The Con Game Of Writing Up Assets

Wolf Richter's picture

Wolf Richter

Normally we see the gory details only after a firm collapses, like Enron or Lehman, when vultures tear open its guts to fight over shriveled assets that had appeared fat and healthy on paper, and some of them had been written up repeatedly to create—which our accounting system encourages us to do—paper income.

Other outfits get bailed out. JPMorgan among them. A distinction made behind closed doors. They still have hollowed-out balance sheets ... and the certainty, if they’re large enough, that the Fed and the Treasury, or central banks and government agencies around the world, will prop them up at a moment’s notice. Confidence is required to keep the scheme going. Once confidence fades, the scheme collapses, and central banks have to print trillions and hand them to the industry so that confidence will reassert itself, and so that the scheme can be driven to the next level. And yet, it’s all about prosaic accounting.

Accounting rules allow the use of estimates to value many assets. And estimates can be written up. If a trader or an executive imagines that an asset has increased in value, he’ll set in motion a chain reaction that will cause the company to make the adjustments, increasing the value of the asset with one entry and increasing by the same amount an income account. It’s all good. Asset value goes up, profit goes up. Trader bonus goes up. Manager bonus goes up. CEO bonus goes up. Investors froth at the mouth. Earnings per share beat analysts’ expectations. A money machine. Everyone is happy. Even regulators, their banks being strong and profitable. Halleluiah.

Until it blows up. So, the revelation that the “London whale”—as JPMorgan trader Bruno Iksil was known due to his enormous positions—had been prodded by his boss to jack up the valuations of his trades comes as no surprise. But this time, the system got snared and exposed live. Iksil had been trading credit-default swaps in amounts so huge that they were budging the index. He lived in Paris and commuted to his office in London, on the Eurostar presumably. What is it with these French guys that are accused of gouging deep holes into the balance sheets of their mega banks?

Before him, there was Jérôme Kerviel who became famous in 2008 as the junior trader who’d lost $6 billion at French mega-bank Société Générale. Accused of a litany of shenanigans, he was condemned to five years in the hoosegow, though he claimed he was innocent and was being scapegoated. He just couldn’t prove it. Until now. And he’s fighting back. Read.... David and Société Générale.

It has been quite a ride for JPMorgan. At first, it was a loss of $2 billion, a “tempest in a teapot,” as CEO Jamie Dimon said. Then more truth seeped out, and it was suddenly $5.8 billion. And now it looks like it might spiral past $7 billion. Citing unnamed sources, the Wall Street Journal reported on the internal investigation that reviewed emails and voice communications. And these people were doing what nearly everyone is doing, nudging up asset values. With a host of beneficial side effects: increase capital ratios, boost income, goose bonuses.

The internal investigators determined that credit-trading chief Javier Martin-Artajo, who was working at the Chief Investment Office (CIO), had pushed Iksil to jack up the values of his trades—not just once, but repeatedly. And Iksil complied. Normally, this would have been no big deal, and future losses could have been swept under the complex rug of the mega bank. They tried. The called it $2 billion and a tempest in a teapot. No big deal really, just some hedging, all by the book. “The CIO balances our risks,” said CFO Doug Braunstein back when the scandal broke. It was about “protecting the balance sheet.” But it turned out to be too big to be swept under the rug.

There will be some housecleaning. And leaks to the Wall Street Journal to make clear to the world that this was a one-time event that won’t repeat itself, the handy-work of a couple of guys—who, through their lawyers, have denied any wrongdoing. New procedures would nip this sort of thing in the bud. These leaks and assorted dog-and-pony shows are part of the campaign to re-inflate the bubble of confidence without which the financial markets—and the valuations of stocks, bonds, and other instruments—would take a big hit.

And here is an issue that has been blissfully ignored or underplayed by the mainstream media though it has a profound impact on the US.... Mexico Dissolves Their FBI And Moves To Legalize Drugs, by hard-hitting Chriss Street.

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dannynewmexico's picture

I think that we are going to see ' all the poisons that lurk in the mud hatch out" soon!

rwe2late's picture

 Another asset scam is done by banks to inflate real estate prices, accomplished by holding distressed properties off the market.

bourbondave's picture

All these articles miss a key question. Where were the firm's auditors??? Where is the Anderson-style collapse as auditing is once again exposed as a fraud?

Eric L. Prentis's picture

Accountants no longer control their own profession. The Public Company Accounting Oversight Board (PCAOB)—directly supervised by the US government—manages accounting and accountants. The same US government completely controlled by the social psychopathic Wall Street banksters.


