Last week, almost every major US bank manufactured profits out of thin air by changing their regular reporting periods to exclude months in which huge losses occurred by changing their definitions of bad debt, and by revaluing their assets at fantasy land valuations that they will never receive in the open market, courtesy of FASB. This event was a non-event to me because it merely continued the process known as the Enronization of America. This event, the systemic injection of fraud and deceit into nearly every aspect of American life, has been unfolding for decades, even prior to the Enron scandal itself.
Recently, Bank of America (NYSE:BAC) CEO Ken Lewis testified that former US Treasury Secretary and ex-Goldman Sachs (NYSE:GS) CEO Hank Paulson instructed him to disobey securities law and conceal material losses in the Merrill Lynch merger from investors. Lewis additionally testified that Paulson threatened to fire him and his entire board if he tried to back out of the Merrill deal. These revelations, too, did not surprise me, for these kinds of activities, devoid of all morals and ethics, have been occurring regularly within the financial industry for decades. It only seems as if such transgressions are more numerous today because of the recent attention given them in the media, but in reality, they have neither proliferated in frequency nor expanded in egregiousness.
Anyone that has ever worked for a Wall Street firm is well aware of the danger an analyst brings upon himself when he refuses to tow the official corporate party line regarding stock ratings for a firm that is simultaneously closing a financially significant deal with the analyst’s employer. Even though this atmosphere of “unspoken coercion” of inflated stock ratings existed for decades, when the bull was strong on Wall Street, very few journalists found this story newsworthy. Even though regulatory laws were passed many years ago to separate investment banking interests from securities interests within the same firm, the percent of US stocks covered by Wall Street firms rated as a “buy or hold” actually increased from 89% (2003) to 93% (2007) after the passage of aforementioned regulations. Who in their right mind would ever believe that 93% of all stocks covered by Wall Street should be rated a “buy or hold” and that only 7% should be rated a “sell”?
When regulations are enforced through self-monitoring and self-policing as is too often the situation, and when all financial regulatory agencies are themselves lacking in integrity and transparency, new regulations can be enacted every day without effect. Self-regulations and regulations imposed by morally bankrupt people have never been effective. How quickly we forget that UBS Paine Webber financial consultant Chang Wu was fired by branch manager Patrick Mendenhall no more than several hours after Enron executive Aaron Brown complained to Mr. Mendenhall about an email Mr. Wu had sent to his clients. In the email that Mr. Brown found “extremely disturbing”, Mr. Wu had advised all of his clients to sell Enron stock due to massive liquidity problems he had uncovered, even though UBS Paine Webber had rated it a strong buy. (Source: CNN, “Financial Adviser Fired Over Enron Advice”, 26 March 2002). After Mendenhall fired Wu, UBS sent an email to their clients retracting Mr. Wu’s statement, informing them that Enron stock was “likely heading higher than lower from here on out.” (Source: New York Post, 4 October 2006).
We should be cognizant that, in light of the Enron scandal, this level of deceit has not been a recent development. In 2001-2002, a partial list of companies that had to re-declare earnings due to erroneous information contained in previous earnings announcements included the following companies: Adelphia, AOL Time Warner (NYSE:TWX), Arthur Anderson, Bristol-Meyers, Squibb (NYSE:BMY), Freddie Mac (FRE), ImClone, Citigroup (NYSE:C), General Electric (NYSE:GE), JP Morgan (NYSE:JPM), Tyco (TYC), Worldcom, Dynergy, Enron, General Motors (NYSE:GM), AIG and Hyundai (OTCPK:HYMLF). Many of the company names on this list are the same companies that have been exposed as withholding material information from their investors about their financial health either in this year or in recent years. And let us not forget that in the early 2000’s, JP Morgan, Morgan Stanley, Goldman Sachs, Credit Suisse First Boston, Lehman Brothers, UBS Warburg, and US Bankcorp Piper Jaffray all paid fined between $32,5000,000 and $400,000,000 for engaging in deceptive and unethical behavior (Source: PBS Frontline, “The Global Settlement, an Overview”, 28 April 2003).
In regard to such ethical issues, unfortunately, little has changed today. With the blessings of FASB and our current administration, almost every major bank in the US is cooking their books today (i.e. consider that, of $4.2 billion of Bank of America’s recently declared earnings, $1.9 billion was attributable to a non-recurring event, the sale of China Construction Bank shares, and $2.2 billion was attributable to a fantasy-land valuation of Merrill Lynch structured notes). As I previously stated though, the Enronization of America started well before the Enron scandal. If we take a moment to dwell on what aspects of our financial system have been Enronized with fraud, it would include our financial ratings system led by Standard & Poors and Moodys, our mortgage system, our banking system, our equities analysts and financial analysts, our accounting system, our regulatory agencies including FASB, the SEC and the CFTC, our media, our politicians, our corporate executives, and lastly and most significantly, our monetary system.
In fact, though the current media focus seems to be on morally bankrupt financial executives and institutions, the fact is that this scenario could not have proliferated over the past several decades if the problem did not run much deeper than just our financial infrastructure. If other integral aspects of our society were uncompromised, they would have flushed out the dishonesty so prevalent in our financial industry many years ago. So the real question that needs to be examined is this - How exactly did the Enronization of America become so systemic?
