This is a long article but worth reading. Majority of the characters involved in these scams are Talmudists, who are destroying the world and it's people through their manipulation of finance, debt and credit system. This truly is terrorism of the worst kind!

awakenedgoyim

CREDIT BUST BYPASSES BANKS

Part 1: The rise of the non-bank financial system
By Henry C K Liu
In a period of just weeks, the subprime time-bomb that had been ticking unnoticed for half a decade suddenly exploded into a systemwide liquidity crisis that then escalated into a credit crisis in the entire money market dominated by the non-bank financial system that threatens to do permanent damage to the global economy.

As an economist, Ben Bernanke no doubt understands that the credit market through debt securitization has in recent years escaped from the funding monopoly of the banking system into the non-bank financial system. As chairman of the US Federal Reserve, however, he must also be aware that the monetary tools at his disposal limit his ability to deal with the fast-emerging marketwide credit crisis in the non-bank financial system. The Fed can only intervene in the money market through the shrinking intermediary role of the banking system, which has been left merely as a market participant in the overblown credit market.

Thus the Fed is forced to fight a raging forest fire with a garden hose. One of the reasons the Fed shows reluctance in cutting the Fed Funds rate target may be the fear of exposing its incapacity in dealing with the credit crisis in the non-bank financial system at hand. What if the Fed fires its heavy artillery but the credit crisis persists, or even gets worse?

Liquidity crunch only a symptom
Banks worldwide now reportedly face risk exposure of US$891 billion in asset-backed commercial paper facilities (ABCP) due to callable bank credit agreements with borrowers designed to ensure ABCP investors are paid back when the short-term debt matures, even if banks cannot sell new ABCP on behalf of the issuing companies to roll over the matured debt because the market views the assets behind the paper as of uncertain market value.

This signifies that the crisis is no longer one of liquidity, but of deteriorating creditworthiness systemwide that restoring liquidity alone cannot cure. The liquidity crunch is a symptom, not the disease. The disease is a decade of permissive tolerance for credit abuse in which the banks, regulators and rating agencies were willing accomplices.

Commercial paper crisis
Investment vehicles in the form of commercial paper that mature in one to 270 days, which normally carry top credit ratings, allow issuing companies to sell debt in credit markets to institutions such as money-market funds and pension funds at rates lower than bank borrowing or standby bank credit lines. Unlike non-financial companies, which use the short-term debt proceeds to finance inventories, financial-company debtors invest the proceeds in longer-term securities with higher yields for speculative profit from interest-rate arbitrage.

Many of these higher-yield securities are in the form of collateralized debt obligations (CDOs) backed by "synthetic" high-rated tranches of securitized subprime mortgages, which have been losing market value as the US market seizes from subprime-mortgage default rates that have risen to the highest levels in a decade and are expected to get worse - perhaps much worse than currently admitted publicly by parties who are in a position to know the ugly facts.

At what level such willful withholding of material information crosses over from serving the public interest by benign calming of market fear to criminal security fraud in disseminating false information is for the US Securities and Exchange Commission (SEC), and eventually the courts, to decide.

SEC as advocate for investors
The professed mission of the SEC is to protect investors and maintain fair, orderly and efficient markets while facilitating capital formation.

Claiming to be an advocate for investors, the SEC proclaims on its website: "As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor-protection mission is more compelling than ever. As our nation's securities exchanges mature into global for-profit competitors, there is even greater need for sound market regulation."

The SEC declares:
The laws and rules that govern the securities industry in the US derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security.

Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions. The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to our nation's economy. To ensure that this objective is always being met, the SEC continually works with all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience.

The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.
The issue of systemic fraud
It is now clear that material information about the true condition of the financial system along with material information of the financial health of major US banks and their financial-company clients has been systemically withheld, over long periods and even after the crisis broke, from the investing public who were encouraged to buy and hold even at a time when they should have really been advised to sell to preserve their hard-earned wealth. The aim of this charade has not been to enhance the return on the public's investment, but to exploit the public trust to shore up a declining market and postpone the inevitable demise of wayward institutions.

