Congress Just Invented A Brand-New Accounting Scam

It looks like the accounting 'method' for student loans will actually 'add' up the projected 'profits' before the payments are made !!

What a scam.

This is how a financial 'crisis' starts. It's a ponzi scheme.

They use the projected 'profits' to 'justify' spending and when the loans default, WHAM

Then the panic sets in.

Right now, about 30% of student loans are behind or in default.

It's a set-up for the next 'crash'.

This garbage is illegal in some places.

It's a banker's wet dream come true !!

Back in June, when headlines were screaming about the coming increase in student loan rates, we told you not to worry. We had full confidence that Congress would devise a scheme to keep the loans rolling for another year. And Congress actually exceeded our expectations. You see, they can’t control spending, even in a budget crisis.

But this time, even I was taken aback by the brazen accounting trick they devised. Congress found a way to claim they were getting revenue as they spent more tax dollars. And here’s how the scheme works.

Congress writes the rules for government accounting. So they’ve required federal accountants to book 100% of the future interest paid by a borrower in the year the loan is made. If a borrower is going to pay $5,000 in interest over the next decade, all the revenue is booked today.

In fiscal year (FY) 2013, for example, the government projects that student loans will generate a profit of $36 billion dollars. They’ve also ordered accountants to book all of the costs of the program immediately, thinking that this will balance the books.

Now we know why they increased the interest rates !!

More fake income and more wild spending.

I bet they do this with other government scams too.

It's definitely a fumble-futz money changer con game.

I wonder how much 'they' paid to the whammers that thought this up ?

Congress Just Invented A Brand-New Accounting Scam

I'm sure the government does this with a lot of things. That is why the books only show about sixteen trillion dollars in debt. Rigging the books for the government is not illegal I guess if it is known all the way up and is "in the best interest of the people." Actually, there is probably a loophole used by banks and businesses that they are using. They leave loopholes on purpose in the laws. Just in case they need them.

Wooo, lets starting spending the unearned profit!

This is passing the buck once again. All the previous economic problems, the fiscal cliff, where remnants of previous poor economic decisions and once again we are faced with another.

Looks good on the books now, but 4-8 years down the road when the possibility of these loans defaulting starts to loom, it will be the next administrations problem...

I expect another BS program in 4-8 years from now to once again band aide the situation.

This is the Enron style of accounting. Books all future potential profits now. Looks good on paper - we saw how it worked in real life.

Originally posted by roadgravel
This is the Enron style of accounting. Books all future potential profits now. Looks good on paper - we saw how it worked in real life.

Accountant here. It sort of is but what Enron was doing was taking debts and more that would be associated with an asset and shoving them into subsidiaries for the purpose of simply holding debt (called "special purpose entities"). Basically, Enron was transporting its massive debts to SPE's and then, not reporting those SPE's to basically provide a false value to Enron's holdings and profits. I had to do a financial analysis on Enron's final 10k and what they did was jaw dropping. Not even remotely close.

The method that is being used for the student loans is sort of based on the the "fair value" method. Although there is a great deal of debate in terms of estimating the value of an asset, fair value accounting for loans takes the original value of the loan and all expected payments from it into consideration of its value minus a discount for the time value of money.

Let's put it this way. Let's say you loan a friend $10,000 at 10% annual interest and one yearly payment of $1000 over the next 10 years (keeping it really simple). Now, circumstances change and you kind of need that $10,000 back so you decide you're going to sell the contract for the loan to another guy. Here's the question to consider...do you sell the loan for the $10,000 or do you sell the loan for the amount of the loan plus the 10 years of interest, which would be $15,500? If it were me, I'd sell it for the actual value of the loan and not the original outlay of $10,000 because that is what the loan is actually worth over the 10 year period (less the time value of money, which I hate calculating so I didn't do lol). Subtracting the uber fun stuff to calculate (read sarcasm) and you end up with what is the present value of that loan to your friend, which would be technically less than $15,500. To witness why I refuse to go into deeper explanation, behold the horror of present value calculations: en.wikipedia.org...



Governmental accounting differs from public sector accounting in terms of the reporting of revenues and outlays.
Forbes sums it up rather neatly:

In issuing student loans, the federal government incurs a large up-front cost (the loan given to the student) and then receives revenues (the student’s gradual repayments of the loan) over a period of several years. The government budgets for these transactions by taking the initial cost of the loan and subtracting all the projected repayments to create a single cost figure.

So that's the quick and dirty explanation of how it's done. The problem is in both the calculation of cost and the expectation that the repayment is "guaranteed".

So far, so good. But things start to get complicated when we remember that students sometimes default on their loans, meaning that the average loan repayment is going to be less than what taxpayers are owed. So the government estimates an “expected” repayment and uses that lower figure to calculate future revenues.

www.forbes.com...

The government, because it is the government, treats the repayments of student loans as guaranteed. Considering that it's a loan via the government, there are some reasons for that feeling. For one thing, even if someone with a student loan declares bankruptcy, they cannot shed the student loan. They are stuck with it until it's repaid or the day that they die. Defaulting on a student loan permanently would most likely require being paid under the table, living underground, and never owning another asset in your life. It's like owing money to the IRS. Not a good place to be. That said, it's still entirely feasible that a student may never repay their student loan so they are still not, with all that power, guaranteed. Worse yet, defaulted student loans probably accrue even more costs associated with the pursuit of payment which brings down the happy little expected repayment profit down further.

That's the problem. Using a proper fair value method for the value of a student loan would actually account for market risk. The market is absolutely tied with employment and wage and if the market is risky, those things are going to falter as we've seen. That also means more defaults for student loans. Hence the screaming by economists.

Hopefully that helped clarify some of the rationales and nightmares of accounting.

Enron was more than just that. I used to work for a competitor that went down with them.

Enron instead elected to report the entire value of each of its trades as revenue. This "merchant model" was considered much more aggressive in the accounting interpretation than the agent model. Enron's method of reporting inflated trading revenue was later adopted by other companies in the energy trading industry in an attempt to stay competitive with the company's large increase in revenue.

Between 1996 and 2000, Enron's revenues increased by more than 750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000. This extensive expansion of 65% per year was unprecedented in any industry, including the energy industry which typically considered growth of 2–3% per year to be respectable. For just the first nine months of 2001, Enron reported $138.7 billion in revenues, which placed the company at the sixth position on the Fortune Global 500.

...

However, when Skilling joined the company, he demanded that the trading business adopt mark-to-market accounting, citing that it would represent "... true economic value." Enron became the first non-financial company to use the method to account for its complex long-term contracts. Mark-to-market accounting requires that once a long-term contract was signed, income is estimated as the present value of net future cash flow. Often, the viability of these contracts and their related costs were difficult to estimate. Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports. While using the method, income from projects could be recorded, although they might not have ever received the money, and in turn increasing financial earnings on the books.

en.wikipedia.org...