More Welfare for the Rich

[tw]

From the NY Times of 29 Oct 2008:

A Question for A.I.G.: Where Did the Cash Go?
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

“You don’t just suddenly lose $120 billion overnight,” ...

Mr. Vickery and other analysts are examining the company’s disclosures for clues that ... company officials knew they had major losses months before the bailout.

Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

The internal auditor resigned and is now in seclusion ...

These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate. ...

A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. ...

A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with ... the head of the company’s financial products division ...

The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. ... About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts ...

At this point, its obvious. AIG was simply a new variation on Enron accounting. Seven years later and the current American administration did virtually nothing to require fiscal responsibility? Of course not. That might cause a downturn. That would require the SEC to investigate which means the SEC needs more money and people. Instead, we do more economic stimulus. We threw more money at the richest members of our economy.

“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.

Instead we are doing what Japan did to ignore their problems for 10 years. Save companies from bankruptcy? Bankruptcy executed early enough only removes top management, saves the company, its employees and its stockholders. Do we let AIG create further and larger economic calamity years later? Or do we swallow the medicine now. Currently Americans have dumped $120biilion into AIG. Next week, we learn how much more George Jr will dump into AIG - because "Reagan proved that deficits don't matter".

[Undertoad]

Originally Posted by tw

AIG was simply a new variation on Enron accounting. Seven years later and the current American administration did virtually nothing to require fiscal responsibility?

FAIL

Spearheaded Sarbanes-Oxley, enormously increased accounting regulations on public companies.

[tw]

Originally Posted by Undertoad

Spearheaded Sarbanes-Oxley, enormously increased accounting regulations on public companies.

Not correct. Sarbanes-Oxley created standards for the auditors. It did nothing to eliminate Enron style accounting in public companies. Sarbanes-Oxley was created by Senators (not by the administration) in response to Arthur Andersen - not in response to how Enron hid losses.

Enron style accounting means, for example, moving losses to structured investment vehicles so that losses no longer appear on the spread sheets. That was ongoing even months before AIG collapsed. As a result, hidden losses apparently are suddenly gobbling up $120billion.

Why a sudden market meltdown and frozen credit markets? Nobody can trust anyone else’s spread sheets. Six years after Sarbanes-Oxley, Enron style accounting still exists. Auditors such as PriceWaterhouse had serious doubts about AIG's accounting and said so. IOW PriceWaterhouse was not doing what Arthur Andersen did. And still the Enron accounting existed in AIG. Even AIG's internal auditor was sidelined and resigned. Did that do anything to change the fraudulent accounting? No. After being told that the auditors had serious doubts, AIGs president went right out and said the company was stable. He could do this because the accounting said so. Because Enron style accounting is was actually getting worse. As the Economist said, "financial innovation [occurred] in response to incentives created by governments."

Sarbanes-Oxley did not eliminate Enron style accounting. Sarbanes only required the auditors to do their job. Auditors can have doubts. But can do little when Enron style accounting is still legal.

From the Economist of 11 Oct 2008 and posted previously in Does Anyone feel like Bailing on 24 Oct 2008 (also in response to UT's previous and same claims):

The trouble is that financial innovation did not occur in a vacuum but in response to incentives created by governments. Many of the new-fangled instruments became popular because they got around financial regulations, such as rules on banks' capital adequacy. Banks created off-balance-sheet vehicles because that allowed them to carry less capital. The market for credit-default swaps enabled them to convert risky assets, which demand a lot of capital, into supposedly safe ones, which do not.

Well international standards such as Basel 1 and Basel 2 were created to address this problem in the banking industry. George Jr did nothing and even discouraged Basel 2. Fraudulent accounting encouraged by a business school graduate? Why not? Where did Sarbanes-Oxley or any proposed legislation from George Jr even try to address this. Nothing. Nada. This accounting is the deregulation that extremist Republicans have been advocating for a decade.

No laws were made to stop Enron style accounting (Enron accounting was well understood when Enron failed in 2001) because money games made the spread sheets look prosperous and will stimulate the economy. Prosperous spread sheets means a more popular president. Why would George Jr want honesty when his entire life was only about promoted an image and lies (such as Saddam's WMDs)?

UT - you keep sighting Sarbanes-Oxley as proof that George Jr wanted fiscal responsibility. George Jr and fiscal responsibility are oxymorons.

Even the Highway Trust fund that supposedly has plenty of cash has a liquidity problem? Where did the cash go? George Jr can borrow that money and not leave an IOW. Therefore the Highway Trust Fund that is supposed to have sufficient money could not pay its bills. More accounting that George Jr approves of. Sarbanes-Oxley also permits that type of accounting.