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December 20, 2005

Kong Attacks Financial Markets!

Dateline Wall Street: King Kong has broken free from theaters nationwide to attack the transparency and integrity of financial markets!! Cleverly dressed in the guise of unfunded pension and other benefit liabilities, Kong has eviscerated the credibility of the balance sheets of hundreds of the nation's largest companies. The crisis seems to have unfolded with startling speed. What may have been minor adjustment errors when Kong was first brought to America now amount to nearly $450 billion!! Said one analyst, "This devastates the S&P 500." But while investors and others reel from Kong's rampage, those at the Financial Accounting Standards Board responsible for getting Kong back under control seem dazed, like deer in the headlights. "This is very political and complicated," said one spokesperson who sought even greater anonymity than is usually accorded accountants as their professional due. "We're going to need several years to work this out."

Several years? Haven't they seen the movie?


More than half the households in America own equities. And way more than half have folks who are employed, with millions of these employees working for companies that have contracted with them to provide pension and other benefit coverage.

Our world of markets, networks, organizations, friends and families is so complicated that probably only a small fraction of people in investor households know that hundreds of publicly held companies now have pension liabilities that outstrip pension assets by just under $300 billion, or that other benefit obligations (e.g. health and prescription drugs) outstrip other benefit assets by nearly $150 billion.

$450 billion of obligations that are not funded. That's a lot of money. For example, it is the same amount just approved for the 2006 defence budget. And, according to Standard & Poor's, it equals a fifth of the tangible book value and 70% of the 2005 earnings of the S&P 500.

No wonder the Financial Accounting Standards Board (FASB) is hard at work trying to figure out how to handle this in a way that helps investors and others get the information needed to make judgments about the economic and financial well being of companies.

FASB will not, of course, require companies to make any radical adjustments. There won't be a new rule demanding an immediate write-off against earnings. Still, one wonders what 'transparency and integrity of financial markets' means when companies have had and will likely continue to have so many ways to miscast their degree of control over these King Kong liabilities. Just one example from S&P: "These evaluations derive from current estimates of what returns and interest rates will amount to over decades. Agreeing on the current Q4 2005 estimate poses quite a challenge -- estimating Q4 of 2035 would appear to be far less of a science."

30 years. Company accountants must consider all the factors that might happen over thirty years in determing the current value of liabilities. Really, now, let's get ourselves some perspective. Even those many, many, many accountants who do their professional and personal best are merely guessing. And, we know too well that plenty of accountants -- and chief executives and chief financial officers -- 'manage financial statements'. For them, "30 years" is an open invitation to "make it up!" (And, by the way, it's also an open invitation to prosecutors with personal agendas to go after even well intended chief exeuctives and chief financial officers under Sarbanes-Oxley).

So, stakeholders beware! Whether you are an investor or an employee with an interest in any of these companies, beware! And be prepared. The odds are that the obligations will be re-written and reduced, the generally accepted accounting approaches will be 'smoothed and managed' to minimize the financial reporting strain, and the real story underlying all of this -- the nation's broken system of sharing the risks and costs of health care and old age -- will continue to go untended or made worse through radically increasing the individualization instead of sharing of such risks.

Posted by Doug Smith on December 20, 2005 02:38 PM | Permalink