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Worse Than Enron?
Wall Street’s big banks are playing dangerous new accounting games—and this time taxpayers are on the hook for hundreds of billions. Nomi Prins uncovers a scandal in the making.
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.
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? Only, there's no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren't easy to answer.
Goldman Sachs and Morgan Stanley, for example, altered their year-end reporting dates, orphaning the month of December, thus making comparison to past quarterly statements more difficult. In the cases of Bank of America, Citigroup and Wells Fargo, the preferred tactic is re-classification and opaqueness. These moves make it virtually impossible to get an accurate, or consistent picture of banks ‘real money' (from commercial or customer services) vs. their ‘play money' (used for trading purposes, and most risky to the overall financial system, particularly since much of the required trading capital was federally subsidized).
Trading profitability, albeit inconsistent and volatile, is the quickest way back to the illusion of financial health, as these banks continue to take hits from their consumer-oriented businesses. But, appearance doesn't equal stability, or necessarily, reality. Here's how BofA, Citi and Wells Fargo play the game:
Bank of America: The firm reclassified its filing categories upon acquiring Merrill Lynch, but it doesn't break down the trading vs. investment banking revenues of Merrill. This either means the firm doesn't truly know what's going on inside its new problem child, or doesn't want to tell. (No wonder no one's jumping for the upcoming CEO vacancy.) That said, despite the obvious information clouding, new acquisitions generally don't have their activities broken out, which makes it a lot harder for regulators, shareholders, or we, taxpaying subsidizers, to know whether the merger was a success or not.
According to Scott Silvestri, Bank of America's spokesman, "On our second quarter's earnings release, there was a note explaining why we changed reporting structure. But, with every quarter that passes, it's harder to unscramble the egg. It's been a merged entity since January 1, 2009."
He added that "we have an earnings supplement. Every quarter, we put out a standalone Merrill 10-Q that shows its profitability." True, but what's the point of issuing a separate Merrill report, without delineating Merrill's contribution in its main books so that you can clearly see how specific parts of Merrill's business impact similar ones in the merged entity? Furthermore, we can't even figure this out ourselves-the Merrill results in the 10-Q don't map directly to those of BofA's books. This all just creates more complexities for a bank that still floats on $63.1 billion in various government subsidies.
When it wants to, it appears that BofA can merge and then break out Merrill's numbers. Under the "Global Wealth & Investment Management " classification, we discover that Merrill contributed three-quarters of the $12 billion BofA took in over the first nine months of 2009. According to Silvestri, "The numbers of the old Merrill are there because the brand name was kept, vestiges of the old Merrill Lynch exist."
Talk about semantics. Why not also break out the area where revenues tripled and trading account profits jumped significantly (from a $6 billion loss in 2008 to an almost $14 billion gain in 2009)? Something is clearly going on there: the best measure of trading risk, VaR ("value at risk" or a firm's daily trading variation) doubled between 2008 and 2009. If I was the CEO, I'd want to see this critical comparison on my merged company filing.
Elsewhere, the sum of Bank of America's quarterly figures doesn't quite add up to the nine months totals. (A few hundred million of discrepancies between friends.) Another item "all other" is off by nearly a quarter of a billion dollars. And so on. The firm also declared, that it "may periodically reclassify business segment results based on modifications to its management reporting methodologies and changes in organizational alignment." In other words, whenever it feels like it. Comforting, isn't it?
Citigroup: Another balance-sheet renovation, this time because of a sale (Smith Barney, which it offloaded to Morgan Stanley) rather than a purchase, and another trading miracle. Citigroup's main trading arm, housed in what it calls the Institutional Clients Group (ICG), made $31.5 billion in net revenue for 2009, compared with a $7.8 billion loss in 2008. Its average daily value at risk jumped too, though "only" by 15 percent or so.
That's a huge and extremely fast trading rebound for the main recipient of government subsidies (at $373.7 billion). But, there is no overall breakdown present in the summaries of Citigroup's latest filings. And the sum of the trading totals doesn't equal the parts, because the firm also noted that certain numbers deemed an "integral part of profitability" weren't included in those computations, without giving any apparent reason. (After adding the missing number, it still didn't add up.)
