Comments on the News

If you thought that monumental greed, unbridled ego, colossally poor judgment, and grossly negligent regulatory “oversight” accounted for most of the financial meltdown, you might be mistaken. At least Steve Forbes wants you to accept a much simpler explanation. “Mark-to-market accounting,” he asserts, “is the principal reason why our financial system is in a meltdown.”

I’m no CPA, but as I understand it, mark-to-market requires a financial institution to reduce the value of an asset on its books when the market value of that asset – what someone else is willing to pay for it at this moment – falls.

This is, of course, highly inconvenient and might have serious consequences for those high-flying financial institutions that threw caution to the winds in pursuit of competitive profits (and fabulous bonuses for certain personnel), even if they existed only on paper. But the solution to their problem is to allow them to invent a more flattering value based on some phony market situation sometime in the past?

Bernie Madoff made up tens of billions of dollars in phony profits and lived the high life. Ramalinga Raju made up a billion dollars in bank deposits and more than 10,000 employees and lived the high life. Both used phony numbers to make their con games work. The longer they were able to keep their scams going the greater the losses their victims had to suffer.

Now Forbes wants the SEC to enable the banks to do the same thing. Only this time it would not be part of the problem, it’s supposedly a major part of the solution. Is he kidding?

If some banks are “too big to fail,” all of them are too human not to fail in some judgments at some point. Why should the government create moral hazard by insuring their losses and, as AIG and others seem to have managed, their bonuses, too? We need less accounting gimmickry, more transparency, constant and effective oversight, and swift and certain justice – and we need all that now more than ever.

Charles Blum

Labels: Confidence, Fraud

Few Americans had ever heard of B. Ramalinga Raju before last week, but most people think they know what to expect of PriceWaterhouse. Raju’s Indian firm, Satyam (from the ancient Sanskrit word for “truth”), built a sterling reputation in providing consulting and outsourcing services to Indians and clients around the world. Ironically, Satyam was no truth-teller. It juiced the value of its shares by inventing assets, including a billion dollars of non-existent cash, and inflating its profits by a factor of nine. As it turns out, Satyam’s fabulous rise was just one more fraud, and Raju, his brother, and the company’s CFO are now under arrest. By contrast, PriceWaterhouse, Satyam’s auditor, insists it’s done nothing wrong.

Thanks to this latest scandal, we can see more clearly than ever that:

--No country has a monopoly on financial fraud. It’s a global problem.

--Even adults need adult supervision, especially when money’s involved. Self-regulation is all too often no regulation at all. When self-regulators fail to adhere to high standards, abuses can go on long enough before being detected that the consequences are dire, widespread and difficult if not impossible to remedy.

--It takes more than one person or a small group of unscrupulous conspirators to perpetrate a fraud such as Raju’s, Madoff’s or the others that keep coming to light. It requires gullible investors in search of the highest possible return, otherwise savvy institutional investors who willingly suspend their disbelief in financial results that sound too good to be true, auditors who don’t audit, and regulators who don’t regulate. These frauds are little more than genteel gangsterism or refined racketeering, not the work of mavericks on the make.
PriceWaterhouse in particular should be ashamed. If it failed to apply the most rigorous accounting standards to Satyam, the culprits within the accounting firm should be prosecuted with the full force of the law. If, as it claims, PriceWaterhouse did it by the book, then the book needs to rewritten – fast.

--In the US and around the world, more than a mere recovery is needed. Our aim must not be to reinflate the bubbles that have been bursting and reward the reckless and irresponsible with an intravenous drip of new capital . Rather, we need simultaneously to restart economic growth, restructure our economies to eliminate the sources of imbalance and excess, and rebuild confidence in our institutions. These goals are interactive and mutually supportive. The bottom line is that a sustainable recovery is probably unattainable unless we get on urgently with the work of restoring confidence in our banks, stock markets, auditors, and governments.

Satyam shows that the truth can hurt. But confronting the truth can set you free, opening up new possibilities for progress and growth with the highest standards of integrity.

Charles Blum

Labels: economic reform, Fraud, Recovery

Bernie Madoff literally made off with billions of unsuspecting people’s cash by promising consistent annual returns that were too good to be true. His $50 billion Ponzi scheme bilked a wide range of rich folks, including a Hollywood mogul, a wealthy US senator and several sports team owners. For some of them, the losses will be significant but not crippling; for others, their entire financial future has gone down the drain. Several charities let the allure of high returns undo the generosity of donors and their ability to perform their mission.

As huge as the scam was, it is not so surprising that personal greed overcame good judgment in a lot of people who might have and should have known better. What’s shocking is the extent to which reputable banks, insurance companies and other financial institutions fell prey to the same instincts.

That list is long and international: Belgium’s floundering Fortis Bank; France’s BNP Paribas which is supposed to rescue Fortis; Spain’s Grupo Santander; the Royal Bank of Scotland; Japan’s Nomura Securities; MassMutual’s Tremont; and more around the world.

Aren’t these the very institutions that are supposed to know all about risk? Don’t they make ordinary borrowers jump through hoops to provide detailed information and pledge collateral before lending sums that by comparison to the eleven figure fraud perpetrated by Madoff are paltry? Aren’t these the very organizations – the financial professionals -- that want to be entrusted with our money because they know best how to manage it?

By the same token, the performance of the Securities and Exchange Commission does little to relieve our fears. The SEC apparently was asked to look into Madoff’s empire in the 1990s and never launched an investigation. Aspiring crooks everywhere may draw the lesson that if the scheme is sufficiently complicated, your reputation impressive enough, and your political contributions well placed, the regulators can’t regulate and might not even try to.

The ongoing meltdown demonstrates that resolving liquidity problems may just be a matter of cash. Restoring confidence is another matter entirely in a financial system that has betrayed the values of honesty and integrity while celebrating “success” that turns out to be based on elaborate fraud and systematic abuse of trust.

Charles Blum

Labels: Confidence, Fraud, Recovery