Tangible Equity: what stockholders own
Tangible Equity:  what stockholders own

The way the majority of managements and their criminal cronies in the elephant herd (institutional holders of minority stakes in our companies) are treating cash paid public stockholders these days, you'd very nearly think that we don't own anything.  The abuses have led those with the attention spans of gnats to assert that stocks are nothing but a gambling game.  His British Lordship the criminal mastermind Greedspan has been organizing a Plan to Bankrupt America by stealing all of the capital out of American capitalism.  His Plan has already succeeded in converting more than 250 formerly healthy companies into de facto bankrupts.  He has been prominent in promoting illegal rigging of stock prices to artificial levels in violation of securities law using criminal theft of the equity owned by cash paid public stockholders for the purpose of paying ludicrous multiples of net tangible equity to his own and munchiment's criminal cronies.  In thereby stealing all value leaving only an empty bag, he has been violating the rights of American citizens to own property provided in Articles IV and V of the U.S. Constitution Amendments.  Compounding the criminal organizing efforts of Greedspan has been the revolving door for SEC staffers between temporary employment as "regulators" and objective employment as overpaid sinecure holders in the "regulated" companies.  That revolving door in turn has been compounded by smashdowns administered by corrupt legis critters whenever an essential regulatory effort has been proposed by the SEC, such as the prosecution of criminal manipulation via wash transaction futures trading which became blatantly obvious during the 1986-1992 period, but when essential evidence gathering was proposed, the Clinton SEC chief was dealt with so harshly that he was never able to say another word about genuine law enforcement throughout his tenure.  As a matter of law, the assertion of the day traders that stocks are nothing but a gambling game (other than for themselves) has "historically" not been true.  Protected, however, by an apparent immunity from ownership laws and laws against theft for their grandiose larceny schemes, resulting from campaign contributions to politicians (typically using money stolen from the rest of us), the organized efforts toward "creative destruction" have been treating the ownership rights of cash paid public stockholders "as if" the values were merely a thing to be stolen by criminal gangs.
      Glib euphemisms about "returning value to shareholders" have been spewed by the criminal cadres in their misrepresentation of fraudulent transfers of massive quantities of stockholder assets, owned ratably by all stockholders, to only a very few generally crony holders at wild multiples of net tangible equity.  That is not "value to shareholders".  It is criminal theft by the breachers of fiduciary duty authorizing the thefts and by the criminal institutions demanding and taking the money from the corporate treasuries, so far beyond grand larceny as to more appropriately be termed Grandiose Larceny.  Even when the the scams are run using the method of apparently genuine small and steady open market purchases, the payout of typically large multiples of net tangible equity for "repurchase" of outstanding shares is wildly destructive to continuing stockholders.
      Beyond the corruption of the SEC and the capitalism destroying objectives of His British Lordship the criminal mastermind Greedspan (who has been promoting the "stock buybacks" swindle to loot all value out of individual private ownership of property since he was appointed by the Raygun/Bush fascist administration in 1987), the largest single reason the thieves have been getting away with it is that far too many shareholders don't understand what those thefts are doing to what we own (see my article about Stock Buybacks for examples of the effects).  The purpose of this article is to explain tangible equity and provide guidlines on how to compute it from the quarterly unaudited and annual certified balance sheets of corporations.  Examples of the effects of the current criminal model of running corporations into deficit tangible equity with criminal thefts of the "stock buybacks" sort are included in the Stock Buybacks article.  Similarly the predominantly fraudulent "mergers and acquisitions" activities these days have the real purpose, under the pretense of creating a "Monopoly Game" kind of grandiosity in the "acquiring" company, of transferring all or most of the value from formerly sound public corporations to narrow groups of outsiders and the M&A arranging frauds of the investment banking community.
