Some intraday data series do not contain a buy/sell identifier for trades. As most estimators of transaction costs require this information, an algorithm is necessary to classify trades as buy or sell. When bid/ask quotes (or best buy/sell limit order prices) are available, a natural method is to compare the trade price with the quotes prevailing at the time of the trade. Trades at or above the ask (or best sell limit price) will be classified as buys, trades at or below the bid (or best buy limit price) will be classified as sells. This algorithm will leave trades within the quotes unclassified. Trades within the quotes may be either ‘crosses’ (trades negotiated outside the central market place) or trades where a floor broker or the order book improved on the price of the specialist’s quote, as often happens on hybrid markets like the NYSE. Lee and Ready (1991) show that this algorithm is very reliable and classifies most trades in the same way as the classification based on a comparison with bid and ask quotes.

I believe we are at the tail end of a nationwide real estate bubble. By any fundamental perspective, property prices have gotten out of hand. In some locations, this may mean a significant depreciation. In other, better locations (the Sun Belt, certain cities), it may mean a two- to four-year deflation of 10 percent or 15 percent. The worst depreciation will probably occur with condominiums, which are traditionally overpriced, overfinanced, and too heavily owned by speculators during bubble periods. That said, I’m confident that you will be able to find good real estate deals this year, next year, and each year thereafter during the downturn.

I’m bullish on entrepreneurship. And I’m at least as bullish on real estate. Stocks are much riskier than real estate—to me—because (1) I’ve lost money investing in stocks and/or stock funds time and again and (2) I’ve seen so many others lose money. Again, I do believe that the stock market has been and will continue to be a pretty good long-term investment. But long term as far as the market goes is a 10- to 20-year time frame. Since we are concerned with getting wealthy in 7 to 15 years (and since the market is currently overvalued, from a fundamentalist’s point of view), I don’t feel confident in stocks.

Nevertheless, since I began actively investing in real estate—about 11 years ago—I have never lost money on a single transaction. The worst two deals I’ve been in since my first big lesson (i.e., disaster) produced yields of 7 percent and 12 percent annually. And that’s not including tax benefits—which were significant. Most of the real estate investments I’ve made have been good to great.

The general ledger exists for three main purposes: It serves as a summary of every transaction as recorded in the books of original entry; it’s the source document for all financial reports; and it offers an audit trail for tracking individual transactions, should that become necessary.

As the heart of the company’s financial body, the G/L records all transactions that occur within the company’s business activities. It also functions as the center of the firm’s books of original entry. When individual transactions are recorded anywhere within the subsidiary ledgers (subledgers), such as accounts payable or accounts receivable, they feed up to the G/L. (If a business is relatively small, there may not be any subledgers. However, even if you work in a company with such a simplified accounting system, it’s good to know how a more sophisticated system works.)

But the G/L is not a single document. Its content is augmented by receipts, journal entries, invoices—paperwork known as “source documents” that support the transactions recorded within. They all roll together, in fact, to form the company’s accounting system, with the G/L at its heart.

Why is it important for any manager not responsible for financial matters to understand general ledger processing? Well, why is it important for a salesperson to understand the nature, properties, and construction of the item he or she is selling? Financial management is a crucial part of your position. The more you know about what takes place on the accounting side of the fence, the better off you’ll be.

Debits are always listed on the left-hand side of T accounts. They represent an increase in asset and expense accounts, or a decrease in liabilities.

Sometimes, the accounting process appears to be a mirror image of what logical thought says it should be. But there’s a root of logic to it that makes it more than just an algebraic equation. Remembering the following formula may help:

Assets = Liabilities + Owners’ Equity

Assets are goods owned by the company—real estate, inventory, and other items of value. Liabilities are obligations, generally owed to suppliers. Owners’ Equity is what belongs to the owners.

If the owners decided to sell all the assets and pay all the liabilities, what would remain belongs to them—their equity. The formula would then work as follows:

Assets – Liabilities = Owners’ Equity

from this simple equation we derive the basic method for recording all business transactions in terms of their effect on the various accounts.

