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Originally Posted by classicman
tw - You're entire premise is based upon the assumption that regulators and politicians were ignorant of what was going on. If that is true, it’s a rather good description.
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Surprise and shock was literally the problem in case after case. Nobody knew LTCM was happening until they called within days of disaster. Anybody even running 30:1 is and should be declared bankrupt. But under Enron accounting, that can be conducted by simply moving the losses to off-balance-sheet vehicles. Enron accounting that was still normal ten years later.
Bear Stearns was a complete surprise to everyone in early 2008 – because the accounting never showed the firm already bankrupt. That is what MBA are trained to do – maximize profits. “He makes the spread sheets say what they have to say.”
None of the big bank presidents knew why the Fed called them in for a meeting with only hours notice. Only then discovered who was also in the meeting. So blindsided that most of them did not bring any assistants. And then were told they had only hours to save the American economy.
Nobody outside of AIG realized how large AIGs contracts were and how deeply embedded AIG was everywhere in the economy. Even AIG top management many years previous - see the many stories from 70 Pine - could not get a handle on how bad things were. Enron accounting virtually makes fraud legal. How do “off-balance-sheet vehicles” exist? Transparency must be subverted.
Enron would simply invent off-balance-sheet vehicles, put massive losses in them, then declare them as profitable entries on spread sheets. Of course, anyone who did not know that is complicit in the problem. At this point everyone over the age of 18 should know that story. Even Arthur Andersen called that acceptable accounting. Why?
In a world that has under $8trilion of actual things, how could these bankers invent $604trillion of financial assets? Easy. Lying in the accounting is acceptable because the purpose of a business is profits – not the product. No regulator can see how bad it is when even the accountant (Arthur Andersen) call that legal.
So what did we do to avert Enron accounting. Apparently nothing. Doing so would have violated a political agenda with included tax cuts to the rich.
From Marketwatch of 3 April 2008 describing Bear Stearns:
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Off-balance-sheet vehicles of various forms proliferated, and increased concentrations of longer-dated assets were held in funding vehicles with substantial liquidity risk.
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And nobody could know anything more. Accounting made it impossible to even know those risks existed – let alone measure them.
How do the AT&T’s Board of Directors not know AT&T was virtually bankrupt until months before they could not even pay its short term debt? Spread sheets said what they had to say so that nobody outside the company and so that no regulators knew how unproductive AT&T had been for over a decade. Sandy Weil, president of Citibank and an AT&T BoD, did not know AT&T was essentially bankrupt until a corporate officer whispered it to him – a leak that nobody was supposed to tell the BoDs.
Even Sandy Weil, the famous Citibank president who built Citibank into what it is today, even he could not see AT&T's demise. Because the spread sheets only said what they had to say. Honesty is not a trait found on Wall Street - because like the mafia - the purpose of a company is only its profits.