      Numerous wags have criticized the introductory remarks above.  The remarks are still there.  Fail to understand why it is important to do the evaluations, fail to understand the intensity, perversity, and intentionality of the enemies of American capitalism and of the Constitutional rights of American citizens to own property, fail to understand the current corrupt weakness of regulatory systems, and the wags will never make it through the genuine work required to get at the truth of what's going on.  Without standards for computing Tangible Equity from the intentionally obfuscated accounting reports of the companies, there is no way to assess the risks involved in such situations.  So here is how I go about it:

How to Compute Tangible Equity
      It looks simple on a balance sheet.  Says right there "stockholders equity".  That must be the number, huh?  Divide by the number of shares outstanding and you have Book Value, right?  That is the way the scammy simplistic web sites which have developed in recent years do it, but nope.  Too many other empty accounts have gone into the creation of that fiction in the "stockholders equity" section, especially in recent years, for it to be taken as what it claims to be under GAAP (Genuinely Asinine Accounting Pretenses euphemized by some to be "generally acceptable accounting principles").  Even the "stockholders equity" section itself has some pitfalls and contortions which can confuse the question when there are such things as Preferred Stock issues outstanding since such issues typically have priority claims on the assets of the corporation.  I have been pleased in recent years as at least some companies have started separating out the Preferred Stocks and separately stating the common stockholders equity, which is the only part available to cash paid public stockholders of the common stock.  But it was easy enough to arrive at a reasonable estimate even before, simply by deducting all things listed in the "stockholders equity" section which aren't clearly owned by the common stockholders.  As a first step.  All you have in the "stockholders equity" section is the Claimed Equity, not the tangible/real equity of the corporation.
      The largest single deduction which needs to be made from Claimed Equity to arrive at Tangible Equity generally is the figure shown in the "Assets" part of the balance sheet as "Goodwill & Other Intangibles" or, in a few more explicit companies, as "Excess of Amounts Paid Over Fair Value of Assets Purchased" in mergers and acquisitions.  It is an empty account.  Only theoreticians and scoundrels in the M&A biz (or their protectors in criminally corrupt government agencies) even bother to claim that it has any value to have overpaid historically for assets which weren't worth anywhere near what was paid for them.  The Financial Accounting Standards Board, in its efforts to help out those misrepresenters of business progress who cook up "earnings statements" made of fiction and fantasy, recently ruled that companies no longer even have to deduct any small portion of those empty accounts each year when reporting "earnings" but need only "review" them annually and, whenever they feel like it but no sooner, to write off part of their stockholders equity for "impairment of intangible assets" which never had any real value in the first place but were only egregious excessive payments for assets of doubtful functionality, for the benefit of the scammers in the M&A biz.  Such writeoffs of course are done without telling anybody about it in the fictional "earnings statements" that companies issue on an "operating basis" only since the fraudulent transfers of stockholder assets to the M&A arrangers never had any operating relevance, nor any genuine business purpose for that matter.  The real damage was done when the fraudulent merger or acquisition was arranged in the first place.
      The next deduction (and in some companies it is larger even than the Goodwill fantasy account) is "Other Assets".  It never ceases to amaze me that accountants are capable of recording such a vague line item, often exceeding the entire amount of the Claimed Equity of the corporation, then proceeding not even to detail what it supposedly contains in the footnotes to the financial statements.  We know for sure that it is not cash nor receivables nor merchandise inventory because those are already separately detailed line items in the balance sheet and if the amounts involved were any of those things, it is for sure that the amounts would be included in the proper line items.  We also know for sure that it is not buildings nor equipment, net of the proper depreciation on those real things.  We know it is not securities held for sale which have genuine market value because those things also are separate line items when a company has any of them at all.  It is not even that vague and questionable "investments in other/affiliated companies" which appears in quasi-conglomerate financial statements.  So what the heck are those "Other Assets" of so many millions or billions of dollars of claimed "value"?  Well, occasionally they actually are things of some relevant value to the business and, in those cases, it is generally detailed with sufficient clarity to permit recognizing parts of the "Other Assets" amount as being valid.  But often it is nothing but a claimed "asset" which relates to an off-book liability of greater amount, such as the "asset" of life insurance on officers and key employees, the proceeds of which are required to be paid to the personal survivors of the officers and key employees, i.e. something which is never going to be of any value to the stockholders of the corporation other than as a benefit to persons entirely other than the stockholders and in some cases where the off-book liability is larger than the coverage provided by the claimed "asset".  Other times it is questionable loans or investments to other companies of doubtful survivability, as for example mezzanine financing provided for the dot cons and dot gones of the Internet Mania swindles, many of which scams continue to be claimed as "Other Assets" of ongoing businesses.  Other times the amounts are described, when described at all, in terms that even I, with more than forty two years experience reading balance sheets, am unable to discern as being anything of any value whatever.  My general rule for handling "Other Assets" is to treat them as an empty account unless I can quickly and conveniently locate a clear and detailed explanation of what they are and am able to recognize the detail as being genuine useful assets of value to stockholders of the company.  That is not often the case.  We know for sure the "Other Assets" are not any of the real things relevant to the business, so the amount (or at least those parts which are not adequately explained and recognizable as real and relevant) is deducted from Claimed Equity in the process of computing Tangible Equity.
