Compucredit (CCRT)

CCRT saw growth in both its revenue and income, but the growth was simply an accounting story. Gain on sale accounting is the practice of recognizing revenue as a result (in this case) of securitizing loans. CCRT originated or purchased loans, and then changed their carrying value, recognizing a gain or loss from securitization. This accounting policy recognized revenues and income for CCRT, but the cash flow statement told the true story. When adjusting the cash flow statement for the actual operations of the company, accounting for the revenues and expenses associated with loan securitizations as operating activities instead of financing activities, the company was losing substantial amounts of money. To calculate the gain recognized, the company used a number of assumptions to attempt to determine how the loan would perform over its life. The assumptions were extremely aggressive and exceeded the actual performance. We warned our clients in September of 2000.

Current Example: Radian (RDN)