For example, Larry Kudlow, a self-proclaimed "renowned free-market, supply-side economist armed with knowledge, vision, and integrity acquired over a storied career spanning three decades", and host of the Kudlow & Company TV show on CNBC, is an intrepid cheerleader for the debt economy in an evangelistic manner, while the logo for his program is "Putting Capital Back into Capitalism".

As an evangelist for free-market capitalism who celebrates debt and voices loud calls for central-bank intervention to reinflate the burst debt bubble, Kudlow sounds amazingly similar to the campaign of Christian evangelist Pat Robertson of the 700 Club to put God back into people's lives while advocating assassination of Venezuelan President Hugo Chavez and proclaiming Israeli prime minister Ariel Sharon's stroke as divine retribution for the Israeli pullout from the Gaza Strip.

The problem of both evangelistic programs is that the declarations of faith are frequently countered by faithless calls for sinful response to developing events. One is grateful that evangelists are not yelling fire in a theater crowded with believers, but to tell the audience to sit and finish watching the movie when fire has broken out is not exactly doing God's work.

There is indeed need to put capital back into debt-infested finance capitalism. Until then, Kudlow's evangelistic message that "capitalism works" is just empty words. While market capitalization of US equity reached US$20.6 trillion at the end of 2006, the US debt market grew to more than $25 trillion in trading volume. There is $5 trillion of negative capital in US capitalism, about 45% of gross domestic product.

Debt drives the market
Hedge funds, which number some 10,000, commanding assets in excess of $2 trillion funded with debt, have become dominant players in the runaway debt market, particularly in complex market segments, trading about 30% of the US fixed-income market, 55% of US derivative transaction, 80% of high-yield/high-risk derivatives, 80% of distressed debts and 55% of the emerging-market bonds.

Investors in hedge funds include mutual funds, insurance companies, pension funds, banks, brokerage house proprietary trading desks, endowment funds, even central banks.

When private-equity firms acquire public companies to take them private, the acquisition is done mostly with debt. Most corporate mergers and acquisition are funded with debt. Foreign wars and domestic tax cuts are funded with sovereign debt. Debt instruments are routinely traded as if they were equity.

Banks and off-balance-sheet 'conduits'
Since bank clients such as hedge funds and private-equity firms are private entities that cater to supposedly "sophisticated" investors, neither the banks nor their private clients are required by US regulation to make full disclosures of their financial situations. Yet mutual funds and pension funds get the money they manage from members of the general public who do not qualify individually as "sophisticated" investors. They should be entitled to better disclosure requirements.

As banks only set up and run investment "conduits" as independent entities to help their risk-prone clients monetize their securitized assets, such as receivables from credit cards, automobile loans or home mortgages, by selling ABCP, such conduits are kept off the balance sheet of banks.

The rise and decline of collateral management
When dealing in the arcane derivatives market in particular, collateral management is an indispensable risk-reduction strategy.

The Enron implosion was caused by "special-purpose vehicles", which were early incarnations of "conduits" backed by phantom collaterals. Enron's collapse was a high-profile event that briefly brought credit risk to the forefront of concern in the financial-services industry. Collateral management rose briefly from the Enron ashes as a critical mechanism to mitigate credit risk and to protect against counter-party default.

Yet in the recent liquidity boom, collateral management has again been thrown out the window and rendered dysfunctional by faulty ratings based on values "marked to theoretical models" that fall apart in disorderly markets.

Kenneth Lay, once the high-flying chairman of Enron, before his untimely death faced securities-fraud as well as bank-fraud charges after Enron's bankruptcy. The bank-fraud issue revolved around an obscure Federal Reserve banking regulation from the Depression era, called Regulation U, which sets out certain requirements for lenders, other than securities brokers and dealers, who extend credit secured by margin stock.

