Remember fondly the days of reality-based accounting

It is something sold but not quite bought. Is it an asset? Is it a debit? Is it a risk? Who cares?! Whatever it is, by the dark-side powers of the zombie spawn of Arthur Andersen, it is off the goddamn balance sheet.

To shareholders and analysts, it is as transparent as bituminous coal.

It is, some say, pure alchemy.

It is, say others, probably illegal (we shall see).

It is now causing anguish and mischief for Citigroup, Bank of America, and a few other Giant Arrogant Smartass Financial Corporations -- and of course anyone who owns stock in these companies or whose mutual funds hold shares in these companies or whose IRAs/401Ks contain shares in these companies.

Liquidity puts.

It’s an arcane financial term. It’s not a subject and verb, like “reality bites,” although the ultimate effect may be the same. Here’s how the game is played (poorly).

Banks put together collateralized debt obligations, or C.D.O.’s, many of which held subprime mortgage loans as assets. The C.D.O.’s were financed by issuing their own securities, and the risk of mortgage defaults seemed to pass to the people who bought the securities.

Or so all the financial reporters and Wall Street analysts seemed to think.

But we now learn that some banks also handed out liquidity puts, giving buyers of C.D.O. securities the right to sell them back to the bank if there was no other market for them. That risk may have seemed slight when the securitization market was booming. But now the banks are being forced to buy back securities for more than they are worth.

That’s not good. In fact, it's very, very bad. And these are the guys who went to Wharton and Harvard and Yale -- just imagine how your idiot brother-in-law would have screwed up.

With such a put in existence, [it is hard to] understand how the banks could get the original loans off their balance sheets. How could they claim they had sold something if they could be forced to buy it back? It will be interesting to see if the Securities and Exchange Commission challenges the accounting.

Indeed, it will be very interesting.

But even if the accounting was completely proper, it was not very informative. It does not appear that any banks chose to mention the puts to investors before this month.

The delicacy of that statement is crushing.