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Strategies & Market Trends : Mr. Pink's Picks: selected event-driven value investments -- Ignore unavailable to you. Want to Upgrade?

To: Mr. Pink who wrote (3292)	9/26/1998 8:51:00 PM
From: Gary105	Read Replies (3) \| Respond to of 18998

did a little more digging. according to fp statements they adjust the value of i/o strips on balance sheet every quarter and they are recording interest on the i/os (sounds like it is one of the first things being paid not the last). the value of i/os on their balance sheet is about equal to shareholder equity. if your short scenario is based on the i/os what makes you think they will suddenly be forced to take a big charge against the value of the i/os?? also shouldnt the pending drop in interest rates work in their favor in securitizing their loan portfolio (lend at high interest rate, borrow at low one)?? thanks, gary

To: Mr. Pink who wrote (3292)	9/27/1998 12:09:00 PM
From: Cube	Read Replies (2) \| Respond to of 18998

Mr. Pink, Let's look at Boeing (BA) as almost the opposite of how FP keeps the books. When Boeing gets a firm order from an airline, they don't book the revenue. When they build the plane, they don't book the revenue. When then airplane is delivered, they don't book the revenue. When the check clears from the airline or leasing company, THEN they book the revenue. Then they subtract expenses for a quarter, and that is their profits. Accounting is pretty simple when you run your business that way, isn't it. Cube

To: Mr. Pink who wrote (3292)	9/27/1998 7:20:00 PM
From: RockyBalboa	Respond to of 18998

Accounting methods and equity of FP remembers me of something... In the late 80ies, there has been an infamous case of revenue recognition, sale of a company and subsequent meltdown. Maybe anyone remembers the fate of "Souvereign Leasing", an U.K leasing company sold to the nowadays biggest Austrian Bank "Bank Austria". Preceeding to the sale of Souverein, an independent audit has been carried out by Price Waterhouse. The resulting proposed price for the entity should reflect the net present value of the assets. The derived assets of S. mostly consisted of the lease backed contracts and from what I know almost no "excess" goodwill. The contracts have been discounted using the swap yield curve for the fixed ones, allowing for a spread based on average default probabilities. The meltdown happened when it turned out that either penalties for early redemption of lease contracts were not enforceable or, when a lessee defaulted, the residual values of the physical assets underlying the in-default contracts had no (computer equipment, special leases) or little residual value. The first led to the reduction of NPV, as the discounted margin wa lo longer to be realized, and the latter grounded the company's equity in short times. As a result of it the predecessor of Bank Austria had to inject some more $200M to keep the company alive which was near to the original purchase price. Finally, also "Länderbank" was whacked on this and other failures and taken over by a big S&L forming the red-flagged "Bank Austria"... (Eventually, Bank Austria won an arbitration against the former auditor in 1998, 9 years after the disaster). The FP case seems to be cooked that way. Recognition of future earnings based on present default probabilities could be unwise in a meltdown scenario. Bottomine: In my opinion, a financial institution of the FP likes is vulnerable if it is very exposed to an adverse selection problem: - good and brave debtors, who made their fortunes in Las Vegas or the stockmarket pay back their debt without penalties, erasing NPV of FP balance sheets. - the real scamsters let FP hold the bag and with the trouble of regaining money by exploiting their assets, which may be more or less liquid? C. D.: Presently, there is no short position in FP, as I did not engage in financials so far, with the exception of JPM.