Fraud is now rampant in financial markets, because accountants have been co-opted by Wall Street banksters. The irony is the US government—and their bankster masters—used the fraudulent behavior of Arthur Andersen in the Enron debacle as the excuse to make accounting completely ineffective, using the Sarbanes–Oxley Act of 2002, which allows banksters to fraudulently steal at will.

Vic Vinegar's picture

Why doesn't Jamie Dimon blog on the internet?

Oh - that's right - he's actually making money, playing the cards he was dealt.

It's hard to believe for some of you, but some people actually try and advance their cause based on how the world actually works rather than reading the words of .gov agents who want you to kill someobdy.

But of course, Jamie D sucks and William B7 is going to give us another dress down of him soon.  As if WB7 isn't the ultimate loser.

engineertheeconomy's picture

And you, TROLL, are spending our tax dollars to fuck with us here on Zerohedge

fonzannoon's picture

By the way I would put car mechanics and contractors up there with retail brokers any day if not higher on that list. No regulation at all. They don't even have me sign 400 pieces of paper that I don't understand. They just rip me off.

Heroic Couplet's picture

Four hedge funds have blown up this summer. That's wonderful.

Vic Vinegar's picture


Can you believe that you are writing for an audience that is comprised of many government employees?  You or I may scoff at how dumb some of the .gov people are, but their influence is real.

And as if any of your articles actually started to mean anything to anyone,  .gov would throw you in a prison.

So that kinda justifies this Katy Perry tune, no?  Sorry to get off topic or not engange "Heroic Couplet"




jeff montanye's picture

the parting shot about mexican drug legalization and, particularly, its link to the original story gives a distasteful authoritarian twist to this crucial and bellwether topic.  the gist of the link is that legalization (not spotty, corrupt enforcement of prohibition, as the article implies) would give more power to the drug cartels when, in fact, it would gut them.  al capone didn't prosper after prohibition on alcohol ended.

this is good news not bad.

Vic Vinegar's picture


Peter Pan's picture

This piece reminds me of the practice whereby US companies could estimate the long term earnings rate of their employee retirement plans and use that instead of the actual rate. If the estimated rate was higher than the rate required to fund the retirement fund, the company was allowed to transfer the non-existent excess to the company's bottom line thus goosing up the profit and hence the stock valuation of the company.

Keep in mind that the LIBOR scandal also has significant ramifications for asset valuations as well.

There is a lot of crap out there that is nothing more than mutton dressed as lamb.

Vic Vinegar's picture

Funny, this piece reminds me of every comment you ever made, which was useless and nonsensical.

There truly is an irony in people coming on this site and hating on RobotTrader, no?  For as smart as some of these people are, I wish they could see that.

AUD's picture

it’s all about prosaic accounting.

Wide of the mark Mr Richter. What it's all about, is that there is effectively no longer an objective standard of measure of account. Ultimately there still is but who knows when government credit blows up.

Sean7k's picture

I would go a step farther and suggest there is no more value. We are constantly made aware of price, this makes us blind to currency inflation. Understanding value is a whole different matter. Value is what someone will pay for something.

This concept has become lost in salaries, asset pricing and also important- an understanding of how manipulation of prices works. A good example is gold and silver. It is impossible to determine their value because we no longer know what to look for. The spot price is engineered. The inflation weighted index is meaningless. A comparison to debt levels is ridiculous.

However, if we look at historical data, it is much easier to see. One ounce of gold bought a cow, not a feedlot cow, but a cow that could be butchered and sold. We are no longer allowed to do that. The large markets can, with other middlemen and the result is a 1200 pound steer yields 900 pounds of product that sells for about five dollars a pound- 4500 dollars.

One ounce of silver represented one day's wages for a laborer. At 12.00 dollars an hour, about 96 dollars. Lets call it 100 even. Ratio of 45 to 1 is within the historical standard for the last two hundred years. 

The Elites want to massage numbers of all kinds to engineer the result they seek. Whether it is jobs, unemployment, stock prices, bond yields, etc. Society is dependent on a central source for information to some degree- we have to trust something or leave the arena. 

Being able to observe circumstances and arrive at your own determinations is an important skill. Just as realizing the value of an asset. Believing what the Elites provide? Never take anything from your enemy. 

MillionDollarBoner_'s picture

Good post. However the historic ratio for gold/silver, particularly while they were monetary metals, was always 16:1.

It drifted for certain periods towards 17:1 but 16:1 is the generally accepted historical ratio.

Much to the chagrin of modern Silver Bugs...  

MillionDollarBoner_'s picture

Okay - try this (simplistic and rounded) example.