Margin stock includes any equity security registered on a national securities exchange; any debt security convertible into a margin stock; and most mutual funds. The regulation covers entities that are not brokers or dealers, including commercial banks, savings-and-loan associations, federal savings banks, credit unions, production credit associations, insurance companies, and companies that have employee stock-option plans. This limits the amount of credit a bank can extend to customers for buying on margin. The purpose of the law is to prevent banks from taking on unwarranted or excessive risk.

Prosecutors alleged that Lay signed documents at Bank of America, Chase Bank of Texas and Compass Bank in which he agreed that he would not use the $75 million in personal credit lines to buy or maintain stock on margin but then proceeded to do exactly that. Had he been convicted, Lay would have faced up to 30 years in jail for each count.

On Lay's official website, the Houston community leader, free-enterprise icon and superstar in the energy business denounced the charges as "based on arcane laws" and added that "my legal team can find no record during this law's 70-year existence of these provisions ever being used against a bank customer [like me] until now".

The role of banks in the Enron fraud
When speculation grew about the role Citibank played in the collapse of Enron, shares of Citigroup fell 12%.

The US Senate heard testimony from Senate investigators about the role US banks and their investment-bank subsidiaries might have played in backing the specious accounting at Enron in a complex scheme known as "pre-pays", under which Enron booked loans as energy trades and thus as profits to make the firm look far more profitable than it really was.

The investigators contended that Enron could not have shown such profitability but for the shady help of large commercial banks, such as Citigroup and JPMorgan Chase, and their investment-banking arms. Under General Accepted Accounting Principles (GAAP), loans issued to Enron should have been booked as debt rather than revenue.

Both Citigroup and JPMorgan claimed that "pre-pay" transactions are entirely lawful.

Each bank engaged in about a dozen deals that involved questionable transactions with the failed energy trader. Enron then illegally hid the loans by cloaking them in transactions that were booked as energy trades to show it was earning more money than it really was. This in turned boosted not only Enron's share price but also its credit rating, permitting it to continue to secure loans at preferential rates. The convoluted transactions involved the leveraged purchase of natural gas and other commodities over long periods with credit to look like sales and booked as revenue to increase profits.

Outrageously, while Enron booked the transactions as profits from phantom revenue, it did not report them on its tax returns, electing instead to log them as loans to deduct interest payments. About $5 billion of such loan amounts remained outstanding when Enron filed for protection under Chapter 11 of the US Bankruptcy Code, which allowed the company to operate as a debtor-in-possession to try to minimize loss to creditors. According to the Senate report, the transactions, which took place from 1992 to 2001, in effect hid part of Enron's mounting debt, which eventually bankrupted the doomed energy giant.

The University of California, whose pension fund invested in Enron stocks, led a shareholder class-action suit against Enron and its banks, alleging that internal Enron documents and testimony of bank employees detailed how the banks engineered sham transactions to keep billions of dollars of debt off Enron's balance sheet and create the illusion of increased earnings and operating cash flow.

The suit listed specifically that Merrill Lynch purchased Nigerian barges from Enron on the last day of 1999 only because Enron secretly promised to buy the barges back within six months, guaranteeing Merrill Lynch a profit of more than 20%. As a result of this fraud, Merrill Lynch ultimately paid $80 million to settle with the SEC.

Also listed as evidence was the fact that Barclays Bank entered several sham transactions with Enron, including creating a "special-purpose entity" called Colonnade, a shell company to hide Enron's debt, named after the street in London where the bank is headquartered. Also on the list was investment bank Credit Suisse First Boston, which engaged in "pre-pay" transactions with Enron, including serving as one of the stop-offs for a series of round-trip, risk-free commodities deals in which commodities were never actually transferred or delivered.

Although the three lead banks and others settled with the Enron fraud victims for $7.2 billion, several huge banks named in this suit still have not paid a penny to the victims of the fraud. After years of trial preparation and just a few weeks before the scheduled trial, a 2-1 Fifth Circuit Court of Appeals decision on March 19 let the banks off the hook and destroyed the hope of Enron victims for any further recovery.

