstore.com, or Excite@Home, or Enron had a gambling problem. They were quacking, too. Investors Anonymous for everybody. 224 Spitzer Fixer · · · What was billed as the “Great Wall Street rip off” became big news. Investors saw their 401K retirement plans wiped out. Ex-employees of telecom companies saw their options and pension plans disappear.

., 206 Beard, Anson, 89, 109 Bell Labs, 7 Berens, Rod, 84–87 Berkowitz, Jeff, 202–3 Bezos, Jeff, 174 Biggs, Barton, 24–25, 92, 123–24, 125, 126, 127, 129, 145, 152–53 Blodget, Henry, 181–85, 214–16, 218, 225–26, 231 Blum, Scott, 207 Boesky, Ivan, 56 Bogle, John, 172 bonus pool, 90 Boston Company, 103 Boucher, David, 141–42, 243 boutique analyst, 109 Boutros, George, 170 Brady, Bill, 139–40, 157, 170, 223 Bright Lights, Big City (McInerney), 39–40 248 Broadcast.com, 177–78 Brooke, Paul, 129, 143 bulge bracket firms, 108, 221 bull market(s), 50–69 takeovers, buyouts and, 53 Burroughs Corporation, 56 Business Week, 216 Buy.com, 180, 207–8 “buying it off the box,” 196–97 buy-side firms, 25 Callahan, Dennis, 73, 150, 215 Cantor Fitzgerald, 67 capital, allocating, 90 Carroll, Jim, 72 Carroll, Paul, 67 Case, Steve, 156 Cashin, Art, 42 C-Cube Microsystem, 165 CDMA, 204–5 Chinese Wall, 94, 216, 221 chip industry, 26–27 CIBC Oppenheimer, 182 Cirrus Logic, 93 Cisco, 102, 105, 126 Citigroup, 216 Citron, Jeff, 197–98, 199 Clark, Jim, 156, 165–67 Clark, Mayree, 226 CMGI, 168 CNBC, 64, 181 Colonna, Jerry, 203–4 commissions, 72, 90 compensation, on Wall Street, 90 Index Compuserve, 36 conference calls, 37 conferences, 119 Contel, 39 convertible bonds, 91 Cordial, Steve, 126 Cornell, Robert (Bob), 5–16, 20, 26–30, 72, 79, 85, 155, 167 Cowan, Ollie, 31, 53 Cramer, Jim, 182, 183, 200, 202–3 crash of October 1987, 71 creative accounting, 219 CS First Boston, 1, 179–80, 190, 223 Cuban, Mark, 178 Cuhney, Adam, 79–80 Curley, Jack, 129–30, 140, 156 Cushman, Jay, 129–30, 132 Dale, Peter, 85, 92, 96, 108, 110 Data Resource Inc. (DRI), 39 D’Auria, Henry, 65 day traders, 198 Dean Witter, 174 derivatives, 91 Deutsche Bank, 169–70, 174, 178–79 “dialing for dollars,” 47 Dickey, Richard, 95, 100, 102, 112, 135, 141–42, 230 Digital Equipment, 67 Diller, Barry, 154 Diller, Jim, 83–84, 126–27 discount rate, 20–21 Doerr, John, 109, 174 Doherty, Matt, 67–68 dotcom companies, 173–74, 180 meltdown of, 213–14 Drexel Burnham, 53, 104 Drugstore.com, 180, 224 earnings, future, 20–21 earnings reports, 92, 124 Ebbers, Bernie, 38, 212, 220, 226, 227 Eddy, Tom, 137–38 Eisenstat, Al, 158 Electronic Communications Networks (ECNs), 72, 198 Enron, 224, 229 equity salesmen, 50 Erickson, Stein, 131 Esber, Ed, 82 Excite, 168 Excite@Home, 224 Exodus Communications, 175–76 Fidelity Magellan fund, 59 fighting, on Wall Street, 68 First Jersey Securities, 82 Fisher, Dick, 101, 130 Flatiron Partners, 203 FNN (Financial News Network), 64 Foremost-Knudsen, 15 249 Index 401K retirement plans, 225 Fram, Jonathon, 11 Gams, Ed, 36–37 Gassee, Jean-Louis, 17, 206 gate arrays, 19 Gates, Bill, 100–101, 128 Gaudette, Frank, 128 General Electric, 81, 173 GeoCities, 178, 203 Gerhardt, Clark, 126 Gilder, George, 204–6 Glaser, Rob, 156, 175 Global Crossing, 219, 220, 224 Goldman Sachs, 101, 109, 130, 139, 175–77 Broadcast.com and, 177–78 IPOs and, 168–69 TheStreet.com and, 201–2 Yahoo!


pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

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accounting loophole / creative accounting, Albert Einstein, Alvin Roth, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, corporate raider, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, information asymmetry, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, Kenneth Arrow, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, ought to be enough for anybody, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

Though the salary cap is generally viewed as having had some success, it is not hard to evade, and it has not equalized spending on salaries in basketball. In 1997–1998, the Chicago Bulls and the New York Knicks had payrolls 2.5 times larger than those of the Los Angeles Clippers and the Milwaukee Bucks.22 This variation occurred because of exemptions: for example, a team may match outside offers made to its players. The true gap, however, is probably much larger than published salaries indicate, because of creative accounting, deferred payments, and unreported payments. “We have spent substantial hundreds of thousands of dollars of the owners’ money,” said NBA commissioner David Stern, “to make sure that the agreement is lived up to by the owners themselves.”23 The salary cap means that small-market teams can, and do, win the basketball championship. But it also transfers earnings from the players to the owners.

“I don’t think so, but it’s very strange, isn’t it, very mysterious that such discrepancies in cost would arise, considering there were so many smart people here working on the bidding.”13 Why does dango persist, and why is the construction industry so hard to reform? Reported profit data provide no evidence that the firms involved benefit greatly. Doubtless some of the profits from dango make their way into the pockets of the firms’ owners and are hidden by creative accounting, but most do not. The firms must try so hard to earn the monopoly profits that they end up with little net gain. Firms use up resources in competing for monopoly profits. Much of the excess profits that dango’s high prices generate are bid away in the competition for political favor; they end up in the hands of the politicians. The construction industry is the largest single source of political contributions in Japan.

The effectiveness of product and financial markets as disciplinary forces on firms depends in turn on institutions: the legal system and antitrust and financial regulation. Without rules designed to give shareholders reliable information about a company, investors would be reluctant to hand over their money to firms. Even with rules in place things can go awry. The Enron scandal of 2001–2 underlined the need for mechanisms to constrain managers from abusing their trust. Hiding behind creative accounting, Enron’s executives enriched themselves at their shareholders’ expense. A modern economy is almost incomprehensibly complex. Transactions require the cooperation of large numbers of people and may take years to come to fruition. Markets need a well-designed superstructure to enable them to handle such complexity. In market design, it is not a matter of markets or the state; it is markets and the state.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, capital controls, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, zero-sum game

Here was an issue of moral judgement – whether to use privileged information for personal gain – that caused public outcry and raised questions about the trustworthiness of employees and the way firms conducted their business. Since then a number of high-profile and highly damaging incidents have also raised ethical concerns over finance. These include the liquidation of the Bank of Credit and Commerce International (BCCI) amid allegations of fraud; the bankruptcies of Enron and WorldCom, which were associated with “creative accounting” – the deliberate manipulation of accounts to obscure the true financial position of these firms – and also with fraud; the activities of rogue trader Nick Leeson, which brought about the collapse of Barings Bank, the UK’s oldest merchant bank; Robert Maxwell’s alleged misappropriation of the Mirror Newspaper Group’s pension fund; the German FlowTex scandal, where non-existent machinery had been sold; and the Credit Lyonnais crisis in the early 1990s, following a disastrous expansion strategy and a failure of risk controls.

