Tangible Equity: what stockholders own
Tangible Equity: what
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
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
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
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
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
Comments about or criticisms of this article are welcome
via email to Bob.
Last updated 4-6-2004.