The appeals court acknowledged that the conduct of the banks was "hardly praiseworthy", but ruled that because the banks themselves did not make any false "statements" about their conduct, they could not be liable to the Enron victims even if they knowingly participated in the scheme to defraud Enron shareholders. The court ruled that Enron Corp shareholders could not proceed as a class against three investment banks for allegedly participating in fraudulent behavior that led to Enron's collapse.

The University of California asserts that the appeals court decision absolving the banks from liability was wrong because the banks were uniquely positioned to create contrived financial transactions to distort a public company's financial statements.

The ruling awards the banks "get out of jail free" cards to commit fraud without being held accountable, lawyers representing the university argued. The ruling, in essence, declares that the mastermind of the bank robbery who planned the heist, recruited the other robbers, provided the weapons, drove the getaway car and went back to the hideout to split up the loot is not legally responsible, just because he did not show his face inside the bank.

As the sole dissenting judge summarized, the ruling "immunizes a broad array of undeniably fraudulent conduct from civil liability ... effectively giving secondary actors license to scheme with impunity, as long as they keep quiet".

The appeals court split decision is inconsistent with the express language of the broad anti-fraud prohibition of 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, which makes it unlawful for "any person, directly or indirectly", to "employ any device, scheme, or artifice to defraud" or "to engage in any act, practice, or course of business which operates ... as a fraud or deceit upon any investor".

In an extraordinary admission, the appeals court's two-member majority acknowledged: "We recognize, however, that our ruling ... may not coincide, particularly in the minds of aggrieved former Enron shareholders who have lost billions of dollars in a fraud they allege was aided and abetted by the defendants at bar, with notions of justice and fair play."

Units of Citigroup Inc arranged an unusual financing technique for Enron that enabled the energy trader to appear rich in cash from trading rather than saddled with debt. In a series of deals known as Yosemite, Citigroup's multifarious scheme helped Enron borrow money over a period of three years that was booked as proceeds from trades instead of loans. The deals involved bond offerings and trades with an offshore entity to help manipulate the company's weak cash flow upward to match its growth in paper profits, at a time when the gap had grown to as much as $1 billion a year.

Enron would not have been able to defraud investors but for the willing participation of Wall Street banks. Evidence supports the allegation that Citigroup, the nation's largest financial institution, which also owned commercial-bank and investment-bank units, helped Enron disguise debt on its balance sheet through complex financial accounting arrangements at the company.

Although Citigroup actions technically might have been in accordance with then-lax accounting principles, they raised questions over whether Citigroup helped shield important material information from Enron investors. Citigroup denied wrongdoing, noting that lenders should not be held responsible for how a client such as Enron accounted for the financing arranged by its bankers.

In a statement, Citibank said: "The transactions we entered into with Enron were entirely appropriate at the time based on what we knew and what we were told by Enron. We were assured that Enron's auditors had approved them, and we believed they were consistent with accounting rules in place at the time."

Citibank was saying that the problem was with the rules of the game and that it had only been a clever player. Pathetically, it was the only true statement in the whole sordid affair.

SEC scrutiny of banks
Citigroup rival JPMorgan Chase and Co also faced after-the-fact SEC scrutiny for similar deals through a vehicle known as Mahonia, which was the subject of a page 1 story in the Wall Street Journal in January 2003.

Mahonia drew wide scrutiny after a lawsuit with insurers who had guaranteed the transactions through surety bonds. The insurers refused to pay Morgan, arguing that prepaid transactions in effect generated loans, not trades. Their view was confirmed by presiding US District Judge Jed S Rakoff, who wrote in an opinion that the Mahonia transactions "appear to be nothing but a disguised loan".

The SEC investigated both Citigroup and JPMorgan on whether the banks helped Enron hide debt and artificially boost cash flow for regulatory violations, and the office of Manhattan District Attorney Robert Morgenthau also examined the deals for criminal offenses. Enron, which had a reputation of browbeating its bankers, was accused of putting pressure on Citigroup to carry out elements of the deals.