., 73 conflicts of interest in, 112–14 cardinal virtues, 37 Caritas in Veritate (Benedict), 6, 52 cash compensation, 132, 134 casino capitalism emergence of, 43 in investment banking, 3 speculative, 16, 93 categorical imperative, 34, 59, 69 Caterpillar, 48 Central Finance Board of the Methodist Church (CFB), 54, 59 chief executive officer (CEO), 116 Christianity, 52–4 Anglican Communion, 53 Methodist Church, 53 Roman Catholic Church, 53 Christian Old Testament, 34 Church Investors’ Group (CIG), 135 Church of England, 9, 53, 58 Citigroup, 19, 112 claiming credit, 134 clients confidential information, 120 conflicts of interest, 105–10 171 duty of care, 105 engagement letters, 122–3 fees, 115–18 financial restructuring, 119–20 hold-out value, 120–1 honesty, 101–5 margin-calls, 121 practical issues, 110–15 promises, 100–1 restructuring fees, 121–2 syndication, 118–22 truth, 101–5 Code of Ethics, 47–50, 147–51 for Goldman Sachs business principles, 46 in investment banking, 47–9 Revised, 47 collatoralised debt obligations (CDOs), 30, 42, 75 command economies, 13 commercial banking, 19–21, 25 communication within markets, 88 Companies Act 2006, 27 compensation cash, 132, 134 defined, 132 for employees, 135 internal issues on, 8 for junior bankers, 136 levels of, 132–3, 138 objectivity of, 144 political issues with, 6, 137 restrictions on, 10 competitors, 113 compliance corporate, 20 danger of, 20 frameworks for, 68, 146 regulatory, 18 requirements of, 6 confidential information, 120 conflicts of interest, 105–10, 158 with capital markets, 109–10 with corporate finance, 107–8 personal, 47 with pre-IPO financing, 110 with private equity, 110 172 Index conflicts of interest – continued reconciling, 68–70 of trusted advisers, 108–9 consequentialist ethics, 36–7, 42 corporate compliance, 20 Corporate/Compliance Social Responsibility (CSR), 7 corporate debt, 17 corporate entertainment, 128–9, 159 corporate finance, 107–8 Corporate Sustainability Committee, 152 Costa, Ken, 9 Cox, Christopher, 96–7 creative accounting, 12 credit crunch, 17 credit default swap (CDS), 71 credit downgrade, 17, 76 Credit Lyonnais, 12 creditors, restricted, 121 credit rating, 75–7 calculating, 76 inaccurate, 5 manipulating, 75, 156, 158 unreliability of, 17 credit rating agencies, 76 Crisis and Recovery (Williams), 53 culture, 46, 136, 151 customers, 69 Daily Telegraph, 84 Debtor in Possession finance (DIP finance), 80 debts bank, 82–3, 120 corporate, 17 junior, 118 rated, 77 senior, 118 sovereign, 17 deferred equity, 5 deferred shares, 133 Del Monte Foods Co., 107 deontological ethics, 34–6 stockholders, 41–2 trust, 40–1 derivative, 27, 30 dharma, 63–4 Dharma Indexes, 57 discounted cash flow (DCF), 27 discount rate, 27 discriminatory behaviour, 129–31 distribution, 15, 35, 66 Dodd–Frank Wall Street Reform and Consumer Protection Act, 25 dotcom crisis, 94 dotcom stocks, 17 Dow Jones, 55–6 downgrade credit, 17, 76 defined, 76 multi-notch, 17, 76 duties, see rights vs. duties duty-based ethics, 66–8 duty of care, 105 Dynegy, 8 Earnings Before Interest Tax Depreciation and Amortisation (EBITDA), 27 economic free-ride, 5, 21 economic reality, 137 effective tax rate (ETR), 140 emissions trading, 14 employees, compensation for, 135 Encyclical, 52 engagement letters, 122–3, 159 Enron, 8, 12, 17, 20, 76 enterprise value (EV), 27 entertainment adult, 56 corporate, 128–9, 159 sexist, 159 equity deferred, 5 private, 2–3, 12, 110 equity research, 88–9, 113–15 insider dealing and, 83–4 ethical behaviour, 38–9 Ethical Investment Advisory Group (EIAG), 53, 58 ethical investment banking, 145–7 ethical standards, 47 Index ethics consequentialist, 36–7, 42 deontological, 34–6 duty-based, 66–8 exceptions and, effects of, 89–90 financial crisis and, 4–8 in investment banking, 1 in moral philosophy, 1 performance and, 8–10 rights-based, 66–8 virtue, 37–8, 43–4 see also business ethics; Code of Ethics Ethics Helpline, 48 Ethics of Executive Remuneration: a Guide for Christian Investors, The, 135 European Commission, 89 European Exchange Rate Mechanism (ERM), 17 exceptions, 89 external regulations, 19, 31 fair dealing, 45 Fannie Mae, 43 Federal Home Loan Mortgage Corporation, 43 Federal National Mortgage Association, 43 fees, 115–18 advisory, 107, 116 restructuring of, 121–2 2 and 20, 13 fiduciary duties, 27–8 financial advisers, 109 Financial Conduct Authority (FCA), 26 financial crisis, business ethics during CDOs during, 90 CDSs during, 90 ethics during, 4–8, 12–34 investment banking and, necessity of, 14–15 market capitalism, 12–14 necessity of, 14–15 non-failure of, 21 positive impact of, 18 problems with, 15–17 reality of, 16 speculation in, 91 173 Financial Crisis Inquiry Commission, 76 Financial Policy Committee (FPC), 25 financial restructuring, 119–20 Financial Services Modernization Act, 19 Financial Stability Oversight Council, 25 firm price, 67 Four Noble Truths, 57 Freddie Mac, 43 free-ride defined, 26 economic, 5, 21 in investment banking, 24 FTSE, 55 Fuhs, William, 8 General Board of Pension and Health Benefits, 54, 59 German FlowTex, 12 Gift Aid, 141 Glass–Steagall Act, 19 Global Settlement, 113 golden parachute arrangements, 133 Golden Rule, 35, 150 Goldman Sachs, 7, 16, 45, 63 Business Principles, 45–6 charges against, 78 Code of Business Conduct and Ethics, 45, 68 Code of Ethics for, 47–8 Goldsmith, Lord, 27 government, 59 business ethics within, 60 guarantees of, 24 intervention by, 22–3 government bonds, 23 greed, 4–5 Green, Stephen, 8–9 gross revenues, 59 Hedge fund behaviour of, 12 failure of, 21 funds for, raising, 2 investment fund, as type of, 3 rules for, 133 174 Index Hennessy, Peter, 42 Her Majesty’s Revenue and Customs (HMRC), 140–1 high returns, 28, 110 Hinduism, 56–7 Hobbes, Thomas, 36 hold-out value, 120–1 honesty, see trust hospitality, 128–9 hot IPOs, 94 hot-stock IPOs, 94 HSBC, 9, 28, 152 Ijara, 55 implicit government guarantee, 22–3 Independent Commission on Banking, 25 inequitable rewards, 6 informal authorisation, 81, 98 Initial Public Offering (IPO), 7 of dotcom stocks, 17 hot, allocation of, 94 hot-stock, 94 insider dealings, 83–4, 155 equity research and, 83–4 ethics of, 66, 70 laws on, 84 legal prohibition on, 82 legal restrictions on, 10 legal status of, 82 legislation on, 74 restrictions on, 83 rules of, 82, 90 securities, 70 insider trading, 12 insolvency, 24–5 institutional greed, 4 integrated bank, 28 integrated investment banking, 2, 30, 67, 106, 108 interest payments, 59–60 interest rate, 60 internal ethical issues, 126–43 abuse of resources, 127–8 corporate entertainment, 128–9 discriminatory behaviour, 129–31 hospitality, 128–9 management behaviour, 131–2 remuneration, 132–9 tax, 139–41 internal review process, managing, 134 investment banking, 94 casino capitalism in, 3 Code of Ethics in, 47–9 commercial and, convergence of, 20–1 defined, 2 ethics in, 1 free-ride in, 24 integrated, 2, 30, 67, 108, 112 in market position, role of, 65–6 moral reasoning and, 38 necessity of, 14–15 non-failure of, 19–20 positive impact of, 18 recommendations in, 94–7 sector exclusions for, 58–9 investment banking adviser, 121 investment banking behaviours, 3 investment banking ethics committee, 151–3 investment bubbles, 95 investment fund, 3 investment grade bonds, 118 investment grade securities, 76 investment recommendations, 94 investments personal account, 128, 156 principal, 15, 28 proprietary, 29 IRS, 140 Islam, 54–5 Islamic banking, 6, 54–5 Jewish Scriptures, 34 Joint Advisory Committee on the Ethics of Investment (JACEI), 54 JP Morgan, 16 Judaism, 56 junior bankers, 139 junior debt, 118 junk bond, 118 “just war” approach, 38 Index Kant, Immanuel, 35, 69 karma, 57 Kerviel, Jérôme, 44, 80 Krishna, 57 Law Society, 19 Lazard International, 9 leading adviser, 41 Leeson, Nick, 12, 44, 81 legislative change, 25–6 Lehman Brothers, 5–6, 15, 21, 23, 31, 43, 76 lenders, 26, 131 lending, 59–60 leverage levels of, 25 over, 75, 80, 119 Levin, Carl, 17, 63–4, 68 light-touch regulations, 4 liquidity market, 95 orderly, 25 withdrawal of, 24 loan-to-own, 80 Locke, John, 34 London Inter-Bank Offered Rate (LIBOR), 23 London School of Economics, 43 London Stock Exchange, 65, 71, 84 long-term values, 147 Lords Grand Committee, 27 LTCM, 23 lying, 101 MacIntyre, Alasdair, 38 management behaviour, 131–2 margin-calls, 121 market abuse, 14, 70, 75, 86–8, 155 market announcements, 88 market behaviours, 74 market capitalism, 12–14 market communications, 88 market liquidity, 95 market maker defined, 65–7 investment bank as, 66 primary activities of, 65 175 market manipulation, 75 market position, role of, 104 market rate, 117 markets advisory, 73 capital, 73, 117–18, 158 communication within, 88 duties to support, 71–2 primary, 103 qualifying, 70, 82 secondary, 103 market trading, 41 Maxwell, Robert, 12 Meir, Asher, 56 mergers and acquisitions (M&As), 41, 79 Merkel, Angela, 93 Merrill Lynch, 8, 16 Methodism, 53 Methodist Central Finance Board, 59 Methodist Church, 54 Midrash, 56 Milken, Michael, 12 Mill, John Stuart, 36 Mirror Newspaper Group, 12 misleading behaviours, 86, 105 mis-selling of goods and services, 77–9, 155 modern capitalism, 54 moral-free zones, 31 moral hazard, 22, 70 moral philosophy, 1 moral reasoning, 38 moral relativism, 38–9, 49, 68 Morgan Stanley, 47 multi-notch downgrade, 17, 79 natural law, 34, 37 natural virtues, 37 necessity of investment banking, 14–15 New York Stock Exchange (NYSE), 65, 71 New York Times, 8 Noble Eightfold Path, 57 Nomura Group Code of Ethics, 47 normal market trading, 71 Northern Rock, 43 176 Index offer price, 64 off-market trading, 71–3, 90, 155 Olis, Jamie, 8 on-market trading, 70–1 oppressive regimes, 61 option value, 121 Orderly Liquidation Authority, 25 orderly liquidity, 25 out-of-pocket expenses, 127–8 over-leverage, 75, 80, 119, 158 overvalued securities, 155 patronage culture, 131, 142 Paulson, Henry M., 86 Paulson & Co., 78 “people-based” activity, 67 P:E ratio, 27 performance, 8–10 personal abuse, 159 personal account investments, 128, 156 personal account trading, 128 personal conflicts of interest, 45 pitching, 102, 159 Plato, 37 practical issues, 110–15 competitors, relationships with, 113 equity research, 113–15 pitching, 111 sell-side advisers, 111–13 pre-IPO financing, 110 prescriptive regulations, 31, 145 price tension, 79, 113 primary market, 103 prime-brokerage, 2 principal investment, 15, 28 private equity, 2–3, 12, 110 private trading, 94 Project Merlin, 133, 141 promises, 100–1 proprietary investment, 29 proprietary trading, 15, 25, 66, 150, 155 Prudential Regulation Authority (PRA), 26 public ownership, bonus pools in, 136–9 “pump and dump” strategy, 86 qualifying instruments, 70, 87 qualifying markets, 70, 82 quality-adjusted life year (QALY), 36 Quantitative Easing (QE), 23 Queen Elizabeth II, 42 Qu’ran, 54 rated debt, 77 rates attrition, 132 discount, 27 interest, 60 market, 117 tax, 140 rating agencies, 76 Rawls, John, 35, 136 recognised exchanges, 71 Regal Petroleum, 84 regulations banking, 16 compliance with, 28 external, 19, 31 light-touch, 4 prescriptive, 31, 145 regulatory changes and, 18–20 securities, 114 self, and impact on legislation, 19 regulatory compliance, 18 religion, business ethics in, 51–62 Buddhism, 56 Christianity, 52–4 Governments, 59 Hinduism, 56–7 interest payments, 59–60 Islam, 54–5 Judaism, 56 lending, 59–60 thresholds, 60 usury, 59–60 remuneration, 132–9 bonus pools in public ownership and, 136–9 claiming credit, 134 ethical issues with, 142–3 internal review process, managing, 134 1 Timothy 6:10, 135–6 Index research, 156 resources, abuse of, 127–8 restricted creditors, 120 restructuring of fees, 121–2 financial, 119–20 syndication and, 118–22 retail banks, 16 returns, 28, 156 Revised Code of Ethics, 47 right livelihood, 57 rights-based ethics, 66–8 rights vs. duties advisory vs. trading/capital markets, 73 conflict between, reconciling, 68–70 duty-based ethics, 66–8 off-market trading, ethical standards to, 71–2 on-market trading, ethical standards in, 70–1 opposing views of, 63–74 reconciling conflict between, 68–70 rights-based ethics, 66–8 Roman Catholic Church, 52 Royal Dutch Shell, 85 Sarbanes–Oxley Act, 20 Schwarzman, Stephen, 20 scope of ethical issues, 7–8 secondary market, 103 sector exclusions for investment banking, 58–9 securities investment grade, 76 issuing, 103–5 overvalued, 155 Securities and Exchange Commission (SEC), 7, 16 Goldman Sachs, charges against, 78 rating agencies, review by, 77 short-selling, review of, 96–7 securities insider dealing, 70 securities mis-selling, 77–9 securities regulations, 114 self-regulation, 19 sell recommendation, 115 177 sell-side advisers, 107, 111–13 Senate Permanent Subcommittee on Investigations, 46 senior debt, 118 sexist entertainment, 159 shareholders, 27–9 shares, deferred, 133 Shariah finance, 55 short-selling, 94–7, 154–5 Smith, Adam, 14, 35–6 social cohesion, 53 socially responsible investment (SRI), 56 Société Générale, 44, 80 solidarity, 53 Soros, George, 17 South Sea Bubble, 90 sovereign debt, 17 speculation, 91–4, 155 in financial crisis, 93 traditional views of, 91–3 speculative casino capitalism, 16, 91 spread, 21 stabilisation, 89 stock allocation, 94–7 stockholders, 41–2 stocks, dotcom, 17 Strange, Susan, 43 strategic issues with business ethics, 30–1 syndication, 119 and restructuring, 118–22 systemic risk, 24–5 Takeover Panel, 109 Talmud, 56 taxes, 139–41 tax optimisation, 158 tax rates, 140 tax structuring, 140 Terra Firma Capital Partners, 79, 112 Theory of Moral Sentiments, The (Smith), 14 3iG FCI Practitioners’ Report, 51 thresholds, 60 1 Timothy 6:10, 135–6 178 Index too big to fail concept, 21–7 ethical duties, and implicit Government guarantee, 22–3 ethical implications of, 26–7 in government, 22–3 insolvency, systemic risk and, 24–5 legislative change, 25–6 Lehman, failure of, 23 systemic risk, 24–5 toxic financial products, 5 trading abusive, 93 emissions, 14 insider, 12 market, 41 normal market, 71 off-market, 71–83, 90, 155 on-market, 70–1 personal account, 128 private, 94 proprietary, 15, 25, 66, 150, 155 unauthorised, 7 “trash and cash” strategy, 86 Travellers, 19 Treasury Select Committee, 26 Trinity Church, 53 Trouble with Markets, The (Bootle), 4 trust, 40, 53 trusted adviser, 108–9, 125 truth, 101–5 bait and switch, 102–3 misleading vs. lying, 101 securities, issuing, 103–5 2 and 20 fee, 13 UBS Investment Bank, 9 unauthorised trading, 7, 80–1, 155 unethical behaviour, 68 UK Alternative Investment Market, 89 UK Business Growth Fund, 133 UK Code of Practice, 141 UK Independent Banking Commission, 4, 22 United Methodist Church, 54, 59 United Methodist Investment Strategy Statement, 59 US Federal Reserve, 24, 25 US Financial Crisis Inquiry Commission, 4 US Open, 126 US Senate Permanent Subcommittee on Investigations, 64, 73 US Treasury Department, 132 universal banks, 2, 21, 28, 67 untoward movement, 85 usury, 59–60 utilitarian, 84 utilitarian ethics, 49, 84, 139 values, 9, 46, 119–21, 148 Vedanta, 57 victimless crime, 82 virtue ethics, 37–8, 43–4 virtues, 9, 34 virtuous behaviours, 37 Vishnu, 57 Volcker, Paul, 25 Volcker Rule, 2, 25 voting shareholders, 29 Wall Street, 12, 19, 53 Wall Street Journal, 20 Wealth of Nations, The (Smith), 14 Wesley, John, 53 Wharf, Canary, 18 Williams, Rowan, 53 Wimbledon, 127 WorldCom, 12, 17, 20, 76 write-off, 80 zakat, 55 zero-sum games, 118–22


