Friday, July 30, 2010


"The American Republic will endure until the day Congress
discovers that it can bribe the public with the public's money."
- Alexis de Tocqueville, in Democracy in America

Wall Street's biggest financial institutions deliberately lie and distort for one reason. Because it pays.

Today Bloomberg is reporting that Citibank left billions of dollars in toxic assets off of it's books, which helped mislead investors and regulators. Doing so allowed Citigroup - which received about $45 billion in taxpayer bailout funds - to continue selling their wares as if they were solid assets. They were not. They now have to pay a $75 million fine for misleading investors.

Count me a unimpressed by the punishment. To understand why let's play "What would you do?"

Let's say you need to dump sell billions of dollars in toxic assets on unsuspecting buyers (in this case pension funds, foreign institutions, etc.). This will help you earn billions over the long term. This will also net you and your other partners in crime hundreds of millions in bonuses (often done creatively to avoid public scrutiny). The only down side is that you have pay a $75 million as a penalty, if you get caught. What would you do?

Think hard about this one ...

I know, it's a tough one ... Do the right (and legal) thing, and tell everyone what you have is crap. Or "mistate" assets and let people buy the crap you have. Hmmm. What to do, what to do?

Well, on Wall Street, where ethics and morality get lost in some kind of giant Black Hole of corporate stupidity and greed, the answer is to deceive and mislead. Big time.

Check this out.

Earlier this month Goldman Sachs agreed to pay $550 million to settle charges that it sold "made-to-fail" assets in 2007. They did so without disclosing that they knew the company (Paulson & Co.) that helped create the asset did so with the idea that it would fail. In fact, they bet on it. They actually went out and purchased insurance on the made-to-fail assets, which netted them huge profits. Nice.

Then, in February, Bank of America said it would pay $150 million for failing to tell shareholders about anticipated losses, and the $5.8 billion in bonuses that was set aside, which were part of the Merrill Lynch purchase. Shall we score another one for doing the right thing, and corporate transparency?

(Note: While BofA paid $33 billion for Merrill Lynch - which was loaded up with toxic assets - Bank of America was given more than $100 billion in taxpayer bailout aid and other guarantees to help it stave off more than $118 billion in losses, and possible bankruptcy. This is the essence of corporate welfare.)

Anyways, back to my original question: What would you do if you could secure money that's virtually "penalty free" by deliberately lying? I know. It's a tough one. Think hard, again ...

The moral of this story is that it's business as usual in America. And that's a bad thing.

Not much to say here except that we're screwed, again.

- Mark

1 comment:

RockyhopefulCPA said...

If I had been sentencing Goldman I would have made the fine bigger than the income from the activities in question. Those involved also need to be criminally prosecuted and walked out in handcuffs like with Enron. That would make a psychological impact on other bankers. Money is nothing to this class of people.

Investment banks have all the money in the world they don't care if they have to pay out a few hundred million. Most of the American public doesn't understand basic credit card interest. There is no way for your average American to understand a special purpose entity and how Goldman helped create the bubble and then profited from the meltdown!

Americans will get even more ignorant if things continue. College tuition is way up and wages are down. My generation (Y) will be too busy working long hours to maintain a reasonable standard of living to be concerned with complicated financial matters concerning investment banks.