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Former Managing Director of Goldman Sachs: Accounting Fraud of the Too Big to Fails May Be Worse Than Enron
Nomi Prins - former managing director of Goldman Sachs
and head of the international analytics group at Bear Stearns in London
- is saying the same thing that financial bloggers have been saying:
The giant banks are manipulating their books to make themselves look
profitable.
In fact, Prins says that this might be worse than the fraud which occurred at Enron:
Enron
was the financial scandal that kicked off the decade: a giant energy
trading company that appeared to be doing brilliantly—until we finally
noticed that it wasn’t. It’s largely been forgotten given the wreckage
that followed, and that’s too bad: we may be repeating those mistakes,
on a far larger scale.
Specifically, as the largest Wall Street
banks return to profitability—in some cases, breaking records—they say
everything is rosy. They’re lining up to pay back their TARP money and
asking Washington to back off. But why are they doing so well?
Remember that Enron got away with their illegalities so long because
their financials were so complicated that not even the analysts paid to
monitor the Houston-based trading giant could cogently explain how they
were making so much money.
Surely someone with Prins' financial background can sort out the accounting of the TBTFs?
In fact, no:
After
two weeks sifting through over one thousand pages of SEC filings for
the largest banks, I have the same concerns. While Washington ponders
what to do, or not do, about reforming Wall Street, the nation’s
biggest banks, plumped up on government capital and risk-infused
trading profits, have been moving stuff around their balance sheets
like a multi-billion dollar musical chairs game.
I was trying to
answer the simple question that you'd think regulators should want to
know: how much of each bank’s revenue is derived from trading (taking
risk) vs. other businesses? And how can you compare it across the
industry—so you can contain all that systemic risk?
The giant banks have played so many games of massaging numbers (see this), hiding losses off the books (see this)
and - as Prins documents - failing to report core data and shuffling
things around so that it is impossible to tell what they are doing.
Indeed, financial writers (like Reggie Middleton, Mike Shedlock, Tyler Durden, Karl Denninger and others) who have dug deep and analyzed the underlying data say that the giant banks are totally insolvent. This wouldn't be the first time that the biggest banks went bust and then covered it up over a period of many years.
Prins offers a solution:
The
long-term solution is bringing back Glass-Steagall. Being big doesn’t
just risk bringing down a financial system—it means you can also more
easily hide things. Remember the lesson from the Enron saga: when
things look too good to be true, they usually are.
Yes, and break up the too big to fails.
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I agree. They should have wiped out the common and preferred shareholders of the worst banks and forced the bondholders to take a big hit to recapitalize them. But they were afraid of the huge losses that would have inflicted on insurance companies, pension funds, mutual funds and others who held those securities. It probably would have triggered failures of some insurance companies and other institutions.
This is not just a U.S. phenomenon. From everything I read the European banks are in even worse condition and even less forthcoming about their exposures and the size of some of the European bank bailouts relative to GDP (particularly the U.K. and Ireland) dwarf the U.S. bailouts. Imagine the taxpayers of a country the size of Ireland trying to backstop 3 banks that are doing business around the world.
CDS must have collateral, standardized, and traded on exchanges.
This is how they are gaming the system.
That will never happen, Kurtz. To do that, existing CDS contracts, and they are contracts made of kriptonite, (as the AIG bailout made so sweetly clear) would first have to be wound down, settled, rendered. But you can't change the rules of the game when the game is still on, and that game is massively still on. As of end June, 2009, there were still 36 Trillion in CDS contracts out there, half of which had 1-5 year maturity dates. Who knows how many there are by now. Those contracts are not standard, they are traded OTC, the collateral is junk paper, and the seller is not required to maintain sufficient capital to pay off on claims. That's why Dodd, Frank, Timmayy, Obama and Co., are leaving a nice loophole in derivative regulatory proposals for credit-related insurance products. The CDS scam is a fundamental one, and it's too big to fix.
What this tells us, first of all, is that the IMF chief was right when he said that half of bank losses remain hidden on the books, and second- that smart money is still shorting the system, betting on a multi-trillion dollar massive scale that collapse of debt securities is still looming over the next half-decade. This game has to be, can only be played in the dark, and the players have our government by the throat.
YOU NAILED IT
Question: How is the "smart money" shorting the system? Shorting is a very short term strategy, as far as I can tell. You have to time it perfectly or you get squeezed like hell and blown up. So how exactly is the smart money doing that?
Good question... but it seems to have been ignored on this thread. Let me take a stab at it.
Lender who has exposure in a transaction buys "insurance" from a firm willing to "write" the insurance. I think that is the essence of the contract.
Lender with exposure to loss is esentially buying a "put". If the borrower can not make good on the loan, the value of the loan declines, but the lender with the "put" takes no loss, as he has hedged his position.
Just like the options market, there are two parties to the "put" contract... the put buyer (the lender with risk--the loan) and the put writer (the contra party) willing to accept the premium paid and accept the risk in the loan..
in market shorthand.. the lender has shorted (bought a "put") the loan.
does that help?
Billy Bob
i thought the cds was 60 trillion in the us....globally its 600 trillion...that's 600,000,000,000,000....the system will crash. it will be astonishing!!!
Every time you see a discussion of the CDS market in the MSM someone will always pipe in that "emm err its not a problem because these are only NOTIONAL values"
Well, the Bank for International Settlements end June report says $36 trillion, down from $60 trillion. While that is certainly not the total figure, remember, there is no requirement for transparent reporting, it's not off by a factor of 10-15. Banks use this information. Then again, I suppose, who knows?
The important thing in the $36 trillion figure is not that it has gone down. That was to be expected. A huge amount of debt and derived securities have been wiped out or written off, taking their CDS hedges out with them. The important thing to note is how much risky debt is still out there, lurking, hidden on the books by the suspension of mark-to-market, in the desperate view of institutional investors and hedge funds. They are still massively purchasing swaps contracts as quasi-insurance against toxicity of that paper.
Around $36 trillion, and it is probably more, certainly not less, is an enormous short position. Again, remember, the credit default swap market did not effectively exist a few short years ago. It arose to game the system and protect big players from the reckless gambles they knew they had taken, primarily in the CDO market.
So, the massive bet against the future that began around 2005 is still the dominant position. AIG and its counterparties took advantage of a loophole in the law and engaged in insurance fraud. Instead of closing that loophole, Obama, Timmayy, Frank and Dodd are turning the loophole into a law. It's the same concept as giving retroactive immunity for warrantless wiretapping.
http://www.bloomberg.com/apps/news?pid=20601103&sid=airX8gvnyGmA
http://news.medill.northwestern.edu/chicago/news.aspx?id=151019
Bravo Col. Kurtz.
If Geithner is making unannounced trips to the Senate then the Banksters are feeling hot breath on the backs of their necks.
True but why are "banks" allowed to trade them anyway?
Because they have a group of international banker lawyers making up laws trying to turn them into real things with banking events setting precedents for something that shouldn't even exist because it's happening without adult supervision.
No shit. Do you have any real news?
Re-establishing Glass-Steagall is like re-establishing the uptick rule. It won't happen. Too many fat cats with too much influence.
The long-term solution is bringing back Glass-Steagall.
Something about closing barn doors after the horses have bolted comes to mind... but it would be a start.