pages: 241 words: 75,516

The Paradox of Choice: Why More Is Less by Barry Schwartz

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accounting loophole / creative accounting, attribution theory, Atul Gawande, availability heuristic, Cass Sunstein, Daniel Kahneman / Amos Tversky, endowment effect, framing effect, income per capita, job satisfaction, loss aversion, medical residency, mental accounting, Own Your Own Home, Pareto efficiency, positional goods, price anchoring, psychological pricing, RAND corporation, Richard Thaler, science of happiness, The Wealth of Nations by Adam Smith

How much this night at a concert is worth will depend on which account it is a part of. Forty dollars may be a lot to spend for a way to fill Friday evening, but not much to spend to find a mate. In sum, just how well this $40 night at the concert satisfies you will depend on how you do your accounting. People often talk jokingly about how “creative” accountants can make a corporate balance sheet look as good or as bad as they want it to look. Well, the point here is that we are all creative accountants when it comes to keeping our own psychological balance sheet. Frames and Prospects KAHNEMAN AND TVERSKY HAVE USED THEIR RESEARCH ON FRAMING and its effects to construct a general explanation of how we go about evaluating options and making decisions. They call it prospect theory. If you look at the diagram above, you see objective states of affairs along the horizontal axis—positive to the right of the vertical axis, and negative to the left of it.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

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accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Meriwether, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk-adjusted returns, risk/return, Satyajit Das, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

Rusnak even kept his forged documentation on his PC in a file called ‘Fake Docs’. 05_CH04.QXD 17/2/06 144 4:22 pm Page 144 Tr a d e r s , G u n s & M o n e y National Australia Bank In 2004, a group of currency option dealers lost $360 million. The traders used incorrect rates and false transactions to hide losses. These are only the known losses – the known knowns. There are losses that are never reported, hidden in reserves and by other creative accounting. In 1998, I was talking to the head of trading for a bank. ‘Thank God for the Asian You have no idea what we crisis,’ he said. I expressed surprise. The were able to write-off. bank had lost over $1 billion, blaming the collapse of Asian markets. ‘You have no idea what we were able to write-off,’ he said with a broad grin. Analysts breathed a sigh of relief at the $1 billion loss figure. It might have been worse.

DAS_C10.QXD 5/3/07 7:59 PM Page 291 9 C re d i t w h e re c re d i t i s d u e – f u n w i t h C D S a n d C D O 291 Hangovers After a period of strong returns, the CDO market hit an iceberg around 2000/2001. The losses were huge – one investor lost a cool $1,000 million plus. The reasons were clear. It was the credit cycle, stupid! You were investing in credit, what did you expect? Defaults increased sharply as the US slipped into recession and creative accounting compounded the losses. CDOs are also massively leveraged: if you buy the 2% equity in a CDO, then you are 50 times leveraged, compared to the 10 to 12 times that a normal bank uses. Losses and leverage are not good bedfellows. Sound, highly-rated companies also found reefs. Asbestos liability and the Californian electricity deregulation claimed victims. As the credit cycle turned, the arbitrage CDOs were hard hit.

Then, Parmalat happened. European bankers blushed: they muttered about ‘American influence’ and DAS_C10.QXD 5/3/07 7:59 PM Page 299 9 C re d i t w h e re c re d i t i s d u e – f u n w i t h C D S a n d C D O 299 ‘American investment banks’. A central player in the Parmalat road crash was a company – ‘Buconero’ (meaning ‘black hole’ in Italian). Buconero was used to conceal a spectacular piece of creative accounting. Parmalat had been a common firm in CDO portfolios. Diversification of credit risk demanded firms in different industries and from different countries, and Italian food companies were hard to find. The Parmalat default resulted in losses to many CDO investors. Many STCDO tranches were downgraded as investors and dealers struggled with ‘jump to default’. Parmalat exposed an interesting use of credit derivatives: the company had invested in self-referenced credit linked notes.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

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accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, John Meriwether, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, Paul Samuelson, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, survivorship bias, the market place, transaction costs, Y2K, yield curve, zero-sum game

The potential distorting economic effects of tax changes and their impact on the way investors, managers, and employees behave are numerous: • If changes in the tax structure produce an after-tax return ranking different from the before-tax ranking, the economy’s resources are allocated in a suboptimal way. • Tax changes alter the way returns are delivered to investors. For example, a financial manager would have an incentive to convert dividend returns into capital-gain returns if the tax on capital gains were reduced in a significant way. The incentive to do so would also generate some creative accounting behavior at the corporate level as well as an increase in resources devoted to the financial engineering of after-tax returns. • Altering the relative attractiveness of the way returns are delivered to investors also alters the investment composition of individual corporations. Changes in corporate and investor behavior are most likely noticeable during inflection points in the tax code. If tax-rate changes have the incentive effects I believe they do, the impact of the changes—in the form of behavioral shifts—should be visible to the naked eye.

The continued investment shifts away from dividends and toward capital gains during the 1990s, as well as the surge in corporate debt, are well documented today. But unlike most, I happen to think these shifts were in large part tax-induced—and this has far reaching implications. During the previous decade, corporate managers, as noted, had an incentive to convert dividends into capital gains. The incentive to do so generated some creative accounting behavior as well as an increase in resources 76 UNDERSTANDING ASSET ALLOCATION devoted to engineering after-tax returns rather than generating before-tax returns. In this environment, employers and employees at times found it worthwhile to develop “creative” compensation schemes. Not only were many contracts written in a way that generated capital gains, the contracts also rewarded managers for generating capital gains.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

Krieger’s figures turned out to be faulty by $80 million but, rather than admit its profitability had disappeared, the bank tried all manner of ‘creative’ accounting practices to cover over the discrepancy before finally having to admit that it had been wrong. Notice the elements in this tale. First, unregulated over-the-counter trading permits all sorts of financial innovation and shady practices which nevertheless make a lot of money. Secondly, the bank supports such practices, even though they don’t understand them (the mathematics in particular), because they are often so profitable relative to their core business and hence improve share value. Third, creative accounting enters the picture, and fourth, the valuation of assets for accounting practices is extremely uncertain in volatile markets. Lastly, it was driven by a young trader who had skills that seemed to put him in a league of his own.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

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accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

. ________________________________________ HOW TO VALUE SHARES 37  To compare cash flow with earnings, the ideal approach is to compare the cash flow statement with the income statement in the annual report and accounts, which is usually available on a listed company’s website. If net cash generated from operating activities on the cash flow statement is materially less than net operating profit on the income statement, there has been creative accounting at work, as Jim Slater put it in his book The Zulu Principle. Earnings per share divided by dividend per share provides dividend cover, a figure that you will be able to calculate from data provided on individual companies in the business section of Times Online. Dividend cover says how easily a company can pay a dividend from profits. It only applies to those stocks that pay dividends, which excludes some of the small growth stocks.

