Friday, March 27, 2009

Is Balance Sheet “Cleansing” PC for Money Laundering?

Open Subscription for the Bair, Bernanke & Geithner LP Hedge Fund.

The cover story in the March 25, 2009 Financial Times discussed the conundrum created by the ill-conceived FDIC and Federal Reserve “Toxic Asset” purchase program. By establishing a heavily discounted “fair market” reverse auction price for these assets, reserve liquidity required by banks post sales will actually need to be enlarged in a market where capital flows are already severely constrained. It came as no surprise that neither Citi nor Bank of America would comment to FT on this fly in the ointment. It came as no surprise that the market celebrated the government’s plan with the same lack of critique that they accepted, well…, no-doc loans, CDO, CDS, TARP, and any other acronym you can imagine and the market lurched forward on shrilled enthusiasm that we may have turned a corner.

Well folks, we haven’t. As the AIG bailout remains a diaphanous money-laundering exercise to pad CDS alleged counterparties at the taxpayers’ expense (the Treasury couldn’t officially just give them money), so the “Toxic Asset” program is a less-thinly veiled racket that, in the final analysis, may temporarily create the illusion that the Federal Reserve and FDIC are not as insolvent as they actually are. After all, as a partner in the purchase of these heavily discounted “assets”, the resulting accounting scams that become options to create illusory variable value assets for both the Fed and FDIC come at a critical time in both organizations’ histories. And the best part about this is that the newly constructed Bair, Bernanke & Geithner LP Hedge Fund is that Congress has no mechanism to oversee or control its actions. Seldom, if ever, have so few been granted such unsupervised control. After all, Congress is only now considering whether it should regulate hedge funds while the Executive branch of government is creating the mother of all hedge funds! And, are we surprised that the same fund managers who tanked billions of dollars of managed funds in the now discredited, careless CDO and CDS mess are stepping to the front of the line saying that they’re in on this scam?

While I’ll write more on this linguistic cultural observation, I thought I might introduce a tiny window into an observation which may bear deeper consideration. We may benefit from a consideration the terms “credit” and “debt” as I believe that has been in the blurring of these important words and their attendant constructs that we may have lost our way. Credit (from the Latin term meaning to confide or entrust), a term that implies a productivity or character based future option, was created to provide capital in the present for a bountiful, more than adequate return derived from accretive value. A farmer received credit in the spring which would be repaid – with return – from the excesses of the harvest. And a letter of credit – made ubiquitous by the Knights Templar – was a conveyance of trust ensuring that there was adequacy in provisions at either end of a counterparty exchange. Debt, on the other hand, was an instrument of scarcity and bondage. Inherent in debt was the control by those who minted the lendable resource over those subordinate to them by virtue of scarcity or station. Anecdotally, you never heard of a credit prison did you? In our less-than-a-full-century addiction to balance sheets, we blurred the line between debits (not to be confused with debts) and credits. And when we took the industrial revolution’s balance sheet, for which this accounting innovation was a means of measuring industrial output efficiency, and applied it to the financial markets, we fully confounded the notion of credit and debt.

When the Nixon administration formalized our modern belief that without debt markets, neither our currency nor our wonton consumption could be supported, we lost our way. When CNBC, CNN, Fox News and others say that we need to open the credit markets, unfortunately neither they nor the politicians for whom they serve as mouthpieces get it. We haven’t had credit markets since we decided to discontinue our productivity-based GDP in favor of debt-ridden, knowledge and service-based consultancies which generate value in the immediate with limited future excess productivity and value. Our plan to repay our debt doesn’t come from an abundant surplus. Rather it comes from our ability to refinance. And that’s the bet that BB&G LP are banking on. In short, the whole system is wired to keep in place a dependency which, in a perverse sense, can only survive when consumers blindly spend themselves into ever deepening holes. The way this mythical Colossus falls is when one component of the scam disengages from the madness.

