Former Managing Director of Goldman Sachs: Accounting Fraud of the Too Big to Fails May Be Worse Than Enron
Nomi Prins - former managing director of Goldman Sachs and head of the international analytics group at Bear Stearns in London - is saying the same thing that financial bloggers have been saying: The giant banks are manipulating their books to make themselves look profitable.
In fact, Prins says that this might be worse than the fraud which occurred at Enron:
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.
Surely someone with Prins' financial background can sort out the accounting of the TBTFs?
In fact, no:
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?
The giant banks have played so many games of massaging numbers (see this), hiding losses off the books (see this) and - as Prins documents - failing to report core data and shuffling things around so that it is impossible to tell what they are doing.
Indeed, financial writers (like Reggie Middleton, Mike Shedlock, Tyler Durden, Karl Denninger and others) who have dug deep and analyzed the underlying data say that the giant banks are totally insolvent. This wouldn't be the first time that the biggest banks went bust and then covered it up over a period of many years.
Prins offers a solution:
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.
2. Did the White House leak Friday's employment report? Obama has before?
Excerpt Submitted by EB on 12/03/2009 13:15 -0500
White House press secretary Robert Gibbs set the rumor mills a-grinding with a statement earlier today that may be a preemptive strike against any surprise "uptick" in unemployment.
WASHINGTON, Dec 3 (Reuters) - The White House has seen evidence that the U.S. November unemployment rate might creep upward from October's level of 10.2 percent, spokesman Robert Gibbs said on Thursday.
Gibbs told reporters that he did not know what the November payrolls data, to be released on Friday, would show.
But citing a recent data signal on payroll perfomance, he said that the White House would not be surprised if it rose from the previous month's 10.2 percent reading.
"One payroll estimate came out ... yesterday and it seemed to suggest that it might tick upward," Gibbs told reporters.
"What we have always said, we're going to have to get to a level of continuing to make progress in seeing a decrease in the number of those who are unemployed each month, in order to see either stability in the jobless rate, or have to have that jobless rate tick down," Gibbs said.
Dial back a few months and recall the August NFP headline figure of -247K...remember the one Goldman so presciently nailed the day prior, lowballing the consensus? As this NY Post article, explains, it was confirmed by none other than the POTUS later that night:
First, President Obama tipped the world off to the Friday number well ahead of time.
Speaking Thursday night at a campaign rally in Tysons Corner, Va., Obama pleaded his case that we've turned the corner economically -- despite a record number of people on food stamps and no slowdown in home foreclosures -- with these words: "I'm convinced that actions we've taken in the first six months have helped stop our economic freefall. . . . We're losing jobs at half the rate we were at the beginning of the year."
But the president appears to have helped people who weren't in that crowd break the laws against insider trading.
The White House and the Treasury Department get the jobs report one hour after the financial markets close on Thursday. But the rules are that these numbers are confidential, and they are supposed to stay secret for a reason. Since investors are trying to make a profit by trading securities at any time somewhere in the world, having knowledge of this very important economic statistic could be used for vast personal profit.
The 247,000 jobs that were later reported to have disappeared in July were, indeed, less than half the number being lost earlier this year -- at least in the official Labor Department tally. But job losses during June were 467,000, which was more than half the amount lost earlier in the year.
So the president had to be referring to the new (and supposedly secret) July report and not the one for June.
Okay, so Gibbs denies knowing the contents of the NFP report and, according to the NY Post article, the White House should not yet have that data until after the close today. However, given that the primary mathematical tool of government econometricians is linear regression, it wouldn't take more than a ruler and a pencil for them to project an "uptick" in unemployment.
Fortunately, the exodus from long term Treasuries over the last two days has stymied any dent to risk assets, and the global markets seem poised to run up equities in a consumer driven economy where approximately one in five people no longer work. No need for panic until next Wednesday's 10 year auction.