The Act, named after its authors, Democrat senator Paul Sarbanes and Republican congressman Michael Oxley, mainly affects a company’s external auditors, internal accounting professionals and IT providers. The Act met the recognised need for stricter auditing controls. At Enron, the Arthur Andersen team in charge of the company audit was found to have destroyed documents to conceal the truth, which showed a need for greater controls. Sarbanes–Oxley aims to reinforce the independent status of external auditors and requires procedures that stamp out creative accounting. Financial reports should be auditable and supported by data, as well as proof against alteration, with systems in place to detect this. Under Sarbanes–Oxley, accountants cannot mix auditing with certain activities, including actuarial or legal services, and bookkeeping. Auditors are supervised by a Public Company Accounting Oversight Board that is answerable to the Securities and Exchange Commission (SEC), the US regulator of financial markets.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

As what some experts believe is a further consequence of the crisis, by a circuitous but discernible route, several governments collapsed amid political uprising in the Middle East during the first half of 2011.1 The broader ramifications of the crisis for the global economy, its effect on the emerging BRIC economies (Brazil, Russia, India, and China), for example, are yet to be fully discerned. This is a crisis of legitimacy as much as economics, provoked by the contrast between the resources that governments have devoted to rescuing banks and on the other hand, their subsequent willingness to make dramatic and socially corrosive cuts in public expenditures. Many financial institutions have been saved from insolvency by a combination of public finds and creative accounting, but households and individuals tend to be granted no such leniency. The crisis has polarized every society that has been affected by it, giving birth to a meme—the 99 percent—that is inextricably tied to rising resentment and hostility toward Wall Street. Faced with these realities, it is little wonder that a war has been declared on the banking system through political protests that have embraced as wide a spectrum of society as the original crisis itself.

The euro convergence criteria (also known as the Maastricht criteria) based on Article 121(1) of the European Community Treaty, were designed to ensure that the Eurozone’s constituent national economies were sufficiently in line to prevent the single monetary policy from working in favor of some member states and not others. The criteria were the result of compromise between French and German negotiators (Eichengreen 2008: 220), and they were subject to creative accounting (Aldcroft 2001). Just before the euro’s launch in 1999 (as a virtual currency, with exchange rates fixed: notes and coins came three years later), the debt/GDP of Germany (61.3 percent) was too high, and in Belgium (122.2 percent) was more than twice as high as the entry criteria demanded, whereas that of the Netherlands ran at 70.4 percent. France’s deficit/GDP was at exactly 3 percent, with Germany not far behind at 2.7 percent (Aldcroft 2001: 275).

From the neochartalist perspective, as discussed in Chapter 3, this means that any government spending not covered by taxes requires external financing (Wray 2006: 92–93). To some experts and political actors, this was (and remains) a virtue, preventing states from using lax monetary policy to fund excessive spending. Such an argument misses three important points, however. First, just as most governments engaged in creative accounting to meet the convergence criteria, some would continue to do so to disguise high levels of borrowing. This appears to be what happened with Greece, where the government consistently misrepresented the size of the public debt (Tsoukalis 2012). In October 2009, the incoming Papandreou government revised the country’s deficit figures, from 5.4 percent to around 12 percent of GDP. After the dissolution of the Statistical Service of Greece for producing false statistics, the figure was revised again—to 15.5 percent—in mid-2010.


pages: 411 words: 127,755

Advertisers at Work by Tracy Tuten

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accounting loophole / creative accounting, centre right, crowdsourcing, follow your passion, Mark Zuckerberg, QR code, side project, Silicon Valley, Skype, Steve Jobs, the High Line

I didn’t have a publisher nor any hope that such a book would be welcome on the shelves of bookstores. But that was beside the point. I had to write this book—mostly to get it out of my system. I wrote it out of an obsession. Once I had the idea in my head, I literally could not stop working on it. After I had finished, I showed the first manuscript around to about forty people I admired. These were just folks in the business. I showed it to creatives, account folks, directors. Every one of them was kind enough to read the entire thing and give me criticism. I am still in debt to those people. After that, it was just a matter of getting it into the hands of the right publisher. Not knowing the first thing about the process, I just wandered over to the Barnes & Noble in downtown Minneapolis and bought some books on how to write book proposals and other how-to manuals.

Tuten: Can you give me an example of a brand that you pushed? I know you might not be able to given client confidentiality and things like that, but if you’ve got a story you can share, please do. Credle: Well, you know, there’s a brand that we all pushed together. It was M&Ms. In 1995, my partner Steve Rutter and I were told that we were going to run the M&Ms account. We were kind of bummed because it didn’t seem like a very creative account. We went out to talk to the client. At the time, the client was Paul Michaels, who’s now the CEO. In one conversation, we realized he was on our side. He was ready to go. He wanted to push this brand to a place that the company, quite frankly, probably wasn’t ready [to be in]. Or if they were ready to go, they hadn’t thought to go there. Together we recreated the M&Ms characters and went on to give them unique personalities.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, basic income, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, Plutocrats, plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

It’s all part of the process of creative destruction that has fuelled the incredible economic growth of the last 250 years. Yet, in the new financialised capitalism, the creativity lay not in long-term investment in goods and services, as it had done in productionist capitalism, but in finding ways of outsourcing activities to cheap labour providers, in sweating existing assets for more income, speculating on price differences in different places and price movements and engaging in tax avoidance and creative accounting. Though finding cheaper labour is often claimed to increase efficiency, it just reduces the amount of demand in the economy because workers have less to spend. Efficiency increases require reorganisation of the ways of doing things so as to increase output per worker, and it is this that accounts for capitalism’s success, not cutting wage bills and making people poorer. As a result of these developments, inequalities widened in almost every industrialised country: top salaries rocketed and the rich cornered much of the growth in income via dividends on shares and capital gains.28 Meanwhile the taxes they paid fell, and benefits for lower-income people were reduced.

Vodafone’s takeover of Mannesman yielded $640 million in fees for intermediaries.87 These fee revenues are typically concentrated at the top. In Goldman Sachs, around 8% of net revenue was claimed by partners who made up about 1% of the firm’s 25,000 workforce, receiving bonuses of nearly $7 million in 2005. Then there is the support force of public relations people, consultants, marketing experts, lawyers, creative accountants and tax avoidance experts, all of whom are in a strong position to reap large rewards. In the financial sector in Britain, the number of intermediaries has been estimated at 15,000.88 These largely anonymous members of the so-called working rich far outnumber chief executive officers (CEOs) and senior executive directors (c.600), let alone footballers and celebrities. CEOs’ pay: because they can You have to realise: if I had been paid 50 per cent more, I would not have done it better.


pages: 234 words: 53,078

The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer by Dean Baker

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accounting loophole / creative accounting, affirmative action, Asian financial crisis, Bretton Woods, corporate governance, declining real wages, full employment, index fund, Jeff Bezos, medical malpractice, medical residency, money market fund, offshore financial centre, price discrimination, risk tolerance, spread of share-ownership

This conservative nanny state attitude appears in both policy debates on enforcement and also in efforts to equalize tax burdens across categories of goods and services. Enforcing Tax Laws: Why the Rest of Us Should Care According to the IRS, in 2001 (the most recent year examined) the government lost more than $340 billion in uncollected taxes.2 This is money that is actually owed to the federal government – not money that taxpayers have been able to legally avoid paying through creative accounting or the clever use of loopholes. This is a substantial sum. It is approximately 20 times what the federal government spends on Temporary Assistance to Needy Families (TANF) each year, the main welfare program for poor families. It is 55 times 2 See “Tax Cheating Has Gone Up, Two Federal Studies Find,” New York Times, February 15, 2006. 84 what the federal government spends on Head Start and almost 100 times annual foreign aid spending for Sub-Saharan Africa.


pages: 306 words: 58,984

Mastering Spreadsheet Bookkeeping by Peter Marshall

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accounting loophole / creative accounting, double entry bookkeeping

‘Small’ companies, however, are exempt from filing one with the Registrar of Companies. They also only have to file a modified version of their balance sheet and do not have to file a profit and loss account at all. Medium-sized companies also have some concessions, in that a modified form of profit and loss account and accompanying notes is allowed. Limitations of published accounts • Creative accounting can hide negative information. • Not all the relevant facts have to be disclosed. Internal accounts Internal accounts or management accounts are those prepared only for use within the company. Unlike published accounts, they are not required by law to be set out in a certain way. However, it pays to keep them as consistent as possible with the published accounts, so that the latter can be drawn up just by adapting the internal accounts slightly.


pages: 190 words: 61,970

Life You Can Save: Acting Now to End World Poverty by Peter Singer

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accounting loophole / creative accounting, Branko Milanovic, Cass Sunstein, clean water, end world poverty, experimental economics, illegal immigration, Martin Wolf, microcredit, Peter Singer: altruism, pre–internet, purchasing power parity, randomized controlled trial, Richard Thaler, Silicon Valley, Thomas Malthus, ultimatum game, union organizing

Yet Charity Navigator’s evaluations don’t answer Karnofsky and Hassenfeld’s key question: How do you know whether the charity is helping the people it’s intended to help? One reason the figures don’t necessarily tell the full story is that they are taken from forms the charities themselves complete and send to the tax authorities. No one checks the forms, and the breakdown between administrative and program expenses can be massaged with a little creative accounting. For example, staff working in an organization’s head office may do some administrative work on an aid program as well as performing more routine office tasks, and in that case their time may be assigned largely to the aid program, so that a high proportion of their salaries is itemized as part of the aid budget, rather than as office expenses. A more significant problem with focusing on how much of its income a charity spends on administration, however, is that this figure tells you nothing at all about the impact the charity is having.