Last night on CNN’s Larry King, I watched Ed Norton promoting the energy-conserving hour long black-out known as Earth Hour scheduled for this Saturday evening. Let’s take it one step further and give the over-taxed raw materials of the earth a breather too. For one day, let’s agree to go debt free. Let’s learn from our religious friends (Mormons, Muslims, and others who fast routinely) to go a day consuming nothing save the gifts that nature has given. Spend nothing that you don’t have in your pocket. Finance nothing. Extend credit only when and where you know that more than adequate bounty is befalling a counterparty. And then watch to see the Colossus crumble. After all, if we cannot model a life free from the debt-laundering nonsense that has enslaved our leaders, we’re ill-prepared to condemn it.

And one more thing – look around your community and find someone who still makes things – a small factory, a bakery, a printing shop, a semiconductor facility, a steel mill, an artist – and spend a few minutes seeing what productivity is again. And then ask yourself – isn’t it time that America re-discovered the value of credit linked to a bountiful, productive future?


  1. I wish you made less sense.

    It seems that Congress is either clueless/inept or collaborative/evil in this money laundering scheme. Either way, it appears they will not stop this process. It also seems unlikely that "We the People" will stop blindly "spend[ing our]selves into ever deepening holes". Unless taxpayers literally revolt, it seems we are dependent upon someone outside the USA stopping our madness.

    Have I oversimplified this?

  2. “By establishing a heavily discounted “fair market” reverse auction price for these assets, reserve liquidity required by banks post sales will actually need to be enlarged.”...

    Exactly. Which explains why the assets won’t be sold at a discount -- if at all. If sold cheaply it means more public capital going into banks; if sold high, the public gets hosed, but it’s a legal way to inject capital without taking equity stakes.

    The Mighty Threesome essentially have boxed themselves into thinking politically about this problem and will do everything possible to avert the inevitable.

    The path they’re about to take creates a faux market for rotting RMBSs, CMBSs, CDOs ... collectively “The Assets”; which with the failure of AIG and weakening in the ratings of FGIC, MBIA et al., have no longer sufficient credit enhancements to support even conservatively modeled NPV regardless of cash flow. They decided the fix here is to make the FDIC “insurer of last resort” to quell credit concerns for new buyers and reflate values.

    This is all bogus and serves only to skirt the politically damning alternative of nationalizing conglomerated banking, imprisoning the hooligans who forgot they even had mothers, and laying to rest stigmatized “going concerns” that have no longer any value now or in the future anyway. If in fact their balance sheets can not support their garbage in Level 3 with available capital, and they can not raise any more, then this is the only reasonable course of action.

    Am I wrong here?

  3. Michael,

    What we see now is the ultimate hedge - this time it's the Federal Government shorting its own economic constituents. It is time to call it what it is...


  4. Dave, your parsing of the difference between "credit" and "debt" is important, profound, and totally overlooked. Extremely useful observation!

  5. Dave,

    Didn't realize Christmas came early this year.


    US banks stand to benefit from rules change
    By Francesco Guerrera and Joanna Chung in New York, and Jennifer Hughes in London
    Published: April 1 2009 19:20 | Last updated: April 1 2009 19:20

    Large US banks like Citigroup, Bank of America and Wells Fargo stand to receive a surprise first-quarter earnings boost from Thursday’s expected loosening of controversial accounting rules by the Financial Accounting Standards Board.

    Wall Street executives and auditors say the accounting watchdog’s likely approval of changes to “mark-to-market” rules could lead to increases of up to 20 per cent in quarterly profits of large commercial banks.

    Rushed through by FASB after lender and political pressure, the changes have been strongly opposed by investment banks, investors, auditors and analysts.

    The changes will make it easier for companies, including banks, to value assets using their own internal models rather than market prices. They will also only have to recognise a part of any impairment in their profits.


  6. Thank you for speaking about the madness in your own articulate way, David.

    For those of you who are Americans, and want to reign in our Federal Government before it is too late (if we have indeed not passed that point yet), you are highly encouraged to read Peter E. Hendrickson's book titled, Cracking the Code, the Fascinating Truth About Taxation in America.

    There is a very powerful sword of truth for the citizen to wield, if he or she has the courage to make their life count for something in this dying Republic. I am hoping there are some among your readers.

    Happy Thor's Day!


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave