[MBA Two or Three Things] Fundraising, Liabilities, and Equity in Financial Report Analysis

Posen was fortunate to study at the Institute of International Business Management at National Taiwan University, commonly known as the National Taiwan University MBA.
Due to the seriousness of the class and the detailed notes, the attached tuition is not cheap.

So I decided to keep the two or three things I made in the past for future generations to laugh at,
But after all, it is a long time ago, if the content is wrong, please correct me.

This class first introduces the relationship between financing activities, liabilities and equity.

At the beginning, it is unavoidable to introduce A=L+E and then start the discussion of various details

Corporate financing

Corporate financing will generate load L, which can be divided into "internal financing" and "external financing".

Liabilities may arise from "production and sales operations" or "financial operations".

"Short-term transaction credit risk indicators" and "long-term transaction credit risk indicators" are the key points of observation.

Which one to observe depends on the needs of the object, if poor data is observed,

We will further interpret other relevant data to interpret whether the company has other trends, rather than make an immediate judgment.

But all the "indicators" and "ratios" are not as high or low.

Don't interpret "mechanically", look at the meaning behind it, and observe the "wholeness".

The Lehman Brothers Story

In the classroom, the "defeat like a mountain" effect was mentioned, taking Lehman Brothers as an example.

At that time, its liability L was much greater than that of asset A, and all creditors did not plan to renew the loan after maturity.

Everyone also believes that its "allowance for doubtful debts" is too low and should be revalued and raised.

It is such a vicious chain of chain effects, which has made it worse, and finally became the largest bankruptcy case in American history.

Note: Devil's Deal - Lehman's fake rp

I was impressed that the teacher mentioned several key points

1. Payables starting with XX are all "liabilities", and receivables starting with OO are all "assets"
2. Debt is on the left, Credit is on the right, nothing else.
3. The difference between a promissory note and a bill of exchange is who issued it, and the utility is exactly the same.
4. "Looking at financial statements is not about looking at numbers, but through careful observation to grasp a kind of weekly extension."

What is a repurchase transaction?

What is a "repurchase transaction", from the perspective of the seller's financial industry, is to sell one or several assets with a long-term maturity (such as long-term bonds, etc.) to investors, and then sell them. At the time of the transaction, it is agreed that the year, month and day will be "buy back" from the investor at the agreed price

To explain it in a simpler way, it means short-term mortgage of assets. For example, if I take a public bond to adjust your position for five days, I will return the principal and interest to you after five days.

However, in recent years, the subject of repurchase transactions has not been limited to fixed-income instruments with a maturity date. Many "repurchase transactions" have been derived from stocks, certificates, debt and even the real estate market. Repurchases, options, etc. are packaged together into extremely complex instruments.

In essence, a "repurchase transaction" is a "short-term liability" for the financial industry.

In normal financial statements, it must be listed as a short-term liability, so in the simplest accounting terms, a repurchase transaction will increase the "debt ratio" and "debt amount" on the balance sheet. When the financial industry buys When a batch of bonds is sold in a repurchase transaction, both sides of the balance sheet increase at the same time.

Lehman's trick

Lehman Brothers and its certified accountants used a long-established deception to cover up. She defined a repurchase transaction as a "sell out" (or sale), and Lehman Brothers provided more than 105% of its assets to obtain 100% of the cash. That is to say, the assets with a market price of 105 yuan are sold for 100 yuan, and at the same time, a "non-public contract" is signed with the buyer and agreed to buy back the batch of assets with 105 yuan after one year.

In essence it was 100% a "repurchase deal", but Lehman Brothers treated it as an "asset sale," thus concealing short-term liabilities. And Lehman Brothers used some of the cash obtained from the "repurchase transaction" to buy other assets and partly to pay off liabilities, which not only beautified the financial statements, but also increased cash flow.

However, the biggest difference between selling assets and "repurchase transactions" is that the latter is a kind of debt that must be repaid in a certain future. Once the subject of the transaction loses liquidity or loses part of its value due to falling prices, it is difficult to use Repurchase this "debt-to-debt" method to get cash.

Repurchase deal 105

This "repurchase transaction 105" is a means of financial deception.

However, this is not such a novel tool. This kind of fake sale and real repurchase transaction is called (Call RP, Repurchase Agreement) in Taiwan. Both parties use buyout and sellout transactions to hide the essence of repurchase. It is nothing more than the following two points, one is that it can avoid legal restrictions and expand credit, and the other is that it can whitewash financial statements, beautify the debt ratio or some liquidity indicators.

The main reason for the collapse of Lehman Brothers is these hidden repurchase transactions. When the period of privately using undisclosed contracts to do hidden transactions expires, the market price of the underlying collateral in these transactions keeps falling. As a result, the creditors and gold owners (Citibank, JPMorgan Chase, etc.) of these "repurchase transactions 105" asked Lehman to increase the margin of the transaction and no longer undertake new transactions with Lehman.

Lehman was finally unable to continue to "pay debts with debts" with fake conditional transactions, and finally the largest financial tsunami in history broke out.