Working the Street: What You Need to Know About Life on Wall Street by Erik Banks

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accounting loophole / creative accounting, borderless world, corporate governance, estate planning, fixed income, greed is good, old-boy network, risk/return, rolodex, telemarketer

The head of investment banking will make the case for trying to take 75 percent of X based on deals, revenues, bottom-line earnings, market share, talent retention, and so on. The head of trading will make the case for trying to take 75 percent of X based on the same rationale, the head of retail sales will do the same, and so forth. In fact, it is well known that every executive manager always wants 75 percent of X for his or her division. During these intense shouting matches, creative accounting often surfaces—accounting in which the sum of each division’s earnings is far, far, far greater than the firm’s total earnings. It’s interesting how such numerate folks can come up with such silly figures. After shouting themselves to exhaustion, the executive managers each walk away with some portion of X (which we will term x). Then come the divisional shouting matches. Within investment banking, the head of M&A will fight for 75 percent of x, the head of corporate finance will fight for 75 percent of x, the head of private equity will fight for the same, and so on.


pages: 192 words: 72,822

Freedom Without Borders by Hoyt L. Barber

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, banking crisis, diversification, El Camino Real, estate planning, fiat currency, financial independence, fixed income, high net worth, illegal immigration, interest rate swap, money market fund, obamacare, offshore financial centre, passive income, quantitative easing, reserve currency, road to serfdom, selective serotonin reuptake inhibitor (SSRI), too big to fail

Let’s take a look at some of the financial challenges and threats we face and then have a glance at what financial opportunities may come out of current and future trends that we can possibly exploit ourselves, that is, while we still have the option. The Economics of Sovereign Investing 39 We have a banking crisis in the United States and Europe that just doesn’t want to go away. Many of the financial institutions in these Western countries are bloated with toxic waste that’s listed as “assets” on their books. These outfits engage in creative accounting to disguise their true anemic financial state, including the reality that many are actually insolvent and others are posting multibillion-dollar losses. Putting these problems aside, the mother of all inventions is the derivative. The derivatives market was introduced by the Chicago Board of Trade in 1973, and it has rapidly grown to be a real ticking stink bomb. Once used as a hedge against other investment risks to protect assets against changes in value, in recent times, derivatives have been used creatively by financial institutions to wager on interest rates, foreign currencies, stocks, bonds, and swaps of floating-rate debt for fixed-rate financing costs, all being horsetraded among banks, brokerage firms, hedge funds, and brokers.


pages: 224 words: 64,156

You Are Not a Gadget by Jaron Lanier

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1960s counterculture, accounting loophole / creative accounting, additive manufacturing, Albert Einstein, call centre, cloud computing, commoditize, crowdsourcing, death of newspapers, digital Maoism, Douglas Hofstadter, Extropian, follow your passion, hive mind, Internet Archive, Jaron Lanier, jimmy wales, John Conway, John von Neumann, Kevin Kelly, Long Term Capital Management, Network effects, new economy, packet switching, PageRank, pattern recognition, Ponzi scheme, Ray Kurzweil, Richard Stallman, Silicon Valley, Silicon Valley startup, slashdot, social graph, stem cell, Steve Jobs, Stewart Brand, Ted Nelson, telemarketer, telepresence, The Wisdom of Crowds, trickle-down economics, Turing test, Vernor Vinge, Whole Earth Catalog

People are meaner in slums; mob rule and vigilantism are commonplace. If there is a trace of “slumming” in the way that many privileged young people embrace current online culture, it is perhaps an echo of 1960s counterculture. It’s true that the record companies have not helped themselves. They have made a public fuss about suing the most sympathetic people, snooped obnoxiously, and so on. Furthermore, there’s a long history of sleaze, corruption, creative accounting, and price fixing in the music business. Dreams Still Die Hard By 2008, some of the leading lights of the open culture movement started to acknowledge the obvious, which is that not everyone has benefited from the movement. A decade ago we all assumed, or at least hoped, that the net would bring so many benefits to so many people that those unfortunates who weren’t being paid for what they used to do would end up doing even better by finding new ways to get paid.

Kill Your Friends by John Niven

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accounting loophole / creative accounting, Etonian, hiring and firing, illegal immigration, nuclear winter, sensible shoes, Stephen Hawking

But, a golden rule of showbiz states, whenever there is a massive outpouring of collective emotion among the lower classes—Christmas, the World Cup, summer holidays—there are records to be sold and money to be made. “Surely we want to be cashing in on all this?” Ross says. “A tribute LP? A charity thing?” Trellick thinks for a bit. “Nah,” he says finally, “too much scrutiny. It’d be impossible to skim any cash off. Maybe in a year. Anniversary thing…” He’s probably right, but it’s a pity because in the past, thanks to a little creative accounting, we’ve been very successful at skimming cash off of a couple of other charity records we’ve been involved in. “Yeah, not worth the grief,” I say. “I dunno,” Parker-Hall says, lighting a cigarette, “the sales would still count towards our market share, wouldn’t they?” “Good point,” Trellick admits, nodding. “Yeah, but,” I start to say, but Parker-Hall has the floor. He’s talking about licensing, about appropriate tracks for a nation in mourning, about marketing.


pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

The idea, one must assume, was to ensure that no angry taxpayer would spot the executives and go punch them in the nose. Mark-to-Nothing One reason why mortgage-backed securities were written down so fast and by so much was that the accounting rules in force made the write-downs self-reinforcing. U.S. government agencies had long worried that the rules were too lax and facilitated creative accounting. During the dot-com bubble, many companies had used strange methods to calculate the value of their assets, and the energy-trading company Enron had managed to trick investors by entrusting that task to complex mathematical models. To address this situation, the U.S. financial authorities now required mark-to-market accounting. Under this model, which has been used by companies in the United States since 1993, an asset is not valued according to the price it was once bought for, the price it is expected to be sold for in the future, or the return it yields in the meantime.


pages: 258 words: 73,109

The (Honest) Truth About Dishonesty: How We Lie to Everyone, Especially Ourselves by Dan Ariely

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accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Broken windows theory, cashless society, clean water, cognitive dissonance, Credit Default Swap, Donald Trump, fudge factor, new economy, Richard Feynman, Richard Feynman, Schrödinger's Cat, shareholder value, Steve Jobs, Walter Mischel

I was spending the week at some technology-related conference, and one night over drinks I got to meet John Perry Barlow. I knew John as the erstwhile lyricist for the Grateful Dead, but during our chat I discovered that he had also been working as a consultant for a few companies—including Enron. In case you weren’t paying attention in 2001, the basic story of the fall of the Wall Street darling went something like this: Through a series of creative accounting tricks—helped along by the blind eye of consultants, rating agencies, the company’s board, and the now-defunct accounting firm Arthur Andersen, Enron rose to great financial heights only to come crashing down when its actions could no longer be concealed. Stockholders lost their investments, retirement plans evaporated, thousands of employees lost their jobs, and the company went bankrupt.

Mastering Book-Keeping: A Complete Guide to the Principles and Practice of Business Accounting by Peter Marshall

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accounting loophole / creative accounting, asset allocation, double entry bookkeeping, information retrieval, intangible asset, the market place

Directors’ report A Directors’ report must accompany all published accounts. ‘Small’ companies, however, are exempt from filing one with the Registrar of Companies; also they only have to file a modified version of their balance sheet, and do not have to file a profit and loss account at all. Medium-sized companies also have some concessions, in that a modified form of profit and loss account and accompanying notes is allowed. Limitations of published accounts . Creative accounting can hide negative information. . Not all the relevant facts have to be disclosed. Internal accounts Internal accounts or management accounts are those prepared only for use within the company. Unlike published accounts, they are not required by law to be set out in a certain way. However, it pays to keep them as consistent as possible with the published accounts, so that the latter can be drawn up just by adapting the internal accounts slightly. 136 55 Revenue accounts of limited companies A ledger account Remember, the trading, profit and loss account is first and foremost a ledger account, so we should begin by treating it as such.

Economic Gangsters: Corruption, Violence, and the Poverty of Nations by Raymond Fisman, Edward Miguel

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, barriers to entry, blood diamonds, clean water, colonial rule, congestion charging, crossover SUV, Donald Davies, European colonialism, failed state, feminist movement, George Akerlof, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Live Aid, mass immigration, megacity, oil rush, prediction markets, random walk, Scramble for Africa, selection bias, Silicon Valley, South China Sea, unemployed young men

We would argue that this episode only reinforces our main point: not only did shady government deals come to light quickly (suggesting that Canada has effective civil institutions for catching this sort of thing), the scandal generated public outrage that helped to topple the Liberals. Corrupt Canadian officials are usually held accountable; corrupt Italians are not. One might make similar claims for the Jack Abramoff influence-peddling scandal in the U.S. Congress, or the creative accounting at Enron, for that matter. In fact, in the 2006 mid-term Congressional elections, a broad public backlash was already in evidence, as voters listed corruption and influence-peddling in government as one of their primary concerns. The fact that these abuses were discovered and justice was served is evidence of a healthy set of national norms and legal institutions. 95 CH A PTER F O U R Because diplomatic privileges are only relevant outside of the home country, the other way to collect evidence is to see how U.S. diplomats behave abroad.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

So if a competitive industry did result in output being set by the intersection of the demand curve and the supply curve, then at the collective level the competitive industry must be producing where marginal cost exceeds marginal revenue. Rather than maximizing profits, as economists argue firms do, the additional output – that produced past the point where marginal revenue equals marginal cost at the industry level – must be produced at a loss. This paradox means that the individual firm and the market level aspects of the model of perfect competition are inconsistent. Creative accounting For the assertion that perfect competition results in a higher level of output at a lower price than monopoly to be correct, then in the aggregate, the individually rational profit-maximizing behavior of perfectly competitive firms must lead to a collectively irrational outcome. This would be OK if the theory actually admitted this – as do the theories of Cournot and Bertrand competition13 – but the Marshallian model taught to undergraduates claims instead that equating marginal cost and marginal revenue maximizes profits for the competitive firm.

commodity and commodity-power commodity production: mystery of; Marx’s analysis of; theories of comparative statics method competition see also perfect competition completeness complexity theory Computational Theory, laws of computers, training in conjectural variation conservation laws constant technology, assumption of constructionism consumer, individual, in economic theory consumer demand; theory of consumer sector, and debt consumption continuity conventions, formation of convexity Copenhagen school of quantum theory costs: fixed; variable Cotis, Jean-Philippe Cournot and Bertrand competition Cournot-Nash model creative accounting credit; analysis of; creation of; nature of; pure credit economy; role of credit crunch Credit Impulse curves see demand curves, Engel curves, indifference curves and supply curves cycles; cyclical nature of capitalism see also business cycle Davidson, Paul Debreu, Gerard; Theory of Value debt; absence of, from macroeconomic models; acceleration of; analysis of; and aggregate demand; banks profit from; correlated with unemployment; creation of; empirical dynamics of; further endebtment of debtors; growth of; limitation of; private (dominant role of); rate of change of; reduction of; relation to national income (GDP) see debt to GDP ratio; repayment of (non-repayment of); role of; zero target see also Jubilee policy debt bubble debt deflation; hypothesis; in USA; modeling of debt-financed speculation debt to GDP ratio Debtwatch deflation deleveraging demand, affected by rising income see also Law of Demand demand constraints demand curves; downward-sloping; for labor; Hicksian compensated; individual, determining of demand management Demiralp, S.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

Management at the energy giant Enron lashed out at short sellers, but the short sellers, like James Chanos at Kynikos Associates, understood there was something deeply wrong with its accounting. Essentially, Enron had set up off-balance sheet entities to which it “sold” its failing projects at a hefty profit, thus creating the appearance of both profitability and growth, even though the reality was just the opposite. It was the short sellers who made Enron’s stock price plummet and forced the company to shut down even while the firm’s traditional bankers supported its creative accounting with yet more creative loans. As Chanos later wrote, defending the short seller’s role as professional skeptic: “We spoke with a number of analysts at various Wall Street firms to discuss Enron and its valuation. We were struck by how many of them conceded that there was no way to analyze Enron, but that investing in Enron was instead a ‘trust me’ story. One analyst, while admitting that Enron was a ‘black box’ regarding profits, said that, as long as Enron delivered, who was he to argue?”