The Enronization of our Legal System
The first phase of the Enronization of America occurred through our legal system. Most of us make the grave mistake of equating our legal system with morality, but law and morality are creatures that often reside at opposite ends of the spectrum under our current legal system. Since those that make our laws are also the same amoral people that control our financial system, often our laws have very little concern with governing morality and much more focus on ensuring that the very elements that hold power maintain or expand their power. Most Americans automatically equate a behavior as right or wrong depending on whether a law defines such behavior as legal or illegal without any critical thought, and this is a mistake. The fact is that today, many laws have nothing to do with morality. In fact, our legal system is laden with such hypocrisy at times that it allows for the very same behavior to be defined as legal if a financial elite is engaging in the behavior but illegal if a “regular Joe” is engaging in it.
Consider that US corporations can legally funnel hundreds of millions of dollars of overseas earnings to sham off-shore shell corporations specifically set up to serve as a tax-evasion shelters and this action is considered legal, but wealthy US individuals that essentially attempt to do the same thing regarding their own personal income will be prosecuted for tax evasion. Consider that Richard Strong, CEO of the former Strong Mutual Funds, admitted to skimming $1.8 million from his clients’ accounts that essentially was the equivalent of stealing, yet under the auspices of our current legal system, was not sentenced to a single day in jail (Source: Washington Post, 23 June 2004). Yet there is little question that if a hungry, unemployed man steals food equivalent to a fraction of the money Richard Strong stole, he will go to jail if caught. Stealing $1.8 million may be legal, but it certainly is not moral.
In 2005 and 2006, CEOs from the 11 largest firms in America paid themselves $865,000,000 in salary even though their “leadership” caused a loss of $64,000,000,000 of market capitalization in their firms during the same equivalent time period (Source: BBC News, 22 June 2006). Yet, if an employee of this firm performed as miserably as did these CEOs, their reward would almost certainly be a pink slip, not millions upon millions in bonuses, salaries and perks. Again, paying oneself hundreds of millions in salary and hundreds of millions more in bonuses despite contributing to unemployment and the massive loss of shareholder wealth is by all means legal though few would dispute the unethical nature of such behavior.
Were our legal system truly to regulate morality, many executive suites of America’s largest financial corporations would transform into ghost towns as a great percentage of executives would be jailed. There are numerous actions that are considered “legal” today that would be illegal if moral and righteous men were making our laws, and even a handful of “illegal” behaviors that would most likely be re-categorized as legal. Suffice it to say, if our legal system has been Enronized, our regulatory agencies by default, have also been Enronized. The Enronization of our Securities and Exchange Commission (SEC) has never been more apparent its failure to shut down Bernard Madoff and protect American and foreign families from fraud even though independent financial fraud investigator Harry Markopoulos informed the SEC both in writing and verbally numerous times of the fraudulent nature of Madoff’s fund over a nine-year timespan.
During Congressional testimony regarding this matter, Mr. Markopoulos stated that when the SEC repeatedly ignored his warnings about the fraudulent nature of Madoff’s practices, he began to fear for his as well as his family’s safety, a damning indictment of not only the SEC’s abject failure to regulate, but also of their propensity to protect powerful members of the financial elite, even when they commit fraud. The continuing failure of other regulatory agencies such as the CFTC to act in the interests of American people is also quite evident. Consider the CFTC’s recent approval of fraudulent financial products such as the new E-mini Gold and Silver futures contracts, introduced on April 19th by CME group, that settle strictly in cash. Futures contracts that specifically prohibit the delivery of its underlying commodity explicitly allow its participants to legally naked short a commodity with zero intention of every purchasing or holding the underlying physical asset in their possession. If this transpires, a fraudulent commodity market that can never resemble the free market dynamics of its physical market is established.
In recent months, the regulatory agencies have demonstrated a propensity to still prosecute criminal activity that occurs among the “regular Joes”; however, if your rank is among the financial elites, a clear and repetitive response of inaction has been established.
The Enronization of our Media
The second phase of America’s Enronization has occurred through the mass media. Ben Bagdikian, the author of the seminal work on media mergers and consolidation titled The Media Monopoly, has noted that almost all major media in the US is now under the control of five major conglomerates - Time Warner (TWX), Disney (NYSE:DIS), Murdoch’s News Corporation (NASDAQ:NWS), Bertelsmann of Germany and Viacom (NYSE:VIA). To be fair, there are a handful of major news organizations not controlled by the “big five”, including The New York Times (NYSE:NYT), The Washington Post (WPO), The Chicago Tribune and Los Angeles Times. However, Badgikian’s basic premise that the problem with our media is “not one of universal evil among the corporations or their leaders” nor one of “a general practice of constant suppression and close monitoring of the content of their media companies”, but one of a contradiction between the values of free enterprise and the interests of giant conglomerates, is still valid.
Today, many important news stories break on the internet by bloggers well before they attract the necessary viral proliferation to draw the attention of major media outlets. Today, a strong case can be made for the argument that one will find a greater level of truth and integrity in reporting on the internet than in major information distribution channels such as CNBC.