Saturday, April 25, 2009

Madoffing the U.S. Financial System 


April 25, 2009 

I reprint Zeus Y.'s important essay today because it makes a critical point few emphasize--that the lies we're being told are being swallowed whole because many of us don't seem to want to know the reality looming behind the smoke and mirrors.

I received the following incisive comments from Zeus in an email:

It continues to amaze me how much people try to divert the obvious. I'm tired of people using words like "unthinkable" and "unknowable" to describe the value of CDS (credit default swaps) and now they might as well be screaming, "We don't want to know. Tell us lies, tell us whatever, just don't cause me anxiety." Am I in the minority? My anxiety disappears when I know. It's this surreal Emperor-with-no-clothes train wreck that everyone is trying to paint as a mere blip that makes no sense to me.

"C'mon," I want to say. "They've already proven that they've consistently and thoroughly enriched themselves at your expense." It is central to their operation. The whole system runs on it. Do you want to continue to be taken after the con has already been exposed? How can that lessen anxiety? "Oh, I've been ripped off. They're doing the same things without any transparency or accountability. Now, I feel so much better!" It's flat-out loony.

We're seeing as much a social psychological watershed moment here (as well as financial, and frankly environmental watershed). We've got to understand the benefit and joy of reality and stop with the damaging fantasies we've bought into. They don't work even when they "work". If everyone could actually be a king (instead of a sucker), the environment would collapse and we would die in a much shorter time. Consider this collapse a grace period to get our crap together and create another system.

This one has proven it does not work, and thankfully, proven it before it takes out the entire globe.

Thank you, Zeus. Here is his insightful essay, in case you missed it. If you reprint it or link to it, please credit it to Zeus Y.

Madoffing the U.S. Financial System

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, etc. 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 St. Louis president, told Reuters at a conference in New Orleans. "It may increase reported bank earnings by 20 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 "90 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 90 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 3 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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