“The essence of lying is in deception, not in words.”
— John Ruskin
Let us see the real example of 2008, how the #illusion was created in the financial world and how it hurt the market. Whenever the bubble is formed by the origin of illusion, it results in financial disaster. Another example is Japan’s 1982-89 bull market in the stock market and the housing sector. In both sectors, the peak of that day is still not recovered after 32 years. #LEHMAN’S #ILLUSION In the Lehman Brothers case, the company used “accounting gymnastics” to manipulate the company’s financial statements during the 2005-2008 financial meltdown — the most devastating since the Great Depression. In 2008, Lehman Brothers’ shaky balance sheet and falling profits left the firm in dire financial peril. It desperately needed to create the illusion that it was healthier than it was.
Lehman used what appeared to be a normal financial instrument in the banking world — a repurchase agreement (a repo) — to book billions of dollars of transactions. A repurchase agreement is a form of short-term borrowing for banks and other dealers typically using government securities. The bank sells the government securities to an investor, in general to another bank, on an overnight basis and buys back the following day. In Lehman’s case, the company did it to exploit an accounting rule, meant to give principled guidance to determine when a repo was a true short-term financing method versus a sale of a financial instrument. The latter desired treatment as a “sale” allowed Lehman to slyly portray its financial condition as rosy when it wasn’t. Lehman significantly executed repo transactions with counterparties on off-market terms, providing a significant amount of game-changing information (not on the page). Combined with the other traditional pieces of information, this ultimately exposed #Lehman’sIllusion.
In Financial Illusions
“It’s not what’s on the page that matters; it’s what’s not on the page that matters.”
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