Again, it's "just" a couple billion of discrepancies, but with books this massive at banks this big and risky, accuracy matters. Plus, such nuances make it extremely difficult to understand its books for regulators or the public.
Citigroup's Danielle Romero-Apsilos said that they periodically change reporting. "ICG existed, but after Smith Barney, we decided to divide it-we call one part securities and banking, one part global transaction services, etc."
That describes the chain of events, but doesn't get closer to determining trading related revenue. Romero-Apsilos said, "We don't break up the financials specifically for those businesses. Over the years, we may have broken out different things."
Wells Fargo: Yet more innovative accounting maneuvers. For example, the innocuous sounding category, "wholesale banking" which provides traditional lending, finance and asset management services, was expanded (following the Wachovia acquisition that completed on December 31, 2008) to include more speculative activities like fixed-income and equity trading. But, those activities aren't broken down in the firm's SEC filing, making it difficult to determine which portion comes from trading vs. commercial or investment banking.
Wells Fargo spokesperson, Mary Eshet (who still has a Wachovia email address) confirmed there is no separate Wachovia 10-Q (like there is for Merrill Lynch), but that it wasn't the case that "Wells Fargo broke out trading related revenue previously either."
In fact, Wells just provides totals for their four main business segments, each of which increased sharply, Community banking rose from $33 billion in 2008 to an annualized $59 billion in 2009. Wholesale banking shot up from $8.2 billion in 2008 to $20 billion in annualized 2009. And, wealth, brokerage and retirement quadrupled from $2.7 billion in 2008 to $11.6 annualized for 2009. (The fourth segment is called ‘other.') Yet, all these rosy numbers come with no specific breakdowns for their various trading business areas.
Separately, Wells states in its filing that its management accounting process is "dynamic" and, not "necessarily comparable with similar information for other financial services companies." This statement should give lawmakers pause: if banks are so complex as to constantly fluctuate their own reporting, deciphering figures just before a crisis won't exactly be a walk in the park.
With taxpayers now on the hook, we need an objective, consistent evaluation of bank balance sheets complete with probing questions about trading and speculative revenues, allowing for comparisons across the banking industry. This lack of transparency leaves room to misrepresent risk and trading revenue.
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.
- Posted in
32 Comments so far
Show AllThe long-term solution is shutting them down and throwing them in jail, but they will milk every last illusionary cent out before the bottom drops. So, the solution will be the inability of them to weave the illusion when the bottom drops, because the mindset in this political climate insures instituting re-regulation will never happen.
Any illusions I still harbored that Obama would change ANYTHING disappeared when he selected Tim Geithner over Nomi Prins for Treasury Secretary.
Enron is one of many organizations that has excelled at cooking the books. The US Government is in the same league as Enron if you consider how they have revised their formulas for compiling statitistics such as the unemployment rate, inflation rate, etc., during the past 3 decades.
These guys are America's most powerful organized crime organizations. How easy do you think it will be to get rid of them so the entire world can stop paying them "taxes" for zero representation?
The “too complicated for mere mortals understand, this is the age of computer modeled transactions” was the spoken justification for the entire derivatives market. The real reason for the derivatives market was to funnel vast amounts of wealth into the hands of a few insiders. When this market failed and threatened to bring down the “Too Big to Fail Banks” they put a gun to Bush and Obama’s heads and extorted twelve trillion dollars from America’s tax payers.
When the “too complicated” excuse is used to make the financial status of a corporation opaque, and it has been used throughout modern financial history; see Enron, you can bet the ranch that something is very profoundly wrong.
The list of financial scams is long and proven to be extremely profitable for the financial crooks; risks are understated as they were in mortgage backed securities, assets that back liabilities are over valued, again like they were in mortgage backed securities or far too small to cover the liability should the need arise as they were in the derivatives meltdown.
The "Too Big to Fail Banks” could also be running little more than a Madoff style Ponzi scheme, which they are hiding behind constantly shifting accounting practices. Or it could be dozens of other dodgy schemes designed to enrich the insiders at the expense of those on the outside; aka the Pigeons.
