Fictitious value, fictitious profits

Accounting has always been mysterious to me. A private equity firm takes over some large corporation, saddling it with a huge amount of debt or using workers’ pension funds to pay off stockholders. In the process, the private equity firm takes out exorbitant sums as payment for its efforts and then continues to take out exorbitant sums as a management fee.

Much of this money appears to be profit.

Eventually, the debt proves to be too much. The company fails. The workers lose their pension funds. Overly optimistic investors find themselves holding worthless stock. Their losses do not appear as a subtraction from profits.

Some of the company’s value will disappear in bankruptcy, but much of it is already disappeared in the form of debt which it has taken over.

What am I missing?

1 comment so far

  1. Alejandro Valle Baeza on

    Michael, I am looking for an answer to this important question by myself. Have any progress on this?

    Saludos
    Alejandro Valle


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