      Generally appearing earlier in the balance sheet itself, but discussed here because the same principles which apply to Other Assets also apply to it, are such things as "Employee Benefits" and "Pension Assets" accounts.  Yes, the property included in those accounts is temporarily "owned" by the corporation.  In fact some of the most magnificent fraudulent games of recent years have revolved around jiggering the "actuarial assumptions" made as to the relationship between those "asset" accounts and the legal liabilities to pay benefits and pensions to already retired or eventually to be retired employees.  Such accounts are, however, not net values to cash paid public stockholders.  Often in fact, they are only a warning sign that there are major undisclosed liabilities lurking to loot any values otherwise apparent.  At the least, such "asset" accounts need to be deducted from Claimed Equity because they are in fact not assets of cash paid public stockholders but of the empees of the company.  The more diligent investor (or one with larger amounts at stake such that surprises are even less acceptable) may wish to look further into "how unbalanced" those purported assets are relative to the real liabilities to former and current employees and to make further deductions from Claimed Equity, based on analysis of the footnote regarding pensions and benefits, for the undisclosed excess liability over the amount disclosed as an "asset".
      Then there are the various kinds of "Regulatory Assets" (nothing but expenses incurred which munchiment wants to pretend at least for the moment that they have some potential for recovering via higher rates to customers "when as and if" the regulatory commissions allow them to recover any of that long gone money).  Wouldn't do to fail to mention the sometimes huge "Tax Assets" which are nothing but hypothetical future reductions in tax liabilities under profitability circumstances which don't currently exist and may in fact never exist (or which are total subterfuges all along pretending to have gotten away with questionable accounting practices for tax purposes).  The creativity of munchiments under Genuinely Asinine Accounting Pretenses is sometimes astonishing.  Straight forward rule for dealing with such things:  unless you can clearly see how the claimed asset is of value NOW to cash paid public stockholders, deduct it.

Derive A Tiffs
      Another category of questionable accounts, which came into widespread use during the reign in the White House of that purported wunderkind of a cattle futures trader who had no experience trading anything but supposedly made $100,000 of "profits" in a business which causes losses for 95% of those persons who ever try trading there, are the accounts relating to "Derivatives".  The valuation estimating procedures for all of those line items (often including "current" derivatives assets, "long term" derivatives assets, "current" derivatives liabilities, and "long term" derivatives liabilities) is so incredibly flakey and suspect that I have adopted a two-pronged approach to dealing with them when they appear.  A euphemism gaining increasing usage is to refer to derivatives as "risk management" assets when in fact they are subjecting the corporation to the increased risk of manipulation by those who control, rig, and distort values in the "derivatives market".  An accounting fraud of increasing usage is to report only the point in time changes in valuations and to conceal (behind the euphemism "notional" or altogether) the magnitude of the risk to corporate survival not only due to the exposure itself but also to counterparty risk when (not if) the alleged risk assumer refuses or is unable to satisfy the obligations of the "derivatives contract".
      The first part of the approach to "derivatives" consists of nettting out all of the aspects which are not clearly a cover for something else.  If the result is a claimed "net asset" amount instead of a net liability amount, deduct that net derivatives exposure from Claimed Equity along with the prior categories of deductions.  At best, those derivatives amounts are additional risk against stockholder interests, entirely or primarily unrelated to the supposed real business of the company and consisting of pufferies which can't be realistically evaluated by stockholders.  The process of evaluating company financial health is not about "trusting" the people running the company.  It is about our money at risk under the too often malicious and/or incompetent control of others.  There is no "benefit of the doubt" to be given when evaluating the situation.
