Just another Reality-based bubble in the foam of the multiverse.

Sunday, April 04, 2010

Because Chaos was the Plan

Michael J. Burry: I Saw the Crisis Coming. Why Didn’t the Fed?

Michael, while you may have been an unpopular outlier at the time, be sure- be really sure- that massive amounts of money moved to enrich many people other than you, although many more were falling hard.

... the truth is this: The collapse of Enron back in 2001 revealed that the biggest financial institutions, here and abroad, were busy creating products whose sole purpose was to help companies magically transform their debt into capital or revenue. At the time, there were news reports about Merrill Lynch pretending to buy Nigerian barges from Enron, JPMorgan Chase dressing up its loans to Enron as commodity trades and Citigroup disguising Enron debt as profits from Treasury-bill swaps.

This went well beyond Enron. Our banks had gone into the business of creating “products” to help companies, cities and whole countries hide their true financial condition. Consider the recent revelations about how Goldman Sachs and J. P. Morgan helped Greece hide its debt. Now we discover that our banks not only were raking in huge profits helping others hide debt, they also drank their own Kool-Aid. As a chief executive of Citibank said in 2007 about financing dangerously leveraged deals, “As long as the music is playing, you’ve got to get up and dance.”

Our bank regulators were not, as they would like us to believe, outside the disco, deaf and blind to the revelry going on within. They were bouncing to the same beat. In 2006, the agencies jointly published something called the “Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities.” It became official policy the following year.

What are “complex structured finance” transactions? As defined by the regulators, these include deals that “lack economic or business purpose” and are “designed or used primarily for questionable accounting, regulatory or tax objectives, particularly when the transactions are executed at year end or at the end of a reporting period.”

How does one propose “sound practices” for practices that are inherently unsound? Yet that is what our regulatory guardians did. The statement is powerful evidence of the permissive approach bank regulators took toward the debt-dissolving financial products that our banks had been developing, hawking and using themselves for years. And it’s good reason for Americans to be outraged by the “who me, what, where?” reaction of Mr. Bernanke and the S.E.C. to the revelation of Lehman’s Repo 105 scam...

Transparency is only as good as the observational medium.

You can be as clear as crystal glass, but if the lights are off, nobody sees through you.

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