Friday, November 21, 2008

Schwartzman on the Crisis

"First, we need to finalize a common set of accounting principles across borders. ... Third, you need full transparency for financial statements. ... Fourth, you need full disclosure of all financial to the regulator. .. Sixth, we need to abolish mark-to-market accounting for hard-to-value assets. There is now emerging a broad realization that mark-to-market accounting has exacerbated the current crisis. ... If we are to sweep a vast array of financial institutions into the net of a single regulator, then that regulator has to be able to regulate not by promulgating a blizzard of ever more complex rules, but by enunciating a set of guiding principles. If these principles are coupled with strong disclosure and oversight, they will give the regulator the flexibility needed to cope with an ever-changing financial landscape, and to provide a clear direction for the regulated institutions. ... We must not create a new system of regulation that throttles innovation through the ever-increasing complexity of its rules", my emphasis, Stephen Schwartzman (SS) at the WSJ, 4 November 2008.

"Blackstone Group Chief Executive [SS] recently put forth a seven-point plan aimed at helping avoid another financial crisis. Among his tonics: abolish mark-to-maket accounting, which requires financial institutions to value hard-to-price assets. ... Blackstone will likely have to write down its $1.25 billion Freescale equity investment by about 50%. And other large Blackstone holdings may soon join Freescale underwater", my emphasis, Peter Lattman (PL) at the WSJ, 6 November 2008.

"Blackstone Group CEO Steve Schwartzman doesn't believe that financial companies should be forced to put market prices on hard-to-value assets during difficult periods like the current depressing stretch. ... In the third quarter, Blackstone took average markdowns of 8% on its private-equity funds and 10% on its realty funds. Those values, however, probably aren't realistic, given a drop in public-equity markets and the depressed prices of bonds issued by several companies in which Blackstone's funds hold big equity stakes. ... Blackstone went public at $31 in June 2007 and Barron's has been bearish on the stock since then. ... Blackstone defends its valuations, saying that most of the companies in which it invests are doing well and that it shouldn't be bound by values of comparable public companies, given the long time horizon of its holdings. ... Schwartzman wrote an op-ed column in the Wall Street Journal last week in which he urged 'full transparency' of financial statements. That's ironic because Blackstone in probably the most opaque of the major asset managers. ... Blackstone's $6 billion equity interest in Hilton probably has little value now. Blackstone is a sizable owner of office buildings because of its 2007 deal to buy Sam Zell's Equity Office Properties. ... It's unkown whether Blackstone's accountants will force it to take a harder look at its investment carrying values when the company prepares its year-end financial report", Andrew Barry (AB) at Barron's, 10 November 2008.

"I hear a lot about substituting international accounting standards, which are perceived as principles-based, for U.S. Generally Accepted Accounting Principles, which is recognized as being rules-based, but I do not hear anything about how GAAP got that way. GAAP was originally principles-based, but shifted to being rules based as a consequence of the principles not being defined tightly enough for courts to determine whether they were being complied with. International standards are in the process of making the same shift, as is evident from rules that are being issued in the form of interpretations", John Ferguson (JF) letter to the WSJ, 14 November 2008.

"Schwartzman proposes some useful principles for reforming the financial system, but in citing lessons learned he omits the most important one. That lesson is that the principals must have some 'skin in the game' until the game is ended. Underwriters must not be allowed to pawn off the risk in the underwriting decisions they make", Frank Nicolai (FN) letter to the WSJ, 14 November 2008.

I've said before, I wish the WSJ would stop printing this junk. I am not part of SS's mark-to-market broad realization. What do I think SS wants? To do whatever he wants and toothless regulators which can be infinitely cowed. We don't need this. We need: more financial institution bankruptcies and uncompromised federal prosecutors who put big league miscreants in prison. SS, you're a lucky guy. You took Blackstone public near the top of the market. You're a billionaire. You lucky guy. Be happy, now take your money off the table and get lost.

PL, be more careful. How do you know what SS's plan is aimed at? I think it's aimed at covering his tush and maximizing his ability to game the system.

AB, I would consider it a favor, if you convinced your fellows at the WSJ, Barron's sister publication, to stop giving SS any more space to peddle his nonsense. According to Blackstone's 2007 Form 10-K, it paid Deloitte & Touche (D&T) $157 million last year for various services, including those to its real estate funds. We'll see how aggressive D&T is in having Blackstone write its assets down.

I agree with JF.

Wall Street is a scam. People there get paid like sucessful entrepreneurs and are just hired help. Imagine, Lloyd Blankfein thinks he did something worth about $70 million in 2007. What, pray tell? What capital have of Wall Streeters at risk? More importantly, whose capital have they put at risk?

I've posted on Schwartzman and Blackstone before:


K T Cat said...

Actually, first you need to stop borrowing and spending ...


Anonymous said...

At the rate that Wall Street is going they are not going to have any capital to put at risk... which is good because then volatility will go down...

I love accounting wars... it may turn out that accountants win the battle of the credit crisis of '07-'08...