As with the Mahonia arrangement, Citigroup's Yosemite transactions involved commodity "pre-pay" transactions, in which money is paid up front for commodities such as natural gas or oil to be delivered at a future date, a practice common in the energy market. But Senate hearings documents showed that the Yosemite transactions were manipulated to make debt appear on Enron's public disclosures as trades through a series of "round trip" prepaid transactions.

In each of the four Yosemite deals, Citigroup set up a trust that raised money from investors in Europe and the US. Then the money moved to a Citigroup-sponsored special-purpose vehicle in the Cayman Islands known as Delta, which then sent the money in a circle through a series of oil trades, first to Enron then to Citigroup, and then back to Delta, each time moving the money through oil pre-pay contracts. Oil never actually changed hands, and the trades in effect canceled one another out in what amounted to financial manipulation.

Cash settlement is common in commodity transactions, but the round-trip nature of the trades is one uncommon aspect that drew the scrutiny of US congressional investigators. So did the accounting effect of the circular trades, which allowed Enron to borrow money from the Yosemite investors but record it as cash generated from its operations - because that pre-pay contracts were booked as trades rather than loans. The distinction was central because the company's burgeoning debt levels were starting to raise red flags among shareholders well in advance of Enron's final collapse.

The use of pre-pays as a monetization tool is a sensitive topic for both ratings agencies and institutional investors. Documents show that Enron routinely kept Yosemite transaction details in a "black box". Only two participating parties would know the precise details: Enron and Citigroup. This type of "black box" opaqueness is present in many over-the-counter derivate products, "conduits" and "special investment vehicles" that are causing the current ABCP credit crisis.

Enron would put into Yosemite an extra payment called a "magic note" that ensured that Yosemite's investors received promised interest on their investments. Those investors were led to believe they were buying assets from Enron that had revenue streams. In fact, Enron simply was paying - out of its other revenues - interest on its magic note, a bond with a yield of as much as 49% in one instance. The return was spread out among Yosemite investors to make sure they were paid the promised interest on their investment in the trust. All of this became a belated concern to regulators because the debt did not appear as such in Enron's public filings.

Banks blame auditors
Citigroup put the blame squarely on Enron and its then-auditors at Arthur Andersen LLP. "I wish I'd never heard of Enron," Citigroup chairman and chief executive officer Sanford I Weill said in an interview. He might have added that he wished he had never heard of Jack Grubman.

Grubman, star telecom analyst of Citigroup investment-banking firm Salomon, entered a quid pro quo with Weill to upgrade his "independent" rating of AT&T to help Solomon land a huge deal AT&T was preparing to finance a spinoff of its wireless-telephone unit. Grubman, in a two-page memo to Weill titled "AT&T and the 92nd Street Y", offered that if Weill, a member of the AT&T board and a close associate of AT&T CEO C Michael Armstrong, would help Grubman's twin children get into a much-sought-after New York nursery school, Grubman would take on a more positive view of AT&T's business model as Weill had suggested. Weill proposed a donation of $1 million to the school if the Grubman kids were admitted.

The exposure of the Grubman-AT&T deal revealed an embarrassing picture of how Wall Street firms put their own interests well ahead of those of the small investors they were supposed to be helping with independent research during the years of the information-technology bubble. The tale eventually led to the departure of both Grubman and Weill from Citigroup, with Grubman barred from the security industry for life. Weill personally survived the multibillion-dollar Enron fraud unscathed, only to fall over the questionable donation of $1 million to help an employee put his children in a nursery school in return for a biased stock analysis. Immunity mounts in proportion to the scale of malfeasance.

On July 28, 2003, the SEC instituted and settled enforcement proceedings against JPMorgan Chase and Co and Citigroup Inc for their roles in Enron's manipulation of its financial statements. The SEC accused each institution of helping Enron mislead its investors by characterizing what were in essence loan proceeds as cash from operating activities. The proceeding against Citigroup also resolved SEC charges stemming from the assistance Citigroup provided Dynegy Inc in manipulating that company's financial statements through similar conduct.

