Skip to comments.Accounting for (Congressional) Dummies
Posted on 02/15/2009 5:17:24 AM PST by Kaslin
This week, I watched, with amazement, Larry Kudlows joust with Congressman Brad Sherman about accounting. Sherman was fresh from his Stalinist show trial of bank CEOs. Having spent the afternoon berating the banks for having the audacity to pay a dividend to their beleaguered shareholders, Sherman went on to lecture Kudlow about the same topic. Larry pointed out that the money for the dividends didnt come from TARP and so it is really none of congresss business. Sherman said that, because dividends come from capital, that indeed it was taxpayer money.
Kudlow was right, and Sherman needs a little accounting refresher. Dividends are paid out of retained earnings, which is the accumulated net income of the business. They are not paid out of direct investment accounts such as preferred stock. The TARP money was in the form purchase of preferred stock, which is a completely separate account than retained earnings.
Its actually even a little bit worse for his case: companies pay dividends out of the retained earnings account, which means even companies that dont have any net earnings can pay dividends without touching TARP money, because retained earnings are the accumulated wealth of prior years of net income. If I lose money this year, but made money last year, and I pay a dividend this year, the money is not coming from preferred stock accounts, or common stock accounts, its coming from the net income of prior profitable years. Bank of America, for example, is sitting on over $70 billion in retained earnings, all available to distribute to the shareholders to whom it rightly belongs.
The bookkeeping entry is simply this: you credit the cash account, and you debit the retained earnings account thats it. No debit to the preferred stock holder account.
In other words, the dividends are paid with corporate earnings, just as they should be; not with TARP money.
Brad Sherman is not just a member of the House Financial Oversight Committee; hes considered the resident expert on topics such as finance and accounting for the group. Nevertheless he was flat wrong on the core question in his debate with Kudlow. He confused different capital accounts with one another.
Is this not a little scary?
On the other hand, Sherman is a smart guy, he has a number of summas and magnas attached to the various laudes on his resume. Could he really have forgotten Accounting 101? Perhaps he really did know the truth, but was happy to fudge his answer, obscuring the truth, because the truth was simply not in his interest at that moment.
Is this not every more scary?
Whether mistaken or malicious, Sherman and his crew are severely harming shareholder capitalism. They are claiming control over the entire shareholders equity portion of the balance sheet based on the relatively small section into which they have placed their investment. They are asserting sovereignty over things to which they have no legitimate moral or legal claim.
All of this raises some fascinating questions, the timeliest of which is: How does a CEO answer questions about financial accounting when theyre asked by dimwits who dont know enough to understand the answers? Honestly, I dont know what I would do if I were in the CEO punishment seat being thumb-screwed by Barney Frank, or mau-maued by Maxine Waters. I hope that Id confess to the truth which is something like:
Congressperson, youve asked questions about matters of financial accounting, but have not taken even the slightest effort to familiarize yourself with the vocabulary or principles of this technical discipline. Do you know anything about double-entry bookkeeping? If I told you that a dividend payment is a debit to retained earnings and credit to the cash account, would you understand any of that? What was your major? Do you balance your own checkbook? Do you prepare your own tax return?
Given the Stalinist show trial we saw this week -- all based on what appears to be a plain ignorance of a few simple accounting principles -- it would appear to be a public service to point out that the dividends, salaries, junkets and all the rest are done without a single deduction from the capital accounts into which the taxpayer funds were shoved.
Looks like he went into a battle of wits with Kudlow unarmed.
“Sherman said that because dividends come from ‘capital’ it was indeed taxpayer money.”
Doesn’t Mr. Kudlow know that everything belongs to the state and that greed is a crime and that all comrades must stick together?
They are PRESS EVENTS to solicit more Campaign Contributions for the Democrats and capture the 5 sec soundbites the News Media so desperately needs to survive !!
What was once serious discussion over serious matters ...has now become the MEDIA CIRCUS !!
As Americans, we need to REPLACE or KICK OUT every member of the House and Senate that has been on the Public Dole for over 10 years !! These career politicans have to go!!
Maybe then and only then ...will the people's real work get done !!!
Personally I think there are two possibilities.
First is sheer ignorance of their subject. Ignorance is bad, no excuse, but may be OVERCOME with a concerted effort.
SECOND, and MUCH worse, is what I personally fear. That is a FEIGNED IGNORANCE. I heard and then read the words of ignorance spouted by our “honored” politicians. These leftist rantings are accomplishing a long and dearly held purpose of the looney left. Namely to DESTROY the reputation and position of the Captains of Capitalism.
The intended target of the harsh criticism and scornful words are the PEOPLE WHO ARE HAPPILY WATCHING AS THE NEW REGIMES FINALLY PUNISHES THOSE WHO HAVE IT ALL.
CEO’s must now travel, hitchhiking by the side of the road, afraid to enter their evil corporate jets. A good thing. How many are aware of the number of JOBS LOST by the people who build and maintain and fly the things? How many even care?
People who receive a “BONUS” for successful performance are vilified, while money is shoveled to those whose most consistant attribute is abject FAILURE.
I, personally believe that those in the seats of power know EXACTLY what they are saying and EXACTLY what they are doing.
“Women, children, and Mawgs to the lifeboats”
BUT, dividends are paid with available CASH. If the Fed.gov injected CASH into the enterprise, it gave it positive cash flow, and thus enabled it to pay dividends. So, taxpayer money probably WAS used to pay those dividends. The CEO is trying to obfuscate the issue.
Dividends are paid out of retained earnings, which is the accumulated net income of the business. They are not paid out of direct investment accounts such as preferred stock. The TARP money was in the form purchase of preferred stock, which is a completely separate account than retained earnings.
No, I did not miss that. I am a CPA. Capital accounts are what are CHARGED for dividend distributions, but all dividends are PAID with CASH. No cash = no dividends, unless it is take-in-kind, such as dental floss from a floss or toothbrush manufactureer.
To have the banks cry that see “I’m broke, broke I tell ya. See my left pocket is empty. (never mind that my right pocket is stuffed with 60 billion or so)” is B.S. There is only one accounting rule that matters here. If you invite the camel nose (government) into the tent, don’t be surprised when you get the whole camel.
That is what I heard last year when they were distributing the money and when our local bank had a lunch for the community to explain what they received. The CEO of Umpqua Bank said the fed money they received was a loan at 5% interest with a balloon for the unpaid balance in 5 years. The interest would increase to 9% if not paid in full in that 5 years.
If this is similar to what other banks received it is a loan and the fed or congress or the taxpayer have no say what they spend it on, until they default.
I refuse to engage in a battle of wits with someone who is evidently unarmed.
After that goes over their head, how about, “Hey Barney, why don’t you stick to something you know about, like running a male prostitution ring?”
It’s not just economics where CongressCritters are deficient, it’s also the Constitution and Bill of Rights.
I would bet that maybe five or six CongressCritters have even read the entire Constitution and Bill of Rights and that none have read The Federalist Papers.
SEND them a copy. Mine go out next week with a cover letter.