Then there’s the possibility they are intentionally inflating the stock markets just to make a killing by shorting the market when the reality of just how bad the economy really is sinks into the greater consciousness and the markets tank like they did in 1929.
The question really isn’t whether or not the "Too Big to Fail Banks" are running a scam, rather it’s which scam are they running? Jail is too good for these slime balls.
Why can't the GAO monitor these scum?
Their obfuscated methods of stealing are not complex, just hidden.
Peel the effing onion.
Excellent article!
Here's one that discusses the Menage À Trois and its illusion of control:
"Madmen, Gamblers, Alcoholics, the US Dollar and Gold"
http://www.financialsense.com/editorials/hera/2009/1130.html
If I am not mistaken, that website contains a fairly solid defense of market-based, laissez faire economics advocating less government spending at all costs, even if the poor and middle class are screwed over. No jobs bills should be passed, no government interventions--a sort of libertarian solution. Might work, but, goddam it, somebody has to suggest something besides laissez faire to help the guy whose ass is in a sling.
Ahhh yes. These banks put the con back in the confidence game. My dear uncle used to say there are honest crooks and there are dishonest crooks. The honest crook sticks a gun in your ribs and demands money. The dishonest crook robs you with a pen. We've improved the game since those words were said. Now the dishonest crooks rob us with a computer and sticks the taxpayers with the tab via polititians they put in place. Street crime pales in comparison to Wall Street crime. The wrong crooks are being locked up.
some minority kid will get a few years in jail for selling a 20 dollar
bag of pot. these bastards will continue to steal billions and never
have to worry about any kind of criminal prosecution! the layers
of deceit are indeed like an onion that will NOT be peeled back.
we are stuck on prison planet until we FORCE ABLY MAKE THIS STOP!
A billion here, and a billion there... Whilst checking with my mortgage modification contact, about Citi's paperwork for me being over six weeks late (although I'm pre-approved), the contact estimated between 80 and 95% of CitiMortgage's customers are either in the modification program, or trying to get in. 80 - 95%. Yikes. Not directly related to the trading division, but not good news for the long run.
I just re-financed my mortgage through a credit union. It went smoothly, the people were pleasant, the rates were LOWER than what the too-big-to-fail banks had to offer, and nowhere do the words, BofA, Chase, Citi, or WellsFargo appear!
go to a credit union. no fun and games.
This is why most have lost confidence in this Congress and this President. Instead of applying themselves to urgent and important things like stopping the financial shenanigans, replacing rules and regulations, changing tax and trade policies to create real jobs they have engaged in politics of the most shameful kind.
They have wasted time on "health care" which is a joke. Cap & Trade exposed by an excellent article on CD today for what it really is and looting the public purse for their own purposes and political payoffs.
To top it off they have looked like a bunch of rank amateurs doing it. Chicago style politics isn't "different" Mr. President.
I don't think health care reform is a waste of time. I believe it's vital for the short and long-term economic prosperity of this nation. The waste of time was the way it was done -- with absolutely no leadership and allowing the right-wingers to rule the day. And now they're going to squabble and BS for many more weeks. Even now Obama could step in, take leadership and push for what the majority of people want -- but it won't happen. So, yes, wasting more time.
I believe Henry is referring to the fake "health care reform" which isn't reform whatsoever. Health care reform given the current health care crisis should have been quick and snappy. A simple putting of single payer on the table followed by cracking down on out of control lawsuits, medical errors, lack of fairness for alternative practitioners both in terms of coverage and government sincerity, and the "war on drugs" would have been real reform worth a year fighting for. Instead, 1,990 pages of corporate status quo bs called "reform" is all we're about to get and I hope to God it fails in the Senate or the economic collapse will be even worse and the chances of single payer will be in the twilight zone.
sierra7
If the FED can create SPV's (Special Purpose Vehicles) like Maiden Lane 1, 2, and 3 to prop up the financial system, I don't see why the major banks (or financial houses) can't either. (Source; the latest Special Inspector General's report on the mess with the FED, it's role in paying 100% par value for the toxic assets of AIG and more)
Don't misunderstand me.....I'm against anything that obfuscates the truth....
