The Unaccountability of modern Accounting Methods

A large portion of what's going wrong in the financial markets is due to the liberal accounting methods that are legal, but not at all sensical.

For instance, Bloomberg's headline article today, "Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math" shows just one of the ways that modern accounting methods have, essentially, so diluted the truth in balance sheets that investors oftentimes don't even know what they're investing in (e.g. probably why Buffet and Munger like those investments you don't have three zeros after the decimal point). You can read the article here.

Another, for instance, is allowed by GAAP which pertains to those Pick-your-Payment mortgages. This allows for banks to claim, as profit, the negative amortization, which is only paper assets. The mortgage has a 1% payment interest rate, but the balance grows monthly because of the fully indexed rate, which is typically 6 - 8%. The difference between the payment rate (1%) and the fully indexed rate (6 - 8%) is then added on top of the balance monthly...and the lender claims this as profit.

So, how are you to invest your assets then? Whom can you trust? And, even if you can trust your broker, or the mutual fund/ hedge fund manager, do they even know what a tranche is??? Do they even know why mortgage-backed-securities are experiencing the highest defaults ever, and that for a AAA rated security? Why all this mess?

One answer...bad accounting.

I guess honesty is the best policy after all, eh?