But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic sh*t they owned -- they just had to sort of promise to hold on to it.
That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bags. What they call "profits" might really be profits, but minus undeclared millions or billions in losses.
"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes.
CON #4 THE RUMANIAN BOX
One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a small machine called the "Rumanian Box." This was a clever little device that the "mark" was invited to feed a blank piece of paper into, then to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums -- but now he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box one which operates on a vastly larger scale.
What the banks did was something that was never -- and never could have been -- thought of before. They took so much money from the government, and then did so little with it, that the government was forced to start printing new cash to throw at them. Even the great Lustig in his wildest dreams could never have thought of this one.
The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks: Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed -- meaning the government was now compensating the banks simply for guaranteeing their own solvency! And a new federal operation called the Temporary Liquidity Guarantee Program (TLGP) let insolvent and near-insolvent banks dispense with (i.e. forget about) their deservedly ruined credit profiles, and borrow on a clean slate -- with FDIC backing! Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase borrowed $38 billion, and Bank of America $44 billion.
Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."
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