How Deceitful Are the Big Banks?

Just as much as high energy costs are squeezing the North American economy, the fight for survival of some of the major banks in the world is also scaring long-term oriented traders who know the importance of the financial sector for the continued good health of the equity market.

This fight to save the banks has been joined by central bankers and finance ministers, using the People’s money, with nobody permitted to rock the boat. However, if this were your problem or mine, those same banks wouldn’t skip a heartbeat before calling in our loan and taking the boat with it.

In essence, that is why we don’t yet live in a fair society.

So, without further adieu, let’s look into a report by David Einhorn as to how deceitful are these banks. “Exposing Lehman’s Lies” (pdf file) is the type of investigation and analysis that independent traders need.

Lehman Brothers (LEH) had a bad week in the market, and I am sure that Einhorn’s article didn’t help. The stock plunged -17.3% last week, -23.0% over 4 weeks, -41.9% YTD, and -51.3% over the past year.

But I suppose if you are a LEH shareholder, consider yourself fortunate you are not stuck in Citigroup (C) (-61.6% over 52-weeks). And you can point to UBS (UBS) (-54.2%), Merrill Lynch (MER) (-53.8%) and Morgan Stanley (MS) (-51.2%) as being in about the same position.

How much worse can this get for Humungous Bank & Broker [HB&B]? I happen to think there is a further -20% to come, mostly because the banks are still hiding the losses, refusing to take write-offs of permanently destroyed assets. What David Einhorn has done is merely invite at least a million eyes to the problem. From this point forward, regulators and auditors who look the other way may be found culpable and could be charged for participating in a fraud. They must take action. The problem is not just Lehman; it's all these major banks.

Comments

[Outside Obs...:]

When everybody knows the emperor has no clothes...who wants to be the first to say it?

2008 May 26 09:25 AM

[Serge Birbrair:]

You don't say....
UBS and it's "cowboy style" banking makes it the best run bank in the world:
www.nothingcontroversi...

2008 May 26 09:38 AM

[Archman Inv...:]

How Deceitful Are the Big Banks???

They are as deceitful as our own Treasury Secretary is, Mr. Hank (bold faced liar) Paulson.

They are as deceitful as our Fed.

They are as deceitful as our own gov't who blatantly put out phony gov't reports. I guess the good news on that front, is that many, many people know those reports are totally bogus and made up.
The bad news is the gov't is so corrupt now and feel they are above reproach, they will continue to outright lie to it's own people.

2008 May 26 09:47 AM

[Moral Hazar...:]

A couple thoughts come to mind after skimming through the report.

Obviously, Sarbanes-Oxley doesn’t prevent this type of nonsense. It’s time to ditch Sarbanes-Oxley as it’s only burdensome overhead to American corporations that doesn’t work. In the end, if a corporation wants to lie and cheat, it will simply lie and cheat.

The beat goes on. The FED will always be your ace in the hole if you’re an investment bank and will always guarantee your reckless but highly profitable behavior. If LEH or BS needs a bailout from the FED and taxpayers due to their reckless speculation in RE, obviously they will get it, despite the terrible moral hazards being created. Now investment banks are helping to create yet another asset bubble by speculating in oil. $200/barrel is easily on the radar. What happens if the world economy hits the skids thanks partly to their speculation and prices fall back down to $60? Not a problem if you’re an investment bank. The American taxpayer that you worked over by stealing their income, putting them in the unemployment lines, and wrecking their 401ks, is always there to bail you out. Many more examples of the FED and Treasury underwriting highly destructive and morally behavior of investment bank at the expense to the rest of us can be given.

Finally, the Fed can pound their chests and now make a big deal about how they will seriously address inflation, but we all know it’s just a show. If the funds rate needs to be 7 or 8 percent they will keep it at 2, or if they economy slows down further they will drop it to 1. What ever it takes to save the RE bubble from seriously hurting the investment banks they will do it even though it creates runaway inflation. Also, If M3 data needs to be totally ignored because it’s running at over 15%, but it greatly benefits the investment banks and the games they play, then the FED will conveniently ignore it. Double digit inflation in real world terms is here for the foreseeable future.

Lessons, the FED will do whatever it takes to protect investment banks despite runaway inflation, moral hazards, stealing from the taxpayer, a wrecked economy, third world starvation... whatever. Allocate your investment portfolio accordingly.

