The Assault on Enterprise

We’re less than three weeks away from the start of the Agora Financial Investment Symposium in Vancouver. And it appears our choice of a theme for this year – Assault on Enterprise: How to Invest in an Age of Rising Taxes, Wall Street Crooks and Government Boondoggles – is more apt than ever.

It’s not easy picking a theme for the speakers and attendees from 29 countries to rally around. Most of the marketing materials need to be prepared months in advance. And despite what you might think…forecasting is a speculative and dicey business.

We hit the nail on the head in 2008. Our theme that year, View From the Peak, came packaged with the prescient subtext “Any mountaineer will tell you, the most dangerous part of the climb is the descent.”

Sure enough, the CRB Index peaked one week – to the day – before the conference began.

2008 CRB Index Fall

The collapse in the commodities markets, while steeper in grade than most, mirrored just about every market index around the globe. Bailouts and stimulus ensued. Those ghosts – the legacy of the Panic of ‘08 – are coming back to haunt us anew this week…

First, we were treated to the revelation that Ben Bernanke and Tim Geithner – then still capo at the New York Fed – put taxpayers on the hook for tens of billions of dollars in junk bonds from Bear Stearns.

Bernanke and Geithner told Congress at the time that the bonds were investment grade.

These are the “assets” the Fed generously agreed to bring into its balance sheet when it arranged for J.P. Morgan Chase to pick over Bear’s carcass. Were it not for a lawsuit filed by Bloomberg News, we still wouldn’t know about this.

As it is, we’re not holding our breath for the Justice Department to open a perjury investigation.

We’ve also been made privy, for the first time, to the sweet deal Washington gave the big banks during the AIG bailout.

Buried in some documents recently released by a congressional panel is this: One of the government’s conditions of the bailout was that AIG forfeit its right to sue its assorted counterparties over any monkey business in the mortgage securities AIG insured.

Of course, now that the SEC is alleging Goldman Sachs knew full well the mortgages were hinky, it’s dawning on AIG executives and shareholders that this might have been a raw deal.

Too bad for them. But it’s icing on the cake for Goldman … and Merrill Lynch, Deutsche Bank, SocGen, etc…. who were the counterparty recipients of the loot, collecting $46 billion of AIG bailout money along the way.

Then there was Goldman’s claim this week that it couldn’t say exactly how much money it makes on derivatives trading, because the income is too “integrated” into the rest of its business. In fact, Goldman’s CFO told the Financial Crisis Inquiry Commission, “We generally do not have a derivatives business.”

Really? According to the Office of the Comptroller of the Currency, Goldman held $49.1 trillion in notional derivatives contracts at the end of the first quarter. Or $41.1 trillion, if you just want to count the commercial bank side of Goldman’s business. Either way, it’s only No. 4 on the list of US derivatives holders.

Top Derivatives Q1 2010

The top four banks hold derivatives contracts “worth” roughly 16 times US GDP.

Worldwide, derivatives contracts total $615 trillion, according to the Bank for International Settlements. Thus, those four banks also hold more than one-third of the world’s total.

Maybe it’s just coincidence, but this week, a host of observers are stepping up to call BS:

  • Veteran retail industry analyst Howard Davidowitz, on an unspoken cause of the credit crisis: “It was a massive fraud… a gigantic Ponzi scheme, a lie and a fraud… and it gets back to the accountants valuing the assets incorrectly… Where were the accountants? They did nothing, checked nothing, agreed to everything” and took millions of dollars in fees while “shaking hands with the CEO”
  • MSNBC’s Dylan Ratigan: “The stock market at this point, which used to be a reflection of the future value of actual businesses in this country, has been turned by our government and our banks into little more than a paper-shredding facility… 70% of the volume is computers that are run by the banks playing Ping-Pong with stocks for 10 seconds at a time.”


Addison Wiggin
for The Daily Reckoning

The Daily Reckoning