Re: Prospects vs Forecasts.

[Clifford Poirot <cpoirot@xxxxxxxxxxx>]

The rise of structured finance schemes does indeed make it more difficult to
distinguish. Thus it is indeed true-information is costly to obtain, subject
to interpretation, and different people have different levels of access to
it ( as well as varying degrees of willingness to search). I have not come
across where Minsky addressed this directly (though I think the implications
are clear) and would of course welcome a correction from those more
knowledgeable about Minsky than I am. But clearly, Minsky's treatment of the
rise of money manager capitalism did address the problem of structured
finance. This is why Minsky argued that modern money manager capitalism was
vulnerable to speculative and Ponzi structured finance-and thus unstable.

That said, let me make a comment about Enron: As far as I have been able to
determine, Enron never actually "hid" the information, except in footnotes
of its annual reports and SEC filings (which is a pretty good place to hide
things since a) nobody reads proxy statements to start with and b) those who
do ignore the footnotes. Those very few individuals who take the time and
trouble to dissect SEC filings and financial statements would have found
themselves richly rewarded in the case of Enron. Enron reported that it had
engaged in "strategic partnerships" with offshore entities. Anyone who
bother to find out about reporting rules in energy would have known that
Enron's reporting of revenues included the price of the contract-not simply
the commission. This information was publicly available-even if one had to
dig for it.

The short answer to your question-how does one distinguish then is: one
reads SEC filings and all financial statements very carefully and throws
management annual reports and analyst reports into the garbage can. If you
do not know how to read a balance sheet, you buy a book on how to read and
decipher balance sheets and if you do not understand, pay a CPA to explain
it to you.



-----Original Message-----
From: Henry C.K. Liu
To: pkt@xxxxxxxxxxxxxxxx
Sent: 8/23/02 4:46 PM
Subject: Re: Prospects vs Forecasts.

You have quoted Minsky on the distinction between a sound business idea
and a
Ponzi scheme,  To distinguish the two, you need data. For example, less
than a
year ago, Eron was considered a sound business idea. Now everyone calls
it a
Ponzi scheme.  My question is: with structured finance and special
purpose
vehicles and what have you, how can anyone distinguish a good business
idea from
a Ponzi scheme?
Is GE a good business idea or a Ponzi scheme?

Henry C.K. Liu

Clifford Poirot wrote:

> See my response below:
>
> -----Original Message-----
> From: Henry C.K. Liu [mailto:hliu@xxxxxxxxxxxxxx]
> Sent: Thursday, August 22, 2002 10:53 PM
> To: pkt@xxxxxxxxxxxxxxxx
> Subject: Re: Prospects vs Forecasts.
>
> Clifford Poirot wrote:
>
> > I can
> > distinguish between a sound business idea and a Ponzi scheme.
>
> Please tell us how that is done.
>
> Henry C.K. Liu
>
> Sound of shuffling papers as I reach for an old working paper by Hyman
> Minsky that is sitting on my desk and cite Minsky verbatim on the
> distinction:
>
> "Hedge financing units are those which can fulfill all of their
current
> contractual payment obligations by their cash flows: the greater the
weight
> of equity financing in the liability structure, the greater the
likelihood
> that the unit is a hedge financing unit. Speculative finance units are
units
> that can meet their payment committments on "income account" on their
> liabilities, even as they cannot repay the principle out of income
cash
> flows. Such units need to "roll over" liabilities (e.g. issue new debt
to
> meet committments on maturing debt). Governments with floating debts,
> corporations with floating issues of commercial paper, and banks are
> typically hedge units.
>
> For Ponzi units, the cash flows from operations are not sufficient to
> fulfill either the repayment of principle or the interest due on
outstanding
> debts by their cash flows from operations. Such units can sell assets
or
> borrow. Borrowing to pay interest or selling assets to pay interest
(and
> even dividends) on common stock lowers the equity of a unit, even as
it
> increases the liabilities and the prior committment of future incomes.
A
> unit that Ponzi finances lowers the margin of safety that it offers
the
> holders of its debts"
>
> Hyman P. Minsky "The Financial Instability Hypothesis" Working Paper
no. 74,
> Jerome Levy Institute, May 1992.
>
>  Prepared for Handbook of Radical Political Economy, edited by Phillip
> Arestis and Malcolm Sawyer, Edward Elgar: Aldershot, 1993.