2008 May 26 11:21 AM

[pimpjui:]

If you think of banks as just another type of business (i.e. producing products, carrying inventory perhaps of those products, marketing them, etc), then banks are probably just as dishonest as other businesses (e.g. tobacco companies, auto makers, etc.). Granted, they are special in the sense that the government (via the Fed) controls what they can do. And at this point in time, banking is producing a disproportionate amount of federal tax revenue, hence it is classified as an industry of strategic importance to national security (i.e. at the same level as the defense indistry). Hence, you can expect all sorts of bailouts. Where else is the government going to get it's taxes from? All the manufacturing and IT jobs shipped offshore? Finally, if the banks are poorly run dishonest businesses, their market prices (e.g 50% drops) are a good reflection of that sentiment. Looks like the banks are taking their medicine....

2008 May 26 12:45 PM

[BioInvestor:]

Thanks for the column. I have been watching these companies closely--particularly Citigroup and Merrill. I was waiting for a futher 30% drop from Friday's close, but 20% will work fine too!

2008 May 26 01:35 PM

[DaveW:]

Are you really surprised at this dishonesty? Do you REALLY want change? Yes? Then start raising your children to be honest and accountable. Ergo, we as parents must live honestly and make responsible decisions. Our culture is built around image and living large - larger than our paychecks, using our homes to finance a larger lifestyle. We have put a generation of children, brought up in a culture of entitlement, into corporate America and - viola! - we aren't so happy with the choices they are making.

The social and cultural motivations behind behaviors is very important with regard to where we find ourselves now. But, just as importantly, these behaviors can be changed.

Let's live within our means, teach our children to live within their means and make it 'normal' to live honestly and make an honest, un-leveraged, living. As such, I would wager that more future CEO's and CFO's would stay away from vague and highly-leveraged investments.

Do I REALLY think that will happen? No, but I can dream. Therefore, in leau of shangri-la, the investment banking system must entirely be regulated and monitored, like the problem child they are.

2008 May 26 03:18 PM

[Greg Pinelli:]

One of the lessons to be learned from this latest monetary maniopulation..is that it is largely irrelevant what kinds of "regulatory" restrictions and boundaries we have...If the Fed and the Treasury (one and the same) are going to bail out the profligate then it hardly matters what the rules are!
The Fed is beyond rules.....and we are going to see the tail end of moral hazard jump onto the impossibly expanding debt bandwagon as it rolls over the edge....

2008 May 27 12:13 AM

[Burt:]

Be careful of your generalizations. You really only mention 1 bank in this entire article.

2008 May 27 07:48 AM

[Serge Birbrair:]

Burt,
If A equals B and A equals C,
B=C

Financials of major Investment Banks you can find in this chart made by St Louis Federal reserve:

research.stlouisfed.or...


Bill, don't be afraid to generalise, the truth is scarrier than we all can imagine.

I double dog dare everybody to find scarrier chart in their lifetimes.

2008 May 27 09:17 AM

[John Pseudonym:]

Let's see, banks use an accounting system that relies on the accountant being honest...

You can take it from there.

2008 May 27 10:13 AM

[Burt:]

Serge,

You have to be an ignoramus to believe that banks and brokerage houses are one in the same. It's amazing how many "experts" are on this website.

2008 May 27 12:32 PM

[nbdubya:]

In banking, the underlying product is entirely homogenous: a buck is a buck is a buck. Textbook hypercompetition. Necessarily, the banks must find other ways of getting ahead. If it's not illegal, they'll do it. Survival of the fittest is the mantra when when there's money to be made. The same hands-off rigor needs to apply when they're on the skids, though. Those that take big risks and lose need to go extinct. Those that can't evolve and stay competitive need to go too. Central bankers are in the midst of a critical bungle by meddling in the field (with our tax dollars!).

Shameless self-promotion: I discussed the motivations and consequences of this meddling in a recent blog series.

nik-o-laus.blogspot.co...

nik-o-laus.blogspot.co...

2008 May 27 03:42 PM

[adan:]

great article, keep them coming, keep us abreast, keep us informed!

2008 May 27 04:28 PM

[Serge Birbrair:]

Burt, if I was long LEH, I'd be touchy too. Have you ever heard of shorting the stocks instead of buying them?

2008 May 28 03:04 AM

[Burt:]

Serge,

I'm short the sector, especially the brokerage stocks which you have a hard time distinguishing. I too believe they are great shorts, but to classify LEH, MER, MS as big banks is ignorant. They are just not the same animal. Keep pretending like you actually know what you're talking about.

2008 May 29 08:18 AM