Friday, October 03, 2008

Creative accounting to salvage collapsing Uncle Sam capitalism

RMBS, SIV, CDO are not mere acronyms. They spell the death-knell of Uncle Sam capitalism because they are clever instruments, accounting creativity to hide satyam. A freemarket is supposed to operated on satyam, truth. When truth is at an officially sponsored discount, not even paramaatman can save the rotting capitalism. One alternative is humanism of sanatana dharma. [RMBS, SIV, CDO: Residential Mortgage Backed Securities, Structured Investment Vehicle and Collateralized Debt Obligations].

RMBS, SIV, CDO are evil manifestations, vikalpa of fetishism of money.


Thanks to Arun Kaul for highlighting the most serious flaw in the bailout package. The road to ruin is paved with evil intentions. Creative accounting may help show a good-looking balance sheet to hide the rot within, propelled by greed and avarice and without any compassion for serving the people and without any desire to promote work opportunities for every able-bodied worker.

These are the ways to create real wealth.

Creative accounting creates virtual wealth, a make-believe exercise which will only deepen the ongoing depression. Depression ain't merely mental or virtual now, it is for real. There is a saying in Tamil: muzhu poosanikkaaye sottile maraikka mudiyaadu (trans. an entire pumpkin cannot be hidden in a plate of cooked rice). America may not be seeing long welfare lines in front of ration shops, but the credit cards are getting used like crazy, with little concern for living within one's means and saving for the future, governed by a sense of time; that we are living in time borrowed from our children of present and future generations. We have no right to impoverish them.

After all, the big Uncle Sam is there: main hoon na, he will bail the credit card loans out. This seems to be the bailout mantra.


Rajendra Palande & BS Srinivasalu Reddy, Hindustan Times
Email Author
Mumbai, October 03, 2008
First Published: 22:07 IST(3/10/2008)
Last Updated: 22:13 IST(3/10/2008)
Bankers worried over US move on bank assets

Bankers in India are worried over the proposal by the US to suspend rules that require banks to value assets at market rates. Bankers feel that this could push the global financial system into a deeper credit freeze and as a semblance of stability brought about by the measure would only be an illusion.
Any proposal that allows banks the freedom to not disclose the true and correct picture of their financial condition could further dent the already shaken confidence of the global financial system, bankers said.

The proposal is one of the inducements included in the $700 billion rescue package. It reiterates the authority of the regulators to suspend the asset valuation regulation.

Arun Kaul, head of treasury, Punjab National Bank, the country's third largest bank, said the financial markets worldwide will not get the true and correct financial status of banks in the US if these financial services providers are not required to value their assets at the prevailing market price.

The rationale for introducing the mark-to-market norm was to bring in transparency in assessing the health of a bank, at any particular point in time. The norm requires banks and companies to assess their assets and report losses if their market values are lower.

The American Bankers' Association, companies and lawmakers have urged the US Securities and Exchange Commission (SEC), the equities market regulator, to suspend or ease the valuation rule.

"One will not be able to assess the real health of a bank at a given point (if the prudential valuation norm is suspended)," said Bimal Jalan, former governor of the Reserve Bank of India and a nominated member of the Rajya Sabha.

"It is a retrograde step. The US is going back to olden times at a time when accounting has progressed in modern times. The market must know the true and correct state of financial health of banks," Kaul said.

Inability of regulators to ensure banks made disclosures led to the shock collapse of entities like Lehman Brothers. It had assets of $639 billion against reported credit losses and asset writedowns of just $13 billion before the world got to know it had collapsed.

Enron was the pit canary, but its death went unheeded
History is repeating itself as companies hide debt, blame the market for their failings and expect the taxpayer to pony up

Bethany McLean, The Guardian, Saturday October 4, 2008

Bad experiences are supposed to be good, in a twisted sort of way. That's because we're supposed to learn things that help us avoid the same mistakes the next time around. But it's hard to argue now that anything good came out of the bad experience called Enron. In fact, one thing that is crystal clear amid all the chaos of these days is that the lessons from Enron went unlearned - or were just forgotten.
Start with the Houston-based energy trader's notorious lack of transparency. After Enron's implosion, everyone talked about how important it was to be able to understand how a company makes money. Now raise your hand if you understand how a modern financial services firm makes money. No hands? The truth is, there is no way to understand. These companies are as opaque as Enron. Just as Enron had off balance-sheet vehicles - SIVs - that allowed it to book earnings and hide debt, Citigroup and other financial institutions had structured investment vehicles that did the same. Indeed, Citigroup had to take almost $50bn of SIVs back on to its balance sheet after they ran into trouble. It would be nice if the accounting rule-makers would grasp this basic tenet: if they want to hide it, we want to know about it.
Of course, SIVs are only a small manifestation of the deeper problem, which is the evolution of financial engineering into a dark art. Enron now seems like the canary in the coal mine. After its bankruptcy, Steve Cooper, who was in charge of restructuring it, told the Wall Street Journal his task might leave him "in a wheelchair and drooling" due to the complexity of its financial structures and the "unbelievable amount of debt accumulated around the company". Doesn't that sound like our entire financial system?
Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn't afford the payments into sleek new instruments called RMBS and CDOs. But Enron's machinations couldn't make the losses go away, and Wall Street's shiny acronyms can't turn a defaulted mortgage into good money.
As for the lessons we've forgotten, how about this one: financial statements aren't supposed to be fairytales. Enron was castigated for its abuse of mark-to-market, or fair value, accounting. This is supposed to allow investors to see what the market says a security is worth, instead of just what the company paid for it. Employed correctly, it makes a company's finances more transparent. But we all joked that Enron didn't mark to market - it marked to myth, to whatever it wanted them to be. In this, the US regulatory agency, the SEC, was complicit, because it signed off on Enron's use of this accounting and never ensured it wasn't abusing the rules.
Today's mark-to-market saga has a new twist. The SEC is facing political pressure to abolish mark-to-market accounting requirements for financial institutions, and some in Congress would like to dig mark-to-market's grave. Said in another way, now financial services firms may be allowed to deceive investors about their status, with the regulators blessing that deceit. (An aside here. Those who say mark-to-market should be abolished argue that because there is no market, firms are being forced to value these securities at artificially low levels. But there is no market precisely because firms aren't willing to sell at a price at which a reasonable investor would buy.)
While for a short period in the aftermath of Enron, we did understand that short-sellers serve a good purpose, we have also forgotten that. Short-sellers were the first to warn there were problems at Enron. But today, nobody is thanking short-sellers like David Einhorn, a hedge fund manager who began to warn investors about Lehman's problems in March, when the stock was worth about $50. Instead, companies say the short-sellers are to blame for their problems. And the SEC has gone along with this and banned short-selling in a number of stocks. Poor Washington Mutual and Wachovia, which plummeted after the ban on short-selling. How will they explain what happened to them now they can't blame short-sellers?
Which leads to the most sobering repeat lesson of all. Most of the believers in the free market only believe in it when it is going their way. When it doesn't, it's someone else's fault. Enron's former leaders often cited their free-market beliefs. Its demise, they said, was due to a short-sellers' conspiracy.
Indeed, when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn't work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it's that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down. Then again, maybe it really isn't a good sign for the future that there don't seem to be any smart guys anywhere in the room.
• Bethany McLean is a contributing editor at Vanity Fair and co-author of The Smartest Guys in the

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