Wednesday, September 13, 2006

Real gold, Fool gold

What I am gonna to present is a very primitive form of way to "do up" or enhance the financial statement. I'm not sure if this may be a legal way but definitely, it is not a method that a business which is values integrity will use in any means. This can be used thru the means of structured products.

The idea behind this special and primitive trade is this: Suppose you pay $100 for a pot of gold. Half of the pot is real gold, while the other half is fool's gold. The portion of the real gold is worth $90, while the fool's gold is worth $10. If tomorrow, the two halves are still worth $90 and $10, and you sell the real gold for $90, can you register a profit? The answer must be no, right? If the real gold cost $90 and you sold it for $90, the profit should be ZERO, right?

WRONG, at least in certain markets where you buy such products. Suppose you buy the pot of gold and claim that each half cost "on average" $50. Tomorrow, when you sell the real gold for $90 - BINGO - you have booked a $40 gain. How? The real gold didn't cost you $90; it cost you $50 - "on average", at least as carried on the balance sheet of the business who purchase the pot of gold - and you sold it for $90 and "gain" $40. Of course you didn't make any profit, but by this way, you can register a gain. And for the fool's gold, you can hold it for as long as the business can, and it will be kept in the cabinet under locks. So by holding, you will never register a loss. It will still be at cost. Many management who are only interested in their paychecks can used such methods to meet the Street earnings expectations. Such problems will eventually surface many years down the road - at such point, it'll most likely be someone else problem - when someone new takes over and the skeleton will have to be brought out from the closet.

This is financial alchemy at its very best.

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