For JPMorgan Chase, the SEC filed a civil injunctive action in US District Court in Texas. Without admitting or denying the SEC allegations, JPMorgan Chase consented to the entry of a final judgment in that action that would (1) permanently enjoin JPMorgan Chase from violating the anti-fraud provisions of US federal securities laws, and (2) order JPMorgan Chase to pay $135 million as disgorgement, penalty, and interest. The settlement suggested that JPMorgan Chase had not been enjoined from violating the anti-fraud provisions of the federal securities laws before the Enron collapse.

For Citigroup, the SEC instituted an administrative proceeding and issued an order making findings and imposing sanctions. Without admitting or denying the SEC findings, Citigroup consented to the issuance of the SEC Order whereby Citigroup (1) was ordered to cease and desist from committing or causing any violation of the anti-fraud provisions of the federal securities laws, and (2) agreed to pay $120 million as disgorgement, interest, and penalty. Of that amount, $101 million pertained to Citigroup's Enron-related conduct and $19 million to the Dynegy conduct.

The SEC enjoinment against the two errant banks is like using the disallowance of further bank robberies as punishment for a previous bank robbery.

The SEC intended to direct the money paid by JPMorgan Chase and Citigroup to fraud victims ($236 million to Enron fraud victims and $19 million to Dynegy fraud victims) pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. That amounted to a mere pittance of the billions in losses suffered by the victims.

History repeats itself
On May 10, 2004, Citigroup under new CEO Charles Prince said that it would pay $2.65 billion to investors who bought securities of WorldCom that had been highly recommended by its analyst Jack Grubman before the telecommunications company collapsed. It also said it would put aside several billions of dollars more in reserves for other legal claims, raising the total cost to more than $10 billion to clean up its problems stemming from the failure of WorldCom and Enron, as well as questionable practices in the offering of new issues and the publishing of sham stock research during the high-flying days before the tech stock-market bubble burst.

The after-tax cost to Citibank would total $4.95 billion, or 95 cents a share against its second-quarter earnings. Prince emphasized that that was only about equal to its profit for one quarter, and bond-rating companies said they would not lower their rankings of Citigroup's debt. In other words, it was no big deal.

Before taxes, Citigroup's total cost of settling the WorldCom suit, paying regulatory fines relating to Enron and research analysts, and setting aside reserves for other litigation came to $9.8 billion, with losses on loans to WorldCom and Enron adding another $500 million.

"These are historical matters," Prince said in May 2004. "They arose in a different era." Last month, it appeared that history was repeating itself.

SEC tolerance
The enforcement division of the SEC commented on the settlement with the two errant banks that "if you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws". It went on to say that it intended "to continue to hold counter-parties responsible for helping companies manipulate their reported results. Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company." It deflected attention from the fact that the disciplinary action was merely a gentle tap on the wrist.

The SEC pointed out that JPMorgan Chase and Citigroup engaged in, and indeed helped their clients design and execute, complex structured finance transactions. The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans. As alleged in the charging documents, by engaging in certain structural contortions, these financial institutions helped their clients: (1) inflate reported cash flow from operating activities; (2) underreport cash flow from financing activities; and (3) underreport debt.

As a result, Enron and Dynegy presented false and misleading pictures of their financial health and results of operations. Significantly, with respect to Enron, both financial institutions knew that Enron engaged in these transactions specifically to allay investor, analyst, and rating-agency concerns about its cash flow from operating activities and outstanding debt. Citigroup knew that Dynegy had similar motives for its structured finance transaction.

As alleged by the SEC, these institutions knew that Enron engaged in the structured finance transactions to match its "mark to market" earnings (paper earnings based on daily changes in the market value of certain assets held by Enron) with cash flow from operating activities. As alleged, by matching mark-to-market earnings with cash flow from operating activities, Enron sought to convince analysts and credit rating agencies that its reported mark-to-market earnings were real, ie, that the value of the underlying assets would ultimately be convertible to cash in full.