      But there is an "at worst" scenario for the derivatives accounts too.  The second part of my approach consists of totalling the exposures in absolute numbers for comparison to the computed Tangible Equity.  When the total exceeds the remaining Tangible Equity (often by large multiples in those situations where it appears at all), I find it necessary to conclude that the books have been cooked to too large an extent to recognize the corporation itself as having any value at all.  Nothing but a bunch of futures market and under the counter derivatives gamblers, the vast majority of whom either are losing money or are looting money from others while puffing the books with fictitious "valuations", is not a viable company regardless of what business they claim to be in.  That conclusion is true also regardless of any legal sanctions which may "appear" to be on the lawbooks as demonstrated in the Junk Bond King case where the criminal thief and destroyer of the lives of thousands of savings & loan association depositors and stockholders was allowed to keep half a billion dollars of the stolen money and provided with two years protective custody against the wrath of the human beings whose lives he destroyed.  The practice of engaging in "derivatives" shams did not originate by any means with Enron.  The puffing up of company "appearances" with such sham trading dates back at least to the Salad Oil Swindle of the 1960s which obliterated one brokerage house and caused massive losses to a unit of American Express Company.  Companies make believe they are engaging in "hedging" activities which don't hedge any reality of their own business but in fact are wild-eyed compulsive gambling based either in manipulating the market itself, as did Enron in its "electricity deregulation" swindles, or on adding additional risks of futures and derivatives market losses to the already major risks of whatever underlying business may exist.  The stocks whose managements engage in such fraudulent and deceptive practices must necessarily be avoided by any self-respecting survival oriented investors and traders.

Summary and Conclusion
     The central question in evaluating a balance sheet is "of value to whom?"  The relevant standard is not "of value" to the daughter of the M&A swindler who gets to attend Sarah Lawrence with all expenses paid while your kid has to struggle to get a scholarship or to mortgage their future with student loans to attend Rundown State University.  The standard is not "of value" to former empees or about to be former empees so that they can have a comfy cozy life while your own retirement has been gutted and looted by munchiment thefts of all assets out of your company.  The standard is not "of value" to criminal thieves stealing everything in sight for the greater honor and glory of communism or criminal gang supremacy or belligerent blasphemy or whatever other systems they proffer as the excuse for their criminal acts against the property rights of cash paid public stockholders.  The standard is not "of value" to insiders for the purpose of lining their pockets with your assets, regardless of how well you may think of the munchiment involved.  The standard is "of value" to cash paid public stockholders.  Fail that standard of value to continuing stockholders and any aspect of the balance sheet which thus fails is nothing but Genuinely Asinine Accounting Pretense puffery.
      After you have deducted all of the empty accounts and sham accounts and overtly fraudulent accounts from the Claimed Equity, you have an indication of whether there is any Tangible Equity present in the company for "equity traders" to trade or whether in reality there is nothing but a big hole in the ground where the stockholders equity "was" or "is supposed to have been".  Three Card Monte players who love the crooked games of Street shysters will no doubt continue trying to guess "which card" has the value under it and hope to prevail by being quicker than the shysters.  For the rest of us, lacking the gambling fever and wanting a decent return on our investments, it pays to do this analysis of Net Tangible Equity to determine whether there is anything there to trade.
      So there you have it.  Net Tangible Equity of a corporation is its Claimed Equity, less Goodwill & Other Intangibles, less most vague and inadequately comprehensible Other Assets if any are claimed, less all net positive "derivatives" exposures to which the company admits, and subject to the caveat that if those flakey "derivatives" exposures are too large in relation to the Net Tangible Equity then the entire company must be treated as suspect, not relevantly in the business that they profess to be in, but instead only crapshooting futures market and under the counter derivatives gamblers.
      Bob Grumbine    :-)##

Comments about or criticisms of this article are welcome via email to Bob.  Last updated 4-6-2004.