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Published: Tuesday, 11/5/2002

Specious figures riddle world of finances

“Figures don't lie, but liars figure” is a saying as old as the hills. But there's lots of modern-day evidence to support that ancient wisdom - including pro forma earnings, balance-sheet “goodwill,” and projected returns for annuities and other investments.

There's also some pretty specious math in the world of consumer finance: Zero-percent car financing and home-mortgage refinancings at unbelievably low interest rates, for example. And how about refund-anticipation loans to taxpayers and payday loans to consumers who need money between paychecks?

All of this calls to mind an age-old riddle: Three men decide to share a hotel room costing $30. They each give the clerk a $10 bill. The clerk discovers the room is actually $25, but he doesn't have change. He gives each man $1 and pockets $2 for himself. Each man is out $9 (total of $27 for the three), the clerk has $2. Where's the missing dollar?

It sounds like a mystery until you figure out there is no missing dollar. The reasoning is phony, the figures are phony. The real math: The room cost $25, the clerk took his $2 “commission,” and the total is $27. The men each paid $9. The missing dollar is imaginary.

And so it goes with much of the math that investors and consumers are dealing with these days. Many things in the financial world are not what they seem at first glance.

The poster child for funny math is the pro forma earnings statement. Pro forma earnings treat special accounting charges “as if” they never happened. In other words, profit should have been higher and (parenthetically) will be in the future. That sort of logic worked far better before Enron and WorldCom woke up a lot of investors.

Another good one is goodwill, the premium that companies paid for acquiring other firms. Goodwill is something like “blue book” value on a car. It's a presumed value, or what a company paid to buy another company based on a lot of assumptions about the value of such intangibles as reputation, customer list, credit rating, etc.

Until this year, companies carried the goodwill on their books, writing it off in relatively small quarterly amounts spread over 30 to 40 years.

Now, they face an “impairment test” that could require writing off big amounts quickly. Some estimates place the writeoffs at hundreds of billions of dollars in coming years; others peg the amount at up to a trillion dollars. A trillion here, a trillion there, and pretty soon you're talking serious money.

Earnings forecasts are specious, too, although perhaps less so now than in the high-flying late 1990s. In extreme cases, missing the target by just a penny or so can cause a stock to nosedive, or to soar. What's so different in the fundamentals of the stock? Nothing.

The cautious consumer needs a sharp pencil and a suspicious mind.

Refund-anticipation loans and payday loans are perfectly legal. And at first, they seem to be perfectly wonderful. Get your tax refund faster. Get your pay faster. But the math doesn't work very well. The annualized interest rate for such short-term loans can be hundreds of percentage points.

Many a homeowner has refinanced in recent years at what seemed to be extremely low rates - perhaps well under 6 percent - only to find much of their savings disappeared into fees for services not rendered, or needed. It doesn't do much good to get a low rate if thousands of dollars in fees are tacked on - unless the consumer keeps the home for many years.

And, just as there is no free lunch, there is no zero-percent financing. The consumer is paying the freight, one way or the other. Too many consumers look at the interest rate without considering the actual cost of the car.

And others could do better by taking cash back from the dealer as a down payment on an interest-bearing loan.

It sometimes takes a little while to figure out a riddle. But it's satisfying in the long run.



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