Paddy,

Thanks for your efforts on explaining these financial concepts. I must say that a lot of this is sounding familiar from the Enron days. In fact, as I recall, Enron seemed to have tried a similar trick with Merill-Lynch in the Nigerian Barge scandal? Not that you have the time, but it would be fascinating to compare the tricks of the accounting scandals of 10 years ago to the stuff that happened in the Financial Crisis.

I think the idea was primarily (1)to replace securities and other assets with cash, improving liquidity ratios on the balance sheet; and (2)record additional sales for the quarter, regardless of profitability. Clearly, a strategy born of desperation. I see that Dick Fuld considers that he is exonerated by the examiner's report which seems a bit, shall we say, counter-intuitive...

2 questions - if if was accounted for as a sale - wouldn't the sale of $105 in assets for $100 result in a $5 loss in the quarter in question (thereby hurting its income statement)? And, second, if it is selling a $105 in assets and only receiving $100 in assets in return, wouldn't this make its balance sheet appear weaker, not better, as it just lost $5 in assets?

Great Video. Yet another accounting scandal!