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Insurance industry

Green Tree Financial Corp. Faces Additional $350 Million in Charges

Strategic Insights

— 1 min read

Green Tree Financial Corp., once the nation's largest mobile home lender, has disclosed that it will need to erase another $350 million from its bottom line due to questionable accounting practices. This comes just six months after the company declared it had cleansed its income statements, taking a $390 million charge to cover the issue. The new charge effectively wipes out Green Tree's 1997 annual profit of $301 million, indicating that the company's accounting problems may be more severe than initially thought.

Key Takeaways:

  • The additional $350 million charge brings the total charges to $498 million, covering the acquisition of Green Tree by Conseco Inc. and its accounting practices.
  • The charges include $350 million to revamp accounting methods and $148 million to pay merger fees, severance costs, and other expenses.
  • The gain-on-sale accounting method, commonly used in sub-prime and specialty lenders, allowed Green Tree to post profits up front, but led to a series of accounting stumbles in the sector.
  • Green Tree initially disclosed the issue in November, stating it would need to shave $390 million from 1996 and 1997 earnings, but the new charge indicates that more work is needed.
  • Conseco has increased its assumptions on loan defaults and prepayments, and has raised the rate at which it discounts expected future cash flows to the present to 15 percent from 11 percent.

Statistics:

  • Total charges: $498 million
  • Additional charge: $350 million
  • Revamp of accounting methods: $350 million
  • Merger fees, severance costs, and other expenses: $148 million
  • Initial charge: $390 million
  • Green Tree's 1997 annual profit: $301 million
  • Rate at which Conseco discounts expected future cash flows: 15%
  • Percentage decrease in Conseco shares pre- and post-announced acquisition: 17.1%
  • Conseco shares closed: $50

Sources:

  • [1] "Green Tree Faces Additional $350 Million in Charges: Analysts Praise Conseco for Being 'Conservative in Its Accounting Policy'"
  • [2] Securities and Exchange Commission (SEC) filings: Conseco Inc., Green Tree Financial Corp. (unspecified date)

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