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Since I am not a great believer in academic dissertations...I tell funny stories instead
The cause of so many recent financial disasters relates directly to the asymmetrical use and arbitrage of accounting principles amoung different jurisdictions. Here are some notes fromrecent accounting classes at Goldman Sachs, Enron, et al
Lesson: 1. How to create an asset? Set up lots of sub-entities. Create a certified paper transaction from magical objects with nine PhDs from MIT. Call the paper a hard paper asset (HPA) Concurrently, record off- balance sheet liabilities in your sub - entities. Then record certified paper -HPA- on balance sheet of the primary entity. Presto...Primary entity books billions in profits. Everyone Celebrates.
Lesson 2Take your Company's solid balance sheet and borrow cash to create more assets (HPA). Pay Bankers big fees and use your asset (HPA) with the Bankers as Collateral Security. Set up trading rooms to show liquidity of HPAs to auditors. Very Popular security. Pay more Big Fees. Everyone Celebrates.
Lesson 3 Bankers need cash and borrow it from the Central Bank based on their solid balance sheet and Collateral Security. Central Bank creates money with the super magic journal entry. They have no assets so they debit a black box (negative equity). Money (IOU) created by the journal entry is lent the Bankers. Everyone Celebrates.
Lesson 4 The system works. Assets are growing. More HPAs created. Volumes and liquidity soar. Everyone is creating paper. Everyone has money. Everyone celebrates.
Lesson 5The Department of Justice (DoJ) is at the gates…prepare for early retirement teaching the next generation of Math PhDs at MIT. Fondly recall past celebrations in lectures.
Well… for some reason this doesn’t seem so funny.
T. A. McNeil
First Financial Insights Inc. Toronto, ON
Winston Churchill “a joke is a very serious thing”