Blackstone (BX) Wants To Use Made Up Earnings

The Blackstone Group is still adjusting to being a public company. Back when it was a private equity partnership, it reguarly booked its assets at cost or higher, if they believed the assets had appreciated. It was a brilliant system because it meant nothing could ever go down until it was sold, which meant the firm could manage its returns–and therefore payments to its partners–by controlling the timing of sales.

As a public company, however, it is forced to mark assets to market. And now it’s learning that this can be far less convenient. So, of course, Blackstone’s CEO Steve Schwarzman wants to go right back to the old way and has been calling for the abolition of mark to market accounting.

But this is a very strange argument for Blackstone to make, as former Bear Stearns executive Leo Tilman argues on his website Financial Darwinism. All the usual reasons people give for reforming mark to market don’t apply to Blackstone’s assets. It seems it just wants to be able to make up numbers about the trash companies it owns so it would look like it is making money even when it is not.


When we talk about the bailout and the program to buy troubled assets, the intent is to stem write downs by financial institutions. It is argued that  forced liquidations and illiquidity during the deleveraging stage of a financial crisis bring prices of securities below their “intrinsic” or “fair” values. Bailouts are designed to stabilise prices. Additionally, various amendments to fair value accounting are proposed to allow financial institutions carry illiquid securities at prices that reflect their intrinsic values rather than firesale levels.

In the case of Blackstone, however, this argument does not apply. One of Blackstone’s larger investments – discussed in The Wall Street Journal – is, for instance, Freescale Semiconductor, whose value Blackstone will need to write down not because of the market disruptions but because of the company’s shrinking revenues, job cuts, and write-downs during an economic downturn. Why shouldn’t a public company report a lower value on such an investment? The issue has nothing to do with the distressed mortgage loans and securities which are at the epicentre of the financial crisis and the bailout and must be judged on its own merits.

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