The SEC further alleged that these institutions also knew that these structured finance transactions yielded another substantial benefit to Enron: they allowed Enron to hide the true extent of its borrowings from investors and rating agencies because sums borrowed in these structured finance transactions did not appear as "debt" on Enron's balance sheet. Instead they appeared as "price risk management liabilities", "minority interest", or otherwise. In addition, Enron's obligation to repay those sums was not otherwise disclosed.

Acting like a Marshal Wyatt Earp who had just cleaned up Dodge City, the SEC congratulated itself for cleaning up the Wild, Wild West of structured finance by gracefully acknowledged the assistance of the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the New York State Banking Department in connection with its Enron-related actions. These agreements, between the institutions and their primary banking regulators, obligated them to enhance their risk-management programs and internal controls so as to reduce the risk of similar misconduct. The regulator focused only on bank obligation to "reduce the risk of similar misconduct", not to eliminate the misconduct entirely. Zero tolerance was not the message.

With these actions, the SEC raised to six the total number of separate actions it brought in connection with the Enron fraud in 20 months since Enron declared bankruptcy in December 2003. The various defendants and respondents include three major financial institutions, Enron's former chief financial officer, and eight other former senior Enron executives. The SEC garnered a pathetic $324 million for the "benefit" of the victims of the Enron fraud.

Despite the banks' denials of any wrongdoing, many investors say the banks had or should have had knowledge about the true state of Enron's finances.

Enron's use of pre-pays arranged by banks was so extensive that accounting firm Arthur Andersen created guidelines that it gave to banks about what was needed for these structures to appear on Enron's books as trades rather than debt. "For pre-pays to be treated as trading contracts, the following attributes must exist," the brochure said, citing, among other things, that "the purchaser of the gas must have an ordinary reason for purchasing the gas". A Houston federal jury convicted Arthur Andersen in June 2003 of obstructing justice after the government accused the firm of destroying documents related to Enron.

An array of executives, lawyers, bankers and institutions were formally named in an amended class-action complaint for their alleged role in the Enron scandal. Lawyers for the Regents of the University of California, the court-appointed lead plaintiff in the case, said the defendants "pocketed billions of dollars" while Enron investors were being defrauded. Among those on the list were: Andersen, Enron auditor; Enron's banks, including JPMorgan Chase and Citigroup; and Enron's lawyers, including Vinson & Elkins. Enron board members such as Wendy Gramm, wife of the influential Republican senator Phil Gramm, were also named.

Wendy Gramm, an economist who had called for deregulation of the energy industry, headed the Commodity Futures Trading Commission (CFTC) from 1988 to 1993. After a heavy lobbying campaign from Enron, the CFTC exempted it from regulation in trading of energy derivatives. Subsequently, Gramm resigned from the CFTC and took a seat on the Enron board of directors, where she was paid $1.85 million.

This lack of CFTC oversight contributed to Enron's accounting irregularities, and the failure of the hedge fund Amaranth Advisors from losses resulting from betting on the wrong side of natural-gas prices last September.

The fall of Andersen
Arthur Andersen, Enron's auditor, with 2001 revenue of $9.4 billion, offered to settle its part in the case for $300 million, reduced from its initial $750 million offer and indicative of its dire financial circumstances brought on by deserting clients and disintegrating worldwide structure. But it failed to cut a deal in time to be removed from the suit.

Joseph Berardino, Andersen's chief executive, who resigned over the issues, was named a defendant. Andersen was convicted on June 15, 2002, of obstruction of justice for shredding documents related to its audit of Enron. Since the SEC does not allow convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to practice before the SEC on August 31, 2002. This in effect ended the company's operations.

The Andersen indictment also put a spotlight on its faulty audits of other companies, most notably Sunbeam, Waste Management and WorldCom.

Sunbeam, a household-appliances manufacturer, acquired three other companies: Coleman, Signature Brands and First Alert with $1.7 billion of debt, which it cited in a court filing as leading to the bankruptcy.

