This is the same story in as my original Lehman video...maybe a Barron's writer actually saw the damn thing. - Best, Mr Mortgage
Wall Street's Latest Illusion
Turning Losses into Paper Profits
ALTHOUGH WALL STREET PROFITS ARE under pressure by a host of forces, the tough times also have provided a little-known financial benefit: Some Wall Street titans have been able to book gains from the declining value of their own debt.
These non-cash gains bolstered the bottom lines of Morgan Stanley (ticker: MS), Goldman Sachs (GS) and Lehman Brothers (LEH) in their first fiscal quarters, ended Feb. 29, helping them beat consensus earnings estimates. They had reported the same type of gains in 2007, mostly in the fourth quarter, as credit markets worsened.
Investors, however, should take little comfort from these accounting gains, for two reasons. They provide no cash benefit and, more important, merely reflect investors' growing concerns about the companies' financial health.
Here's how the accounting works: When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value.