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Mayew (2008) found that analysts who had recently issued a strong buy recommendation for a firm were more than twice as likely to be allowed to ask a conference call question as analysts with strong sell recommendations. Analysts who had given favorable assessments of the company were allowed to ask their questions earlier than those who had given unfavorable ones. THE POWER OF THE CORPORATE ELITE 131 Paying Well for Lies, Gambles and Creative Accounting Top executives will routinely and inevitably possess information not available to investors. In these situations, changes in short run share prices will not imply a similar change in long run shareholder value. —Michael Jensen and Kevin Murphy, 2004 The large amounts of stocks and stock options that top managers get, ostensibly to align their interests with those of shareholders, create a massive insider trading problem.


pages: 346 words: 101,763

Confessions of a Microfinance Heretic by Hugh Sinclair

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accounting loophole / creative accounting, Bernie Madoff, colonial exploitation, en.wikipedia.org, end world poverty, financial innovation, financial intermediation, Gini coefficient, high net worth, illegal immigration, inventory management, microcredit, Northern Rock, peer-to-peer lending, pirate software, Ponzi scheme, principal–agent problem, profit motive

The main sections “edited,” (that is, that were censored/omitted) were: Comments about the remaining high overhead costs (principally salaries) at head office, and the use of client savings being an illegal practice with no one accepting clear responsibility. Regarding self-sustainability: [World Relief] Baltimore is ultimately picking up the bill for the poor performance/excessive overhead of FCC, and that the cost management has been achieved with some creative accounting that shifted costs around rather than cutting them. The issue of wide salary discrepancies unrelated to productivity was also “omitted.” An entire paragraph from the original minutes was deleted, discussing the rather important issue of competition and fund raising. . . . I feel that our donors, largely [World Relief] Baltimore, have a right to hear of the reality of the company they have so diligently funded over the last decade.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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accounting loophole / creative accounting, Bretton Woods, business climate, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Excessive deficit procedure (including one-off proceeds relative to the allocation of mobile phone licences (UMTS)). AMECO data deficit class: data at current prices. Figure 2 General government deficit 1990–8 (percentages of GDP) – admittedly with grave exceptions as regards public debt levels. The 1990s saw often steep declines in budget deficits, albeit with the numbers massaged in certain instances by acts of ‘creative accounting’. Such a violation of the spirit of the Treaty provisions was more than regrettable in the run-up to monetary union. As later became clear, it created precedents that significantly weakened discipline in applying the rules of the Stability and Growth Pact. All of this should not, however, detract from the appreciable efforts that were made to improve budgetary positions before the start of monetary union.9 As figure 2 shows, the reductions in budget deficits achieved during 1990–98 were impressive.


pages: 340 words: 91,387

Stealth of Nations by Robert Neuwirth

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accounting loophole / creative accounting, big-box store, British Empire, call centre, collective bargaining, corporate governance, full employment, Hernando de Soto, illegal immigration, income inequality, informal economy, invisible hand, Jane Jacobs, jitney, joint-stock company, Joseph Schumpeter, megacity, microcredit, New Urbanism, pirate software, profit motive, Shenzhen was a fishing village, Simon Kuznets, special economic zone, The Wealth of Nations by Adam Smith, thinkpad, upwardly mobile, Vilfredo Pareto, yellow journalism

If they paid for some food and offered him a couple of kwai (“a few bucks,” in Chinese slang) on the side, he would help them organize their trading forays. David had started in trade in the auto parts market in Nnewi, a city in the east of Nigeria. He knew nothing about clothes. But selling is selling and buying is buying, and he knew from experience that his profit would come from the increment between the two. Over time, he learned that, with a tiny bit of creative accounting, he could work in a little extra profit for himself on every deal. “If the factory gives you something for eight naira, you tell the person who hired you that it is nine,” he said, and you pocket the addition. At approximately a hundred and fifty naira to the dollar, this amounts to less than a penny on each item. Then, over time, he discovered that he could expect to earn an equal increment from the other side of the equation.


pages: 364 words: 101,193

Six Degrees: Our Future on a Hotter Planet by Mark Lynas

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accounting loophole / creative accounting, Climatic Research Unit, Deng Xiaoping, failed state, ice-free Arctic, Intergovernmental Panel on Climate Change (IPCC), Live Aid, nuclear winter, oil shale / tar sands, peak oil, price stability, South China Sea, supervolcano

These ‘free goods’, which include all the ecosystem services which support the human species, are considered financially valueless and missed out from conventional economic accounting. The standard ‘gross domestic product’ (GDP) measuring stick of national economic success tots up the value of production and consumption without considering the sustainability of the process. In a master stroke of creative accounting, conventional economic theory therefore counts the depletion of resources as an accumulation of wealth. This is analogous to an individual spending all of the money in their current account and counting it as ‘income’-an absurdity, but one which underpins our entire economy. Bearing this societal dysfunction in mind, it is perhaps rather unfair to blame individuals for not facing up to climate change when the whole weight of economy and society works effectively in preventing them from doing so.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

Even after people have a high enough income to meet their basic needs such as enough to eat and an adequate home, acquiring more goods but also importantly more services, more variety and greater quality, continues to increase well-being. The change in the character of the increases in GDP as economies grow rich is important—services of all kinds and features of products that depend on intellect or creativity account for a growing share of our increasingly weightless economies. People continue to want the economy to grow. No politicians will win elections by calling for the economy to shrink or even stand still. However, it’s widely believed that markets have made society worse, in a moral sense. What’s more, as the first part of this book set out, we face the acute dilemmas posed by the fact that we’ve not reached a clear threshold at which we can say people have Enough.


pages: 311 words: 99,699

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

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accounting loophole / creative accounting, asset-backed security, bank run, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business climate, collateralized debt obligation, commoditize, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, easy for humans, difficult for computers, financial innovation, fixed income, housing crisis, interest rate derivative, interest rate swap, locking in a profit, Long Term Capital Management, McMansion, money market fund, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, Satyajit Das, short selling, sovereign wealth fund, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

The news stunned the markets and corporate world. Enron had been a poster child for innovation and free-market competition. It employed 22,000, had reported revenues of $101 billion in 2000, and had been named as “America’s most innovative company” by Fortune magazine for six years in a row. However, in the autumn of 2001, it emerged that those stunning profits had been a mirage; the company had used creative accounting tricks to inflate its results, seemingly with the knowledge of its banks and accountants. When those schemes came to light, confidence in Enron collapsed, and the company filed for what was then the largest bankruptcy in American corporate history. The news delivered a shocking blow to JPMorgan Chase. During the 1990s, Chase had developed a tight relationship with Enron, lending the company vast sums, underwriting its bonds, and creating a series of structured financial products and schemes in collaboration with the company, including some of those with which Enron had inflated its results.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

Realizing that such ad hoc measures were not enough to stop the complete collapse of the economy, the government set up a bad bank, the National Asset Management Agency (NAMA), to take the toxic assets off the banks’ books. The end result of all this activity was a full guarantee of the assets of the entire banking system: a total bailout. NAMA bought the assets at above book value with taxpayer money, sold shares of NAMA back to the banks, and they, in turn, used these shares as collateral to get liquidity from the ECB. In short, creative accounting and a helpful government enabled the banks to walk away scot-free from the carnage they had caused. Ireland was now shut out of international markets and placed at the mercy of the IMF-ECB-EC troika. Since then, over 70 billion euros have been injected into its banking system—divided by a population of some 4.5 million. Some 47 billion euros disappeared into Anglo-Irish alone, never to be seen again.8 The “assets” the taxpayer purchased via NAMA are not coming back anytime soon.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

In a sense, the euro represents a modern version of the gold standard in which countries must make sacrifices to retain their exchange rate. And those sacrifices are hard to make in a democratic country. Greece was the first country to get into trouble. It had joined the euro in 2001, slightly after the other PIGS countries, thanks to its long history of higher-than-average inflation rates and large budget deficits. And although it appeared to qualify under the deficit rules, it has subsequently admitted that creative accounting had been used to massage the figures. The country may have hoped that joining the single currency would impose an external discipline. But it failed to knuckle down to the task of being competitive; by 2010, its costs had risen 25 per cent relative to the rest of the euro-zone.9 This had resulted in current-account deficits of more than 10 per cent of GDP in each of 2006, 2007 and 2008. In October 2009, the newly elected Prime Minister, George Papandreou, admitted that the fiscal deficit for the year would be 12.5 per cent of GDP, and not the 6 per cent it had earlier reported.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, double helix, factory automation, financial deregulation, financial innovation, fixed income, full employment, game design, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, invisible hand, job automation, John Markoff, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, mass immigration, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

But that prosperity has masked, and even encouraged, some truly egregious problems. It was, clearly, the obsession with share price that encouraged many companies to start inflating quarterly earnings. From 1992 to 2005 the number of firms issuing earnings “restatements”—essentially, admissions that previously reported earnings were bogus—jumped from six a year18 to nearly a hundred a month.19 And the term earnings fraud doesn’t do justice to creative accounting undertaken at firms such as WorldCom, which padded earnings by nine billion dollars, or Enron, which concealed twenty-three billion dollars in liabilities in “special purpose entities.” In hindsight, however, it’s plain that these scandals were only a prologue. The real catastrophe would come as Wall Street’s new mentality of capital efficiency—of delivering high returns by whatever means necessary—made the jump, like a virus, into the mind of the consumer.


pages: 327 words: 90,542

The Age of Stagnation by Satyajit Das

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9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, labour mobility, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Since 2009, US share buybacks totaling nearly US$2 trillion, frequently financed by low-cost debt, have boosted share prices and now make up an increasing proportion of the value of stocks traded. Since the crisis, governments too have resorted to financial engineering to deal with economic problems. The EU experimented with complex finance techniques, originally used for repackaging residential mortgages, to finance bailouts of troubled member countries and ambitious infrastructure investment programs. The aim was to overcome the lack of available funds. Governments use creative accounting. In the period prior to the introduction of the euro, Italy and Spain used derivative transactions, allegedly to understate their debt levels. Now, governments use off-balance sheet structures and often delayed payments to massage the level of borrowings. Governments have consistently understated liabilities, such as unfinanced commitments for future healthcare, aged care, and retirement benefits.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

In practice, financial institutions and stock markets are generally a long way from achieving this ideal of perfection. They are often sources of chronic instability, waves of speculation, and bubbles. To be sure, it is not a simple task to find the best possible use for each unit of capital around the world, or even within the borders of a single country. What is more, “short-termism” and “creative accounting” are sometimes the shortest path to maximizing the immediate private return on capital. Whatever institutional imperfections may exist, however, it is clear that systems of financial intermediation have played a central and irreplaceable role in the history of economic development. The process has always involved a very large number of actors, not just banks and formal financial markets: for example, in the eighteenth and nineteenth centuries, notaries played a central role in bringing investors together with entrepreneurs in need of financing, such as Père Goriot with his pasta factories and César Birotteau with his desire to invest in real estate.14 It is important to state clearly that the notion of marginal productivity of capital is defined independently of the institutions and rules—or absence of rules—that define the capital-labor split in a given society.