In the late 1990s, Sunbeam CEO Al Dunlap used accounting tricks to paint a picture of a turnaround in earnings that didn't exist. With a pay package that included more than 7 million shares and options, Dunlap stood to make more than $200 million personally if he could keep Sunbeam's stock price flying. In the spring of 1998, when Dunlap and his team ran out of tricks, Sunbeam corrected its books, it declared bankruptcy on February 6, 2001, and the stock price plunged from $53 at its peak to just pennies.

In an ominous harbinger of the Enron scandal, the SEC discovered that Andersen accounting documents had been destroyed. In 2001, Andersen paid $110 million to settle (without admitting legal responsibility) a class-action suit by shareholders of Sunbeam over wildly "mis-stated" corporate financial statements in the 1990s.

In the case of Waste Management - which in 1998 issued the largest corporate restatement before Enron - the company had exaggerated its earnings by $1.7 billion. The SEC's investigation found a long-running cover-up - not just by Waste Management, but by Andersen as well.

Andersen and Waste Management paid a steep price in stockholder settlements, but no one went to jail. The SEC fined Andersen $7 million in June 2001, and Andersen promised to shore up its internal oversight - but by then it was already deeply enmeshed in new trouble at Enron.

The bankruptcy of WorldCom on July 22, 2002, came one month after it revealed that it had improperly booked $3.8 billion in expenses. WorldCom surpassed Enron as the biggest bankruptcy in history, which led to a domino effect of accounting and other corporate scandals that continue to tarnish US business practices.

WorldCom, with $107 billion in assets, collapsed under its $41 billion debt load. Its bankruptcy dwarfed that of Enron, which listed $63.4 billion in assets when it filed a year earlier. Immediately upon filling for bankruptcy protection, WorldCom lined up $2 billion in debtor-in-possession financing from Citigroup, JPMorgan and GE Capital that would allow it to operate while in bankruptcy.

The WorldCom bankruptcy was precipitated by the revelation on June 25, 2002, that it had incorrectly accounted for $3.8 billion in operating expenses. The admission cast WorldCom into the top tier of scandal-ridden companies alongside Tyco International, Global Crossing, Adelphia Communications and Enron.

On May 31, 2005, the US Supreme Court unanimously overturned Andersen's conviction on the ground of serious flaws in jury instructions. In the court's view, the instructions allowed the jury to convict Andersen without proving that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents.

The opinion, written by the late chief justice William Rehnquist, was also highly skeptical of the government's concept of "corrupt persuasion" - persuading someone to engage in an act with an improper purpose even without knowing an act is unlawful. The Supreme Court was in effect saying that common-sense unethical business behavior can be technically legal. The court seemed to view Andersen's destruction of incriminating documents as merely an attempt to manage public relations, in opposition to the lower court's view of criminal obstruction of justice.

Conduits dispersed
The problem for the banks now is exacerbated when asset-backed commercial paper conduits are no longer issued by one issuer and sold to one investor. ABCP now combine a variety of debt categories from different issuers and are sold to a large number of investors, making full disclosure difficult to understand even by "sophisticated" investors. Notes from conduits now account for half of the $3 trillion global commercial paper market.

High public officials who are in the position to know, ranging from the chairman of the Federal Reserve to the secretary of the US Treasury, repeatedly gave assurances to the investing public that were not only at variance with discernible trends but turned out to be materially false within weeks. The "basic facts" about the market that the SEC claims as its mission to make available to all investors were systemically distorted and withheld from the investing public with denials by officials of distress firms and their regulators up to days before the adverse information surfaced as undeniable facts.

These officials can now rest at ease for misleading investors because the high court of the United States of America has declared "corrupt persuasion" to be legal, that persuading someone to engage in an act with an improper purpose even without knowing an act is unlawful is not criminal behavior.

Posted in

• enron
• Scams
• SEC
• Tamudists
• Thieves
• Worldcom

Submitted by awakenedgoyim on Thu, 2007-09-06 00:17.

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