[R-G] [BillTottenWeblog] Madoffing the US Financial System

[Bill Totten]

by Zeus Y

of two minds.com (April 22 2009)


We are seeing unfold before us nothing short than the Madoffing of the
U.S. financial system. The recent reports of profitability for the major
financial companies - Bank of America, Goldman Sachs, Citigroup, et
cetera are exactly Bernie Madoff on a large scale.

Here is the recipe: 1) Cannibalize incoming capital and investment to
keep the bonus, fee, and salary gravy train going for broker and firm,
2) Sustain the illusion of solvency by paying dividends and claiming a
profit, and 3) Ensure through accounting tricks that liabilities are
never counted. It's very easy. Hand out phony returns, based on
laundered incoming bailout and investment money. Skim your take. Hide
liabilities. Delude people into thinking you are profitable.

Investment banks have all they need to keep the fraudulent charade
going: 1) Highly fungible bailout money, much or most of which has no
strings, no requirement even to notify lending authorities where the
money is going, 2) The power to price assets, including so-called "toxic
assets" (sic), in any way that suits them [freed from "mark to market"
accounting], 3) An immense amount of greed, entitlement, opportunism,
and nihilistic amorality among the leaders and managers of financial
institutions, and 4) political enablement which accedes to "too big to
fail" blackmail, conducts inconsequential and invisible "stress tests",
and assures institutions that no matter how badly or corruptly they
perform they will not be taken over.

Forget that manic or addicted behavior has never been solved by
enablement. Enablement, in fact, only makes the problem worse by
delaying the inevitable and necessary coming to terms.

The Financial Accounting Standards Board's (FASB) recent ruling that
banks can establish prices for their assets any way they choose leaves
us with a huge valuation-of-assets problem: "I think it's a mistake. If
it's too cold in the room, you don't fix the problem by holding a candle
under the thermometer", William Poole, former Federal Reserve Bank of
Saint Louis president, told Reuters at a conference in New Orleans. "It
may increase reported bank earnings by twenty percent, but it has
nothing to do with the reality of bank earnings. It's very important to
maintain that distinction", Poole said.
(http://www.bnet.com/2407-13071_23-284495.html)

This might alternatively by called the "ninety trillion dollar blender"
problem (www.calculatedriskblog.com). South Park did an unfortunately
"truth is stranger than fiction" satire on the finance industry in which
the industry leaders claimed a Margaritaville blender was worth ninety
trillion dollars. FASB's ruling allows them to do just that. If you live
by the market (including wildly inflated values), then you should die by
the market. Even if you feel your assets are undervalued, you should at
least give an accounting as to what they are, why you think they are
undervalued, and submit your reasoning to public scrutiny and debate.

As far as I know there is no such requirement presently, and therefore
no transparency or accountability. Banks can simply assign whatever
worth is convenient for their purposes. This gets back to the
counterfeiting charge I leveled against credit default swaps. This is
simply phony money. If I can say my pen is worth three million dollars
and then borrow against that to try to make a quick buck in some
investment scheme, I am committing fraud. Banks do it, and they are
acting legally? If past performance is any indication of future
behavior, investment banks are probably right now continuing to make
highly risky, highly leveraged investments to stoke their personal
largesse, while hoping for a Hail Mary patch for their company's books.
These addicts won't be kept from their crack.

I know President Obama is trying with his conventional approaches to buy
time, space out damage from financial mismanagement, and avoid a panic.
There is probably some wisdom to that. However, trusting these companies
to right their own ship after the atrocities they have consistently
committed is suicidal. Why don't we just pick off these institutions one
at a time. I am almost certain that even generous stress tests have
shown the major players to be insolvent.

Instead of indulging in corporate welfare to bail out these crooks,
force the worst in order, one by one, into receivership (with adequate
time in between to absorb and reallocate assets), wipe out the
stockholders and bondholders, and sell off the healthy parts. If fraud
has been committed, seek criminal conviction and set up a special civil
court to allow stockholders and bondholders to seek damages. This will
help avoid the "Oh, crap" factor and attendant market panic.

However, it will also mean we as a society will need to take the heat
and full responsibility. Gray Davis, according to the documentary
"Enron: The Smartest Guys in the Room", had the power to do this with
Enron (go in and take them over), but he demurred, as Obama has, to the
mistaken notion that private market players are always the better
arbiter of the mistakes created by those same players.

This protracted travesty is the logical outcome of an economy
increasingly dependent upon financialization -the notion that, "Your
money can work for you; you don't have to work". Increasingly endless
and abstract mechanisms must be developed to create a notion of "growth"
that has lost its foundation in real productivity. Our whole economy is
being kept afloat by international demand directed, at first, at our
derivatives and other phony high-yield financial vehicles, and now (in a
reactive spasm) conveniently directed at our "secure" bonds (which is as
you noted, Charles, another emerging bubble).

As long as we insist upon enabling this money-for-nothing illusion in
ourselves and our financial institutions, our problems will get worse
and our character will take a beating.

_____


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