One gold sovereign = 8g so there are 3.5 sovereigns to an English (28g) ounce. Purity is .917 (22ct)

One shilling = 5.6g so there are 5 shillings (one crown) in an English ounce. Purity is .925 (sterling)

Twenty shillings (four crowns) = one pound sterling = a gold sovereign

20 / 5 * 3.5 = 14

Simplistic yes but 100% applicable to Sterling, the dominant currency in the industrialised world, up until 1920 :O)



GMadScientist's picture

Stop obsessing on the damn tokens. It's the cow and what you do for others (that then give you silver) that provide value.

A great deal at Wal-Mart (that ultimately bankrupts an entire nation) is not a great deal!

Vic Vinegar's picture

Is this a sneak-peak a Wal-Mart's new fall advertisiing campaign?  

Let's be honest: that smiley face is kind of boring.  Tokens/cows/silver are much more interesting.

Damn dude you are smart!  I'm gonna call you Don Draper from here on out.

GMadScientist's picture

Never been that dashing...or pickled.

Vic Vinegar's picture

Even more ironic is Sean7k is a smart guy yet still occupies the headspace of "The Elites" wanting to do things.

Quit being a loser, OK buddy?  Nobody got on a box of Wheaties with your mindset.

Vic Vinegar's picture

Yeah!  You should totally get greened for this!  You're totally not a loser!

/sarc off

philipat's picture

They even screwed Buffett. So long as they just circle jerk, which is what is left of the markets has become, it couldn't happen to a nicer bunch of Guys.

Barbarous relics anyone?

SafelyGraze's picture

when the tax appraiser writes-up the value of housing assets, people pay more in property taxes

totally unfair

although at least it allows the city to increase its level of borrowing

GMadScientist's picture

Alternatively, see Prop 13 in CA for an example of "unfair" property taxation (higher valuations and taxes are for the little people that can't buy each other like corporations do).

GrinandBearit's picture

We live in a bizarro world gentlemen.  This is easily the most scandalous, manipulated market in history... the biggest con game ever.

This market defies all logic and common sense... MF Global, PFGBest, JPM whale trade, HSBC laundering fiasco, Knight trading fiasco, LIBOR scandal, Muni scandal, Facebook IPO scandal and fraud, central banks pumping trillions of dollars into the market (that banks don't lend out), manipulating interest rates, etc...  Bullshit on top of bullshit yet the market keeps going up.

 The longer TPTB kick the can down the road, the worse the final implosion will be.

northerngirl's picture

Don't worry Uncle Ben will take care of everything. 

GMadScientist's picture

Make sure you pack it in some diatomite.

Vic Vinegar's picture

Agreed.  When I contast the works of internet commenters vs. Gentle Ben, I'll take BB 100 times out of 100.  Wouldn't you?

Jlmadyson's picture

Yup and they only have so much time left at this point.

bigwavedave's picture

My advice is to not bank with JPM. Close your accounts with Chase immediately and open a checking account at Goldman Sachs. Wait...

Vic Vinegar's picture

I love these tits.  I would probably sign up for a credit union if asked by you.

GMadScientist's picture

I find them intimidating because the framerate is sped up...looks like some kind of aggressive amazonian breast attack.

It'd be great for the few seconds before you lost consciousness though.

Vic Vinegar's picture

Apologies with seeming to be mean to you above.  Anyone who gives an honest take on that picture is in my heart.  Best of luck dude.




have an


to fulfill

engineertheeconomy's picture

Yes, tell us about your Troll Agenda

GMadScientist's picture

Could I really ask Vic Vinegar to be anything less than the deeply disturbed acetic ascetic we all know and loathe?


Jlmadyson's picture

$7 Billion. The poster child of the 08 crises is no more.

GMadScientist's picture

No, that was Wells "we don't need the money" Fargo.

Vic Vinegar's picture

Greenie for you...somebody cared about what you had to say.  Fuking crazy for sure.

You might as well be on a pro-HFT blog right about now.  Your comments mean shit.  

GMadScientist's picture

So judgemental...need more fiber?

Vic Vinegar's picture

I cannot take it anymore.  I do not understand why this site is not more proactive with who it lets comment here.  

It bothers me in my soul.  So I'm gonna hang here all weekend or until.................................................

i-dog's picture


"I do not understand why this site is not more proactive with who it lets comment here."

It's called 'free market of ideas', 'no censorship', 'free speech' and a few other things. Idiots can be ignored, junked, challenged or rebutted.

What's your alternative? ... A net nanny? A censored echo chamber? Katy Perry lyrics only?

You've made a good point [over and over] about the inane one-liners, OT distractions, and calls for violence from trolls and provocateurs, but I'm certainly suspicious of your choice of targets ... so far, they've all been anti-big government....

engineertheeconomy's picture

If you are not logged in, you can't see Vic's red down arrows

El Oregonian's picture

Holy crap Batman! There goes ALL the christmas bonuses!!!