., 600n29 Challenges wealth rankings, 442, 624n18 Charles X, 613n21 Chavagneux, Christian, 628n56 China: income and, 62–­64, 66; growth in, 82, 99, 329, 429; income in­e­qual­ity in, 326–­327, 610n27, 646n42; assets of, 463, 627–­628n50; taxes in, 491, 492; regulation in, 535–­536 Civil Code, 362–­366, 614n23 Clark, Gregory, 591n15 Class designations, 250–­252 Climate change, 567–­569 Clinton, Bill, 309 Cobb, Charles, 599n18 Cobb-­Douglas production function, 217–­220, 599n17, 600n25 Cole, Adam, 607n42 Colonial empires, 120–­121 Colonial era, 44–­45 Colqhoun, Patrick, 230 Colson, Clément, 57, 591n19, 617n10 Columbia, 327, 329 “Common utility,” 480, 630n20 Communist Manifesto, The (Marx), 8–­9, 225 Communist movements, 8, 10 Competition: pure and perfect, 30, 212, 214, 312–­313, 332, 639–­640n48; fiscal, 208, 221, 355–­356, 373, 375, 422, 496, 562; inheritance and unrestricted, 423–­424 Concentration effects vs. volume effects, 410 Condorcet, marquis de, 363, 654n56 Confiscatory tax rates, 473; executive income and, 505–­508; fiscal progressivity and, 512–­514 Conservative revolution, 98, 138–­139, 333, 511, 549 Consumption taxes, 494, 496, 651n37 Continental blocs, 59–­61, 68 Contributive justification, 524–­525 Convergence, 21–­22, 27, 571; forces favoring, 69–­71; global, 72 Corporations, 156, 203, 332; taxation on profits of, 560–­561, 650–­651n33, 651n36 Creative accounting, 214 Crédit Suisse, 437, 623n10 Cross-­investments, 194 Crouzet, François, 591n11 Cumulative growth, law of, 74–­77 Cumulative returns, law of, 75, 77 Cyprus banking crisis, 519, 553–­556 Damages (TV series), 419 Data: importance of, 2–­3; national income as, 11–­13, 56–­59, 584n18; on income, 16–­17; on wealth, 17–­20; geo­graph­i­cal and historical boundaries of, 27–­30; developing countries and, 58–­59 Daumond, Adeline, 582n33 Davies, James B., 638n8 Debreu, Claude, 654n56 Debt.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

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accounting loophole / creative accounting, active measures, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Powell Memorandum, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

In the country with the second-highest CEO pay levels—Switzerland—CEOs are paid on average around three-fifths of what American executives earn.42 Pay is not only lower in other rich nations; it also takes different forms. American CEOs, for example, receive much of their pay in short-term stock options, which not only lack transparency for stockholders but are also highly lucrative for CEOs who can create quick stock market gains through job cuts, restructuring, or creative accounting. Stock options are used in other nations, too, but they are much more often linked to long-term rather than short-term performance, as well as to firm performance relative to industry norms.43 Thus, for instance, options can be designed so that when the rising price of oil drives up the share price of energy companies, CEOs receive extra compensation only if their firm’s performance exceeds industry averages.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Obviously, there isn't much time left over after the clients are serviced to do serious corporate and industry research. One thing analysts rarely do is second-guess the numbers that firms report to their shareholders, which are certified by outside auditors, typically a brand-name global accounting firm. Accountancy may have a reputation for dullness, but it can be the scene of great creativity. Accountants are notoriously eager to say kind things about the companies they audit; after all, the subject of the audit pays the fees. Notorious bankrupts of the PLAYERS 1980s, from Drexel Burnham Lambert to BCCI to several hundred S&Ls, were repeatedly given clean bills of health by prominent accounting firms — the very outside auditors who are supposed to provide an external check on a firm's numerical self-representation.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

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accounting loophole / creative accounting, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, global reserve currency, Guggenheim Bilbao, Gunnar Myrdal, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, new economy, New Urbanism, Occupy movement, peak oil, phenotype, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, short selling, Silicon Valley, special economic zone, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

We see their representatives gliding through the streets in limousines and populating all the upmarket restaurants and penthouses in all the major global cities of the world – New York, London, Frankfurt, Tokyo, São Paulo, Sydney … These are the so-called creative cities, where creativity is measured by how successfully the ‘masters of the universe’ can suck the living life out of the global economy to support a class whose one aim is to compound its own already immense wealth and power. New York City has a huge concentration of creative talent – creative accountants and tax lawyers, creative financiers armed with glitteringly new financial instruments, creative manipulators of information, creative hustlers and sellers of snake oil, creative media consultants, all of which makes it a wondrous place to study every single fetish that capital can construct. The fact that the only class in the world to benefit from the so-called economic recovery (such as it is) after 2009 is the top 1 per cent, and that there is no visible protest on the part of the rest of the population left behind in the economic doldrums, is testimony to the success of their project.


pages: 418 words: 128,965

The Master Switch: The Rise and Fall of Information Empires by Tim Wu

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accounting loophole / creative accounting, Alfred Russel Wallace, Apple II, barriers to entry, British Empire, Burning Man, Cass Sunstein, Clayton Christensen, commoditize, corporate raider, creative destruction, don't be evil, Douglas Engelbart, Douglas Engelbart, Howard Rheingold, Hush-A-Phone, informal economy, intermodal, Internet Archive, invention of movable type, invention of the telephone, invisible hand, Jane Jacobs, John Markoff, Joseph Schumpeter, Menlo Park, open economy, packet switching, PageRank, profit motive, road to serfdom, Robert Bork, Robert Metcalfe, Ronald Coase, sexual politics, shareholder value, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Telecommunications Act of 1996, The Chicago School, The Death and Life of Great American Cities, the market place, The Wisdom of Crowds, too big to fail, Upton Sinclair, urban planning, zero-sum game

.), held dozens of media concerns and other properties under a single roof. This vision would spread throughout the 1980s and 1990s to become the dominant industrial organization for movies, music, magazines, newspapers, book publishing—all forms of content once called “leisure.” There is no understanding communications, or the American and global culture industry, without understanding the conglomerate. Yet this industrial form, born originally to assist in creative accounting on the part of public corporations, remains surprisingly difficult to characterize, let alone justify. It is a hydra-headed creature whose operations and advantages have mystified lawyers and economists alike. As a 1981 paper in the Bell Journal of Economics put it: “Despite extensive research, the motives for conglomerate mergers are still largely unknown.”4 Nonetheless, the conglomerate is the dominant organizational form for information industries of the late twentieth and early twenty-first centuries; here and abroad it is inseparable from the production of the lion’s share of culture.


pages: 493 words: 145,326

Fire and Steam: A New History of the Railways in Britain by Christian Wolmar

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accounting loophole / creative accounting, Beeching cuts, carbon footprint, collective bargaining, computer age, Corn Laws, creative destruction, cross-subsidies, financial independence, hiring and firing, James Watt: steam engine, joint-stock company, railway mania, rising living standards, Silicon Valley, South Sea Bubble, strikebreaker, union organizing, upwardly mobile, working poor, yield management

He treated these businesses as his personal fiefdom and his ability to accumulate so much power so quickly within the railways demonstrated that the money men of the City, rather than local mercantile interests, were beginning to control the industry. It is unclear whether Hudson’s early success with the York & North Midland, where he quickly turned deficits into profits, was based on genuine commercial activity or whether it was merely his particular brand of ‘creative accounting’, a term that could have been invented for him. However, even if he did start off honestly, his modus operandi soon became utterly corrupt. His method was to put forward a range of proposals for new railways and amalgamations with the ultimate intention of creating a controlled monopoly. He was a wheeler-dealer sine qua non, who promoted new railways, bought out existing ones at bargain prices and, having become an MP, used his political position to push his interests and destroy those of his rivals.


pages: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

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accounting loophole / creative accounting, agricultural Revolution, barriers to entry, cognitive bias, creative destruction, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, endogenous growth, Ernest Rutherford, experimental economics, financial innovation, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, Kenneth Arrow, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, peer-to-peer, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, transaction costs, Y2K

Martin’s has some idea of how to price a book to avoid losing money, this suggests Norton made, at the very least, on the order of $1 million. We also know that its contract with the government called upon the publisher to donate its “profits” to charity – and we know that it did, in fact, “donate $600,000 to support the study of emergency preparedness and terrorism prevention.”19 Because the entire Hollywood movie industry has managed by creative accounting to avoid earning a profit during its entire history, we can be forgiven if we suspect that Norton earned a bit more than the $600,000 it admitted to. We have already mentioned that it took us a few years to revise this book for final publication. The delay was probably bad for our reputation as professional book writers, but the three years that passed between the first draft and the revised edition allowed for a number of our wild conjectures to be tested by facts.


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

Issing admitted that as regards the criterion of public sector indebtedness – the ratio of government debt to GDP – ‘the progress made, if [there was any] at all, was much more modest’ than the figures governments announced relating to their budget deficits. Total national debt figures of the aspirant eurozone countries remained high, even though annual deficits seemed to be kept low, by official figures, in the 1990s. Rather ominously, he also admitted that the deficit figures had been ‘massaged in certain instances by acts of “creative accounting”’.38 Issing’s gravest fears about monetary union, however, were the lack of political union accompanying it, a reservation shared by many German technocrats and politicians during the 1990s. In two important areas, ‘regulation of the labour market, on the one hand, and government tax and spending, on the other’, national governments had been allowed sole discretion. Some of the fears which Issing expressed about monetary union were articulated before the euro was born.


pages: 523 words: 159,884

The Great Railroad Revolution by Christian Wolmar

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1919 Motor Transport Corps convoy, accounting loophole / creative accounting, banking crisis, Bay Area Rapid Transit, big-box store, collective bargaining, cross-subsidies, intermodal, James Watt: steam engine, Ponzi scheme, quantitative easing, railway mania, Ralph Waldo Emerson, refrigerator car, Silicon Valley, strikebreaker, too big to fail, trade route, transcontinental railway, traveling salesman, union organizing, urban sprawl

Worse, the top three executives—Saunders; Alfred Perelman, his counterpart on the Central; and the finance director, David Bevan— spent more time plotting against each other than running the company. Possibly because he realized that the railroad business could not make any money, Saunders embarked on a massive round of acquisitions, resulting in the Penn Central owning an extraordinary 186 subsidiaries.17 Moreover, he ran the company on the basis of what was kindly described as “creative accountancy” but was really outright fraud. He consistently over-valued assets and undervalued liabilities and boosted profits through paper deals to convince Wall Street that the company was profitable. It was in fact losing $1 million per day and started borrowing money at 10 percent interest, when even in the good times it was earning 5 percent: “Never, in recent times, had the books of a large corporation been so thoroughly cooked.”18 It could not last and it didn’t.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

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accounting loophole / creative accounting, Airbnb, basic income, Ben Bernanke: helicopter money, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, creative destruction, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, fixed income, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, information asymmetry, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, liberal capitalism, market bubble, means of production, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, The Future of Employment, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, Vilfredo Pareto, winner-take-all economy, Wolfgang Streeck

When his Brussels tenure came to an end Monti earned his living as an advisor to, among others, Goldman Sachs, the greatest junk-bond producer of them all. Lukas Papademos, now prime minister of Greece, was president of the Greek Central Bank when the country secured, through falsified statistics, its access to the monetary union and thus to unlimited credit at German rates of interest. Help with the creative accounting of the Greek national balance sheet was provided by the European division of none other than Goldman Sachs – to be headed shortly thereafter by Mario Draghi, who is now of course president of the European Central Bank. The three of them should get along well. CONTINENTAL IMBALANCES Meanwhile, it is now quite clear that the democratic states of the capitalist world have not one sovereign, but two: their people, below, and the international ‘markets’ above.

