Monday, March 29, 2010

We Are All Zaitech Now

Repo 105 has come and gone in the media - a mere Tourette's tic-of-a-reaction. Lots of shock and indignation (in which, surprisingly, NY law firms came out looking good), along with calls for some good ol "hang 'em high" Fuld-targetted vigilanteism, but not the amount of introspection one might expect. Former bank analyst, John Hempton, now CIO at Sydney Bronte Capital made the very important point (in Repo 105's Antecedents: Ken Lewis) that Repo 105 was an old trick, commonly used by many firms to - without mincing words - brazenly deceive.  "Bed & Breakfast" trades are of course common in equity-land too, by hedge funds and banks, used to tart things up for prying eyes when out in public. John points the finger at Bank of America as an example (and what he believes is MUFJ on the other side) highlighting the difference between average assets over the quarter and end-of-quarter measures (witnessing the inverse at MUFJ). There are of course other explanations, but John's sleuthing makes sense, conjecture though it remains.  

The natural question implied by Repo 105 and by John's accusation, in the bigger picture is, "How endemic is this raping of the spirit of the law", not just in finance but across our society ? Wasn't Enron and Sarbox was supposed to usher in a new era?

I remember the scathing denunications and indignation coming from the USA in regards to the arguably laughable and ludicrous zaitech shenanigans in Japan, at its height during the early 90s. So pure and transparent was the US by comparison (so Japan's critics argued), that by comparison, one could have no confidence in the Japanese accounts. And after Yakult, Olympus, and admissions by other companies that the financial assets on their balance sheets were not real, the skeptics were proved right.  

But that was then.  And (despite Boesky and no shortage of similar dithering in the grey netherworlds) then), "What is Normal" now, in the USA (particularly in finance) has travelled a long long way, as a mere inventory across the timeline reveals (noting that these were systematic crimes - not idiosyncratic:

- Tainted & conflicted analysts passing off conjured fiction as "research"
- Largest mutual fund companies complicity in mutual-fund timing scandals that systematically defrauded longer-term investors for the benefit of the management company and short-term trader;
- Rampant, options back-dating by managements for self-gain, systematic balance sheet and income statement fabrication across a wide universe of securities whether channel-stuffing or any other manner of creative accounting;
- Systematic altering of pension-fund return assumptions to reduce required corporate contributions to pad EPS;
- Ludicrous, unbenchmarked and grossed-up executive comp schemes, structured by boards appointed by management themselves;
- Endemic abuse of SPVs and tax-havens for balance sheet distortion and tax avoidance;
- Bid-rigging by brokers (supposedly working for their clients) across the entire reinsurance industry with complicity by the reinsurers themselves;
- Acceptance and use by major companies of "finite-insurance" to directly smooth earnings, at best willfully deceitful, and at worst, completely fraudulent;
- The wholesale capture and corruption of the ratings agencies who were at the very center of financial money markets;

This is before one even talks about the abuse of securitisation-run-amok, and the shadow banking system. And I have undoubtedly left a few out. All these things were/are criminal in the spirit of the law, and most to the letter. It has gotten to the point where one must look very hard for the honest company with real down home values, I suppose like Berkshire Hathawy. Ahhh, yes, one points to Warren Buffett and that pillar of sobriety, Warren and Berkshire Hathway. Errr ummm, except that even the revered WB was front-and-center to the finite reinsurance game of providing earnings-smoothing "insurance" and earnings management to those in need. Anything to make a buck.

At least the Japanese bowed their heads in shame, and eventually fessed-up and took the painful medicine. Mr Buffett, as the example of the American solution by contrast, disavowed himself of all knowledge of these activities, for crimes which his loyal underling is now rotting in jail. With Repo-105, only the number of zeros have gotten larger, and the fact that they were caught red-handed. However, the pattern of behavoiur of what is normal, remains completely out of bounds to what prevailed, and what is required in modernity to enforce the rules of fairness and what remains of trust, else the entire system unravels towards lawless chaos, or an authoritarian nightmare arbitrarily awarding the spoils to the cadre of cronies. How have we fallen so far? How is it our society grants the rights and privileges seemingly without the responsibilities? These are the questions we should be asking ourselves when looking at Repo-105.... 


RCJ said...

I think that's about right, the people I know that are still on the street seem to rely on a few major old time rationalization structures:

1) "Everyone else is doing it" - (To which my Mom would respond with the jumping off the garage question)

2) "It's what I'm paid to do" - (A variant of the "just following orders" theme)

3) "The market rewards it, therefore it's the right thing to do" which has so much sloppy logic in it as to almost cause paralysis

But the real answer is "I want to make money but not be held responsible for my actions" which I guess is what you've been saying about the street for awhile -

or to put it in context for today - "How is today the same as every other day" - the greedy asshats are still breaking stuff and refusing to clean up there messes ...

"Cassandra" said...

The Japanese are impeccably honorable as individuals (e.g. wallets stuffed with money returned untouched to police) , and it always bugged me that this individual rectitude could serenely co-exist with the oft corporate treachery of price-fixing, collusion, bid-rigging, hiding losses, because in the latter they were performing their duties to the group. Does dishonesty run deeper in America? Shame and responsibility - not just to oneself, but to one's immeditate and extended families are massive deterrents in a society where certain values rise above the monetary. In America, there is little shame. Just look at John Merriwether...

Anonymous said...

C: How have we fallen so far? How is it our society grants the rights and privileges seemingly without the responsibilities? These are the questions we should be asking ourselves when looking at Repo-105....


We have fallen this far because spineless regulators like Geithner and politicians like Dodd, Frank, and Lieberman cave to lobbyists at every turn. So the regulators undercut Glass-Steagall up to repeal. The legislators repealed Glass-Steagall and passed toothless Sarbox legislation. Regulators like Bernanke, Greenspan, and Geithner watered down and willfully refused to enforce the law.

And the public was too apathetic to watch the corrupt politicians and regulators. Public apathy allowed Geithner, Frank, etc to engage to sell out the country's patrimony.

scepticus said...

"How is it our society grants the rights and privileges seemingly without the responsibilities?"

The answer is democracy. Democracy is simply the means by which various nameless money interests compete for control. Any system which ensures a lowest common denominator outcome via the ballot box or any other means will eventually be subverted because convergence to the lowest common denominator removes the possibility for political change, after which all is left on the table is the grubby stuff.

I think we can safely say western liberal democracies have now converged to the lowest as per the process above, making the democratic process rather pointless since it can't deliver any further change.

Having now hopefully bottomed out in this way, it is only cultural change that will generate improvements, and cultural change is not something that can be driven by politicians, or for that matter bankers.

Just don't expect it to be quick.

Pablo said...

One amother interesting thing happens in the market last week of March: this is the inversion of swap spreads in US market.

Believe it is leading to a new conendrum. here, the article:

play said...

I must've missed this - what loyal underling (of Buffett) is rotting in jail?

"Cassandra" said...