So for a while now we have all been hearing about this whole government bailout for financial institutions.  Well, the dust has settled and the Obama administration has left its mark on history.  While no disrespect is intended, Obama sure has provided some “change.”

For starters, he changed the record for most money involved in a bill passed by the United States.  He will change the way some companies books look.  He will change the value of our dollar by freely throwing another $800 billion into our economy.  Sounds fun doesn’t it?

Recently a friend of mine put together a blog concerning the plans many politicians have with how to go about taking care of this financial crisis.  I will tell you right now, the worst way to reduce debt is by creating more of it, and at an exponential rate might I add.

One of the speculations of what will be done with all this money is the re-purchase of some bad assets, bad debts, bad securities, and liabilities.  This sounds great to the average person, however, such transactions can have very negative affects on a companies financial statements.  What is more is that these money hungry institutions are the reason why our economy is in the toilet.  That and our fun-loving consumers who think making $30,000 a year and spending $120,000 is a way of living.

My only concern with this idea of giving banks funds for bad assets as well as buying liabilities/securities that have gone bad is the balance sheet effects these transactions would have. What will most likely happen to most of these banks is a large extraordinary loss will be reported on their income statements due to the fact that their is no way in hell that the government will be willing to give them anywhere near the adjusted basis of most of those assets, which is what translates into a negative result for company’s balance sheets and income statements.

To explain what was said above, say ABC Bank has an asset on their books in which the adjusted basis (book value after depreciation) is $2 million.  Then say the government looks at this asset and says, “$500,000”, well now what happens to this $1.5 million difference?  See my point?  Let’s not forget what effects this will have on the stock market, granted, their is no logic that can explain that psycho ward, but say we were actually using logic to explain the stock market, this loss would be a bad thing.

The plus to that is with the new stimulus bill, these institutions would be allowed to transfer NOLs to all the way back to 2005.  NOL is the acronym for Net Operating Loss.  This refers to any net loss from a business for a specific year of business.  Usually, NOLs can be carried back two years and forwards 20 years, the beauty of this is you can use a loss from this year, to amend a prior year’s income, reduce it, and receive the tax benefit of a refund on the amount of your NOL.  Granted, the amount of the benefit is dependent on the tax bracket in which the company in, however, something is something.  Obama’s bill allows companies to take 2008 and 2009 losses back to 2005.

With most companies reporting in the red last year and this year, this may all turn out to be good on paper, however, all this does is further reduce government revenue and force us to rely more on debt as a means for financing our stimulus bills and really expensive inaugurations.