More than 1,000 individuals went to JAIL after the investigations into the Savings and Loan mess in the '80's...so far we have none directly tied to this financial havoc going. (I don't consider Madoff part of this mess; he was just taking advantage of the system like any other common shyster in normal times)
As long as we have pols like Chris Dodd and his likes, and a congress bootlicking the major financial moguls we will continue to have a thoroughly corrupt system, not even a republic.
Ben Franklin was correct: "You now have a republic, IF you can keep it!"
Can we????
Thx again for another great article, Nomi Prins!
"More than 1,000 individuals went to JAIL after the investigations into the Savings and Loan mess in the '80's...so far we have none directly tied to this financial havoc going. (I don't consider Madoff part of this mess"
What an excellent point!!
AND FAT CHANCE THAT THEY WILL GO! the politicians
get a nice off shore bank account or are being
blackmailed and either way are in no postion to complain!
Sierra 7- You missed Barney Frank. He was howling for blood and an audit of the FED only a couple months ago. He has done a complete 180 degree reversal and voted against the proposal in his House Committee. It does show how campaign contributions/bribes work in Congress. It does create a lot of cynics. For the damage that has been done, we need to rent a Chinese judge and their law against "High economic crimes". Throw in a Chinese executioner and we are set to start some real reforms.
Looks like the richfilth animals are not finished sucking the blood from our veins. Nothing quite like being a richfilth animal, means you have total impunity and ALL the politicians are your co-conspirators...
Time to start building the guillotines, then storm the Bastille(Wall Street).
Allow me to summarize:
They own the place. There are no rules. The refs have been bought. Only the elite can afford a ticket, while the other 99% of us beg for a job hawking beer and peanuts for minimum wage.
And, if you're a charter member of The Place, Inc., you're looking out your window and you're like, "Man, no matter how much we screw them, the rubes just sit there and take it. So why stop the screwing?"
When NFL Team X is up by 21, they don't stop playing because the other team's defense sucks - they rack up as many points as possible until the final buzzer sounds.
Banksters = NFL Team X. And we have the worst defense in league history...
The finance sectors job is to determine where investment dollars should flow. Through these, and other shenanigans, it is clear that the answer is: to the finance sector.
There is clear collusion going on here. We need to develop more finance options and divest ourselves of these people who have broken our trust repeatedly.
And, at this point in the monopoly game that requires, sorry to say it, big government. Government needs to take these guys on and take them down, and its not doing it.
I am surprised that none of the good people here yet mentioned the article on Obama shaming the banks regarding foreclosures yesterday. That even got a lot of derision on HuffPo. Several months ago I recall Obama "showing anger" towards Wall Street? Does anybody remember that one? And then, of course, the watered-down credit card reform bill came down, he stepped back and remained mute as Dick Durbin struggled -- and failed -- to get the bankruptcy, with cramdown passed, and the battle ended with Durbin saying frankly, they own the place.
The implications of this article are, of course, one more piece of frightening news for the near or possibly not-too-distant future. Frightening but not surprising. More frightening because you know nothing is going to be done about it.
Since the banksters have locked up the federal government, creating public alternatives to banking at the local, county and state levels appears to be our best chance of eroding the financial sector's international hegemony.
Ellen Brown's webofdebt.com is useful here, as is public-banking.com, and David Korten's Agenda For A New Economy. If his previous books are any indication, Hoodwinked by John Perkins should also be a valuable resource (I haven't read it yet).
North Dakota's state bank is a factor in its being one of only two solvent states (Montana is the other due to mineral riches). In 1919, farmers and small businessmen won an election and passed a law to put all of the state's money in its own bank to avoid the usury of Wall St. bankers. They have the lowest unemployment rate in the USA (4.4%), and a $1.3 billion surplus.
Or maybe you enjoy feeding the Wall St welfare queens.
While we're invoking Enron, just thought I'd remind everyone that the government's vast Enron dossier bit the dust when the office of the Securities and Exchange Commission in World Trade Center Building 7 miraculously vaporized with the rest of that 47-story skyscraper on 9/11/01.