It’s clear that owners’ equity is increased by amounts invested by the owners, and de creased by what they withdraw from the company. It’s also clear that if we order some materials, we’re increasing our assets and increasing our liabilities. Unfortunately, it’s not all that easy. However, you should understand the basic concept of T account diagrams and how they reflect business activity in terms of debits and credits while maintaining the balance of the assets = liabilities + equity equation.

Although there are many benefits associated with loan workouts, they can suffer from drawbacks that make them unsuitable for all cases of corporate distress.

The principal problem is that they need all the participants affected by the terms of a workout to agree to its terms. This can create a ‘hold-out’ problem, whereby one or more disgruntled creditor can demand disproportionately preferential terms in exchange for their consent. Similarly, parties not necessarily directly affected by the loan workout, for example trade creditors, may seek to improve their position by taking, or threatening to take, legal action to recover their exposures to a company. This can undermine the entire process.

In addition, the structure of the creditor group in amulti-creditor workout can have a considerable impact on its effectiveness. The larger this group is, and the more divergent its interests are, the more difficult and time-consuming the process of developing a consensus is likely to be. For example, a loan workout involving a significant number of banks, purchasers of distressed debt, bondholders and shareholders, with each group potentially having conflicting objectives, may not be possible to agree without some form of recourse to the courts.

One of the major advantages of loan workouts is that negotiations can be conducted in private. In some situations, the entire process can be resolved without any publicity, thereby avoiding uncertainty among customers and suppliers, and any consequent instability to the business. Even in cases where the disclosure of a company’s financial problems is unavoidable, for example to meet local stock exchange requirements for quoted companies, the parties involved are usually able to manage communication flows better outside a statutory process.

The participants in a loan workout are able to retain control over the transaction, rather than relinquishing it to the court. As a result, the final outcome more closely reflects the needs of the participants most affected by the company’s problems. The ability to control the process also results in flexibility. Provided the needs of the participants are met, the process (for example, the timetable) can be varied to respond to the prevailing circumstances. This is often impossible under a court-administered process.

The range of solutions possible, for example, the use of innovative financial instruments, is often greater under an out-of-court process. Less reliance on the legislation and judiciary can overcome many of the other shortcomings associated with statutory processes highlighted previously in this chapter. For example, transactions can usually be completed quicker, and with more focus on commercial issues. The fact that it is up to the participants to agree a financial restructuring and ensure the rescue of a company, rather than delegating that responsibility to a third party, can also engender greater ownership and commitment to the process.

As markets become international, companies serving them have been expanding geographically. Even small- and medium-sized enterprises need an international presence today. In addition to multiplying the impact of many of the factors under discussion, global corporate rescues bring unique challenges. Perhaps most importantly the activities of a group can become subject to the incompatible insolvency rules and regulations of different countries. The internationalisation of banking and capital markets has meant that lenders may also face different local constraints, for example, in the areas of loan loss provisioning, taxation and lender liability. The impact of variations in formal rules and regulations is exacerbated by different local traditions, cultures and practices.

Although globalisation is adding to the complexity of loan workouts, it also brings many benefits. International banks are exporting best practice in this area to new countries. The adoption of variants of the London Approach in many South-east Asian countries is an example of this. Moreover, a cadre of industry professionals comprising bankers, accountants, lawyers and consultants are now working globally. Their activities are considerably improving the technical skills of local participants in loan workouts.

An increasingly competitive banking industry and a more critical focus on return on capital, is shortening the decision-making horizon. There is less willingness to become drawn into complex and time-consuming loan workouts. As a result, practices such as the sale of distressed debt are becoming more common. A more competitive environment for companies means that if their financial problems are publicised, it can have a severe impact on their prospects for survival. Increasingly stringent disclosure requirements, for example for stock exchange quoted companies, exacerbate this problem. All these factors contribute to considerable instability in a workout transaction. The diverse range of interests represented in a workout add to this instability. Consequently, the time available to develop and negotiate a restructuring is curtailed.