Monday, February 04, 2008


Subprime Fallout of the Day

This past week, as strange as this may sound, Bristol-Myers Squibb [BMS] was the latest company to do the equivalent of taking a charge against cash when it announced a $275 million impairment of debt investments that held such things as surprise! subprime and home-equity loans. —Herb Greenberg reporting in "How 'cash' at companies became risky"

Yes, it's true. Number 129 in the list of Fortune 500 companies—the drug company that makes "Abilify" to control your mania—was itself seized by mania. It played in the subprime market and is now looking at over a quarter-of-a-billion-dollar loss of "marketable securities."

But it wasn't really cash, was it? Greenberg explains—

Companies don't really take charges against cash, of course, but investments that double as cash might as well be cash. Auction-rate securities, as these arcane investments are called, were deemed so safe that they sat on the balance sheet not far from Treasurys in a near-cash category called "marketable securities."

Until a few years ago, before a change in accounting rules, Bristol-Myers accounted for auction-rate securities as actual cash. They are so much like cash that they yield just a fraction of a percent above cash and, as Bristol-Myers regulatory filings say, can "be liquidated for cash at a short notice."

Now their liquidity has congealed into a pill that no one will take, much less buy.

It's all in what you call it

Maybe I should have called this post "Why accounting rules matter," because it's through the accounting rules that the public is hoodwinked. "Accounting rules" for the Movers and Shakers is seen as an insidious euphemism for "government regulation." And they believe in "freedom of the markets," don't you?

So what's so important about calling these investments "good-as-cash"?

As The Wall Street Journal's Karen Richardson pointed out as far back as September, quite a few nonfinancial companies have cash exposed through direct investments in mortgage-backed securities. "Not all cash is created equal," is the way Merrill Lynch put it in a recent report that asked the question, "Are cash investments safe?"

This is important for investors, since a reason people buy technology stocks, and any stock during periods of volatility, is cash on the balance sheet.

It's as if you'd been invited to invest in a company whose assets included a personal check from me.

Fallout beyond finance

Readers of Simply Appalling should have an inkling by now that many banks are in a "parlous" condition, thanks to the unregulated frenzy of the free financial markets in which they've been allowed to participate. But drug companies?

Why would a pharmaceutical company invest in subprime mortgages, you wonder? Well, they had so much money lying about that it seemed a shame to let it just lie there. According to BMS' Chief Financial Officer, they were looking for "a small bump in returns."

BMS is not alone. The CFO said that the company's auditing firm tells him they have "around 70 clients 'who are dealing with issues like this.'" And that's the report from just one auditor.

The lesson

If BMS wanted to use that pile of money to make more money, maybe they should have invested it in drug research. "Innovation" is what the free market is said to offer. And innovation is the excuse we're endlessly given for why we pay those exorbitant drug prices. From the consumer angle, it appears we're not getting what we pay for. And in certain circles that's known as "fraud."

But not to worry. BMS has learned its lesson and promises not to do it again. Greenberg reassures us—

At Bristol-Myers, at least, don't expect to see auction-rate securities on the books in the future.... There is only so much cash, after all, that companies are allowed to turn into trash.

Related posts
Preemptive patent infringement (7/13/04)
No Free Lunch gets a table (9/25/05)
Thigh Slapper of the Day (5/11/06)
Many in finance found to be SIV-positive (10/30/07)
Must-View of the Day (11/17/07)
Tautology of the Day (12/18/07)
Pharmaceuticals of the Day (1/15/08)


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