Commentary - 04/17/09

False Profits Once Again

We are seeing these headlines recently, and many folks wonder just how this could be:
Stocks jump at open on Wells Fargo profit surprise
(April 9th) Wall Street is poised for a sharply higher open Thursday after the banking giant Wells Fargo & Co. forecast a record $3 billion profit for the first quarter.
Citigroup Posts $1.6 Billion Profit, First Since 2007
(April 17th) Capping off a week that has brought some better-than-expected news from the banking sector, despite a wake of other glum economic indicators, struggling banking giant Citigroup this morning announced that it posted its first quarterly profit since 2007.
JPMorgan shares up after profit tops view
(April 17th) First-quarter net income available to JPMorgan common shareholders was $1.52 billion, or 40 cents a share, compared with $2.29 billion, or 67 cents a share, a year earlier. Analysts' average forecast was 30 cents a share, according to Reuters Estimates.
The answers are explained in the following book, which shows we simply haven't learned our lessons yet. It explains how two insolvent financial entities can be combined, then add some fancy accounting and ending up with "profits."

I'm about halfway through this book titled The Best Way To Rob A Bank Is To Own One, subtitled How Corporate Executives and Politicians Looted the S&L Industry. It was published in 2005 by William K. Black. Due to headlines shown above, it seemed worthwhile to post this commentary immediately.

The following is from the Preface of the book, which is about the S&L fiasco a few years back, and shows how highly relevant it is today:
"This book arose from my concerns that we had failed to learn the lessons of the S&L debacle and that the failure meant that we walked blind into the ongoing wave of control frauds." The defrauders use companies as both the sword and shield. They have shown themselves capable of fooling the most sophisticated market participants and academic experts. They are financial superpredators who use accounting fraud as a weapon and a shield against prosecution.

Several factors make control fraud uniquely dangerous. The person who controls the company (or country) can defeat all internal and external controls because he is ultimately in charge of those controls. Fraudulent CEOs do not simply defeat controls; they suborn them and turn them into allies. Top law firms, under the pretense of rendering zealous advocacy to the client, have helped fraudulent CEOs loot and destroy the client.

Top-tier audit firms are even more valuable allies. Every S&L control fraud, and all of the major control frauds that have surfaced recently, were able to get clean opinions from them. Control frauds, using accounting fraud as their primary weapon and shield, typically report sensational profits, followed by catastrophic failure.

I happen to see Bill Moyers Journal interview with William K. Black on April 3rd. The video can be found here, and the transcript can be found here.

What's best is that it's not a tin-foil conspiracy-type book. William Black was there in the middle of these past events, even to the point of death-threats. As he wrote:

I was a regulator during the heart of that crisis. As the book shows, I had an uncanny ability to end up in the wrong place at the wrong time and a talent for getting powerful politicians furious at me.
I'm disappointed that I did not know of this book back in 2005, as it was certainly available. Perhaps I would not have appreciated it as much as I do now having worked this website for almost three years. However, as the old cliche goes, "Better late than never."

For those who follow GATA, the Gold Anti-Trust Action Committee, Chapter 4 may be highly relevant. Its title is Keating's Unholy War Against the Bank Board. The FHLBB (Federal Home Loan Bank Board) was the federal S&L regulator. The CFTC Commodity Futures Trading Commission job is "ensuring the integrity of Futures and Options Markets." Chapter 4 describes conflicts at the FHLBB during the S&L scandal, and it may help illustrate the problems of legitimate members of the CFTC against manipulation of gold and silver. At the very least, the chapter illustrates just how ugly politics can be against those who honestly try to protect the public interest.

Sometimes The Dragon Wins entirely too often.

2009 by Edward Ulysses Cate
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