Principles of Protocol Design by Robin Sharp

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accounting loophole / creative accounting, business process, discrete time, fault tolerance, finite state, Gödel, Escher, Bach, information retrieval, loose coupling, packet switching, RFC: Request For Comment, stochastic process, x509 certificate

Given this particular DIT, the name: {C=GB, L=Cambridge, O=Slush Funding Ltd., CN=Ivor Fiddle} would uniquely identify the person known as Ivor Fiddle, and so in fact would the name: {C=GB, O=Slush Funding Ltd., CN=Ivor Fiddle} Of course, this only works if Slush Funding Ltd. have no Ivor Fiddles working for them at other localities than Cambridge or in other organisational units than the Creative Accounting department. A particular example of the use of X.500 names is in systems for handling electronic mail according to the ISO MOTIS and ITU-T MHS standards [191], where they are usually referred to as O/R names. O/R stands for Originator/Recipient, reflecting the fact that they identify the sender or receiver of the electronic mail. 7.1 General Principles of Naming and Addressing 197 req( nam ) Client entity Name server resp( addr ) Fig. 7.2 Obtaining an address from a name server.


pages: 518 words: 147,036

The Fissured Workplace by David Weil

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accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business process, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, Y2K, yield management

See Seligman (1995, 418–437). Williamson (1985) notes: “Indeed, one would expect, and events have borne the expectation out, that the ‘go-go’ conglomerates would become unglued when adversity set in—as it did in the late 1960s. Those firms found it necessary to reorganize along M-form lines (divisional structures), to simplify their product lines, or to do both” (289). 31. The merger wave had been enhanced by creative accounting techniques that allowed companies to hide some of the costs associated with mergers and acquisitions activity, making the acquisitions look more attractive than they often were. This led to investigations by the Federal Trade Commission and the Securities and Exchange Commission (SEC). As a result of growing public and investor concern with the issue, Congress passed the Williams Act in 1968, requiring disclosure of cash tender offers resulting in changes of ownership of more than 10% (later lowered to greater than 5%).


pages: 432 words: 127,985

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, margin call, market bubble, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, short selling, The Market for Lemons, transaction costs

This predisposed Wall to believe industry complaints about aggressive regulators. Because Wall’s team viewed Gray and his people as the enemy and as vindictive, they believed control frauds’ claims about vindictive field regulators. The control frauds’ only expertise was in manipulating people. Wall’s team would be lambs to the slaughter if control frauds existed in huge numbers. Wall’s efforts at deregulation and creative accounting, like Pratt’s, improved the environment for control frauds and weakened the Bank Board’s ability to fight them. Wall’s actions exposed the nation and his reputation to two other risks. He weakened supervision by removing the nation’s top financial regulator (Selby) from the region that most needed tougher supervision and placing Barclay in charge. The loss of supervisory talent would have been enormous in any case, but Wall greatly compounded the loss by removing Selby in an attempt to placate Speaker Wright.


pages: 552 words: 168,518

MacroWikinomics: Rebooting Business and the World by Don Tapscott, Anthony D. Williams

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accounting loophole / creative accounting, airport security, Andrew Keen, augmented reality, Ayatollah Khomeini, barriers to entry, bioinformatics, Bretton Woods, business climate, business process, car-free, carbon footprint, citizen journalism, Clayton Christensen, clean water, Climategate, Climatic Research Unit, cloud computing, collaborative editing, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, commoditize, corporate governance, corporate social responsibility, creative destruction, crowdsourcing, death of newspapers, demographic transition, distributed generation, don't be evil, en.wikipedia.org, energy security, energy transition, Exxon Valdez, failed state, fault tolerance, financial innovation, Galaxy Zoo, game design, global village, Google Earth, Hans Rosling, hive mind, Home mortgage interest deduction, interchangeable parts, Internet of things, invention of movable type, Isaac Newton, James Watt: steam engine, Jaron Lanier, jimmy wales, Joseph Schumpeter, Julian Assange, Kevin Kelly, knowledge economy, knowledge worker, Marc Andreessen, Marshall McLuhan, mass immigration, medical bankruptcy, megacity, mortgage tax deduction, Netflix Prize, new economy, Nicholas Carr, oil shock, old-boy network, online collectivism, open borders, open economy, pattern recognition, peer-to-peer lending, personalized medicine, Ray Kurzweil, RFID, ride hailing / ride sharing, Ronald Reagan, Rubik’s Cube, scientific mainstream, shareholder value, Silicon Valley, Skype, smart grid, smart meter, social graph, social web, software patent, Steve Jobs, text mining, the scientific method, The Wisdom of Crowds, transaction costs, transfer pricing, University of East Anglia, urban sprawl, value at risk, WikiLeaks, X Prize, young professional, Zipcar

Integrity Years ago corporate social responsibility advocates coined the optimistic adage, “you do well by doing good.” They were trying to make a business case for good corporate behavior. Few were persuaded. The main reason for the lack of success in winning support for corporate responsibility was that the “doing well by doing good” adage was not true. Many companies did well by being bad. Creative accounting, unfair labor practices, corporate secrecy, monopolistic behaviors, externalizing costs to society, and shady environmental behaviors could help beef up the bottom line. Not to mention that corporate executives themselves could “do well” by paying astronomical bonuses, even while their companies were struggling. But all that is changing. Because the previously discussed principles are driving success, increasingly the “doing well by doing good” adage is becoming true.


pages: 598 words: 169,194

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

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accounting loophole / creative accounting, airport security, Albert Einstein, banking crisis, Bernie Madoff, break the buck, British Empire, centralized clearinghouse, collapse of Lehman Brothers, computerized trading, corporate raider, diversified portfolio, Donald Trump, dumpster diving, Edward Thorp, financial deregulation, financial thriller, fixed income, forensic accounting, Gordon Gekko, index fund, locking in a profit, mail merge, merger arbitrage, money market fund, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, random walk, Renaissance Technologies, riskless arbitrage, Ronald Reagan, short selling, Small Order Execution System, source of truth, sovereign wealth fund, too big to fail, transaction costs, traveling salesman

Regulators would argue that, as a lawyer and licenced securities professional, he could not have failed to discover the crime if he had been doing his job properly. Peter had signing authority for one of the firm’s bank accounts until about 1985. Although he was not an accountant by training or a partner in the firm, he could have gotten access to the firm’s general ledgers and might have seen the creative accounting and emergency loans arranged during the cash crisis in 2005 and early 2006, despite the awful distraction of his son’s illness during those frantic months. And, as chief operating officer of Madoff’s investment advisory business, he arguably should have made it his business to know what was happening on the seventeenth floor, however much his brother tried to shoo him away. Like everyone else in the family, Peter was the target of lawsuits by Madoff victims.


pages: 670 words: 194,502

The Intelligent Investor (Collins Business Essentials) by Benjamin Graham, Jason Zweig

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3Com Palm IPO, accounting loophole / creative accounting, air freight, Andrei Shleifer, asset allocation, buy low sell high, capital asset pricing model, corporate governance, corporate raider, Daniel Kahneman / Amos Tversky, diversified portfolio, Eugene Fama: efficient market hypothesis, George Santayana, hiring and firing, index fund, intangible asset, Isaac Newton, Long Term Capital Management, market bubble, merger arbitrage, money market fund, new economy, passive investing, price stability, Ralph Waldo Emerson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, sharing economy, short selling, Silicon Valley, South Sea Bubble, Steve Jobs, survivorship bias, the market place, the rule of 72, transaction costs, tulip mania, VA Linux, Vanguard fund, Y2K, Yogi Berra

Securities and Exchange Commission that Informix had committed accounting fraud, the company later restated its revenues, wiping away $244 million in such “sales.” This case is a keen reminder of the importance of reading the fine print with a skeptical eye. I am indebted to Martin Fridson for suggesting this example. 8 Martin Fridson and Fernando Alvarez, Financial Statement Analysis: A Practitioner’s Guide (John Wiley & Sons, New York, 2002); Charles W. Mulford and Eugene E. Comiskey, The Financial Numbers Game: Detecting Creative Accounting Practices (John Wiley & Sons, New York, 2002); Howard Schilit, Financial Shenanigans (McGraw-Hill, New York, 2002). Benjamin Graham’s own book, The Interpretation of Financial Statements (HarperBusiness, New York, 1998 reprint of 1937 edition), remains an excellent brief introduction to the basic principles of earnings and expenses, assets and liabilities. * Of Graham’s four examples, only Emerson Electric still exists in the same form.

The Sum of All Fears by Tom Clancy

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accounting loophole / creative accounting, airport security, Benoit Mandelbrot, British Empire, colonial exploitation, complexity theory, cuban missile crisis, demand response, financial independence, index card, mandelbrot fractal, trade route, uranium enrichment

"Because we've been running around in circles trying to confirm it," Jack answered. "And?" "Al, we've been unable to confirm directly. There are indications that the KGB is up to something. There seems to be a very discreet operation in Germany, looking for some lost tactical nukes." "Good Lord!" Fellows noted. "What do you mean by "lost"?" "We're not sure. If it ties in with SPINNAKER, well, maybe there's been some creative accounting on the part of the Soviet Army." "Your opinion?" "I don't know, guys, I just don't know. Our analysis people are about evenly divided - those that are willing to offer an opinion." "We know their army isn't real happy," Fellows said slowly. "The loss of funding, loss of prestige, loss of units and billets but that unhappy?" "Pleasant thought," Trent added. "A power-struggle in a country with all those nukes How reliable has SPINNAKER been?"


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

I was spending the week at some technology-related conference, and one night over drinks I got to meet John Perry Barlow. I knew John as the erstwhile lyricist for the Grateful Dead, but during our chat I discovered that he had also been working as a consultant for a few companies—including Enron. In case you weren’t paying attention in 2001, the basic story of the fall of the Wall Street darling went something like this: Through a series of creative accounting tricks—helped along by the blind eye of consultants, rating agencies, the company’s board, and the now-defunct accounting firm Arthur Andersen, Enron rose to great financial heights only to come crashing down when its actions could no longer be concealed. Stockholders lost their investments, retirement plans evaporated, thousands of employees lost their jobs, and the company went bankrupt.