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How Lies=Bonuses

So, in a week where Goldman Sachs reported mega billions in quarterly "earnings" and even CitiGroup squeezed out $4 billion, I have to direct your attention to the Columbia Journalism Review's "The Audit" blog where, for several months, some of the best business reporting has been compiled.

Today the prolific Ryan Chittum posts on the "Ugly Numbers on Toxic Asset Prices," following National Mortgage News (with a hat tip to the excellent Naked Capitalism) on Wells Fargo's recent sale of some of its mortgage poop for 35 cents on the dollar.

That's just about what so-called doomsayers (like yours truly) were saying these securities would fetch many months ago.

Wells sold its bundle in an over-the-counter transaction, apparently to avoid triggering "price discovery"-that bad thing that happens in a functioning and open market. Price discovery would bankrupt a lot of banks, it seems-their claims of "profits" notwithstanding.

To recap the problem: banks have a lot of non-performing loans on their books, mostly in the form of mortgage-backed securities (aka bonds) that are impossible to untangle. As people stop making payments, the banks that hold the bonds stop receiving the money. The banks keep the bonds on their balance sheets as "assets" and assign them a value based on what they think they're worth. The real value of these bonds is, in many cases, south of 40 percent of their face value. But the banks are claiming, against all evidence, that the assets are worth about 97 percent of their face value. That means the banks are lying, and by lying about these values, they can avoid appearing insolvent, and continue to pay massive bonuses to their "key employees."

The reason the banks can lie?

Chittum points to a Bloomberg story about how Sen. Chris Dodd (D-Connecticut) and others in congress leaned on the Financial Accounting Standards Board to loosen its accounting regulations. He concludes:

Eight major banks would have had losses instead of gains if they weren't engaged in wishful-thinking (to be kind) accounting. Papering over the problem is not going to make it go away.