You are right. And, information about myriad other financial crimes being investigated by the Office of Naval Intelligence also was destroyed - along with almost ALL of the Office of Naval Intelligence employees conducting these investigations when their newly-remodeled offices were specifically targeted at the Pentagon on 9/11.
Why would a 'terrorist' who could barely fly make a series of complicated maneuvers to hit that exact spot in the Pentagon?? Why not just crash the plane right in the center of that huge complex and destroy most, if not all, of the US military nerve center? Why not just crash into the Capitol or the White House - which would have had much more emotional impact on Americans?? Because Messers. Cheney & Rumsfeld needed to continue to run the military from there in order to attack Iraq, et al...
as they had planned in their PNAC "Defense Strategy for the 21st Century."
Hi Amitola--
Just curious, what in the world was the Office of Naval Intelligence doing investigating financial crimes? Shouldn't that be the province of the SEC, Comptroller General's Office, or maybe even the FBI? (how different would that be?!!). Is this a sign of our military adminstration of civillian government or were these investigations related to military procurement (if you know)?
Poet
Nomi Prins could be to banking regulation and reporting what Elizabeth Warren has become to credit regulation and reporting.
She has impeccable credentials, speaks the language of the regulated industry, and can cut through all their obfuscating bs. Too bad it probably won't happen.
Poet
We are in for a horrible future if we don't stop this now! Clearly our greatest enemy isn't some foreign army or group. It is a great number of our elected officials and their refusal to carry out their duties. They are not working for the majority of US citizens, In fact they are doing everything they can to make our lives very difficult. We need to really come together, democrats, republicans and Independents to find a solution.
I would like to recommend another essay under the title "The Rascals of Wall Street". Very enlightening piece on the immorality of certain money holders and lenders withholding capital for the sole purpose of making money by creating distress in the markets and leaving foreclosures and financial ruin to others in their path.
You'll have to find a back-issue of Scribner's Magazine though ... it's under "Topics of the Times" in the December, 1872 issue. That's right, Eighteen-Seventy-Two ...
The more things "change" ... &c. &c. &c................
Cicero: "Freedom is participation in power."
In the recent PBS Frontline piece on derivatives in the late '90s they told the story of the female regulator who tried to shine a light on and regulate derivatives who was quickly hushed by a tag team of Alan Greenspan, Robert Rubin, the head of the SEC at that time and Lawence Summers. Her agency was summarily stripped of most of its powers and she resigned saying that she lacked the authority to do meaningful oversight. The next year Clinton signed into law a bill further deregulating commodities and related derivatives. That Frontline piece said that even eleven years ago the estimated global size of the still "dark market" in derivatives was in terms of hundreds of Trillions of dollars.
The recent turmoil in Dubai may be just one shark fin surfacing in an underwater feeding frenzy of which the world's citizens have, so far, only caught the barest bloody glimpse. Halliburton, KBR, Xe and the cocaine cartels are probably good-hearted small fry compared to some of the enormous shoggoths giant squid jetting around down there doing Cthulhu's lap-dance. I think this explains the lack of any substantive new regulation: When one even attempts to regulate a legalized black market the size and complexity of the global derivatives market, that means a somewhat more accurate estimate of its size and degree of fraudulence (on a global scale) must come to light. I think all our top regulators who understand this are maintaining what will be an ongoing anti-regulatory cover-up until the world economy truly sails off its flat edge. To me it is clear that our corporatist politicians and electric media eels have all been given their marching orders on this one. Welcome to laissez-faire capitalist Mafia Planet! Muscle, uh, mercenaries anyone?
This massive level of corruption combined with TARP money and borrowed money from foreign lenders may be the only thing keeping the stock market afloat right now. If this situation implodes even worse than last year the New World Order may be over before it hardly began. So far as I've been able to ascertain, that may not ultimately be such a bad thing. Business as usual is what is making the biosphere uninhabitable for human beings and destroying any Alberto Gonzalez-quaint notions of morality, ethics, simple human decency and common sense.