Readers Talk Back, May 2001

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Payable When-Able

Re: Back to the Grind: Lucent Loan Customer Nears Collapse

Scott Moritz: Many telco companies became "bankers" to their own customers. They supplied not only goods, but also money to buy those goods, without taking precautions for the customers' creditworthiness -- something a normal banker would do. Their sale was on consignment, rather than an outright sale that generates revenued profit. By reflecting such consignment sales as real sales, companies like Lucent (LU Quote) were booking revenue and profits excessively. This practice amplified their growth factor in earnings -- on which stock price usually depends. Most of such exercises in the telecom sector were aimed to boost the stock prices of respective companies, which created the bubble.

Such consignment sales allowed the customer to follow the policy of "Payable When-able" instead of payable when due. This is nothing unusual. Most of the trading companies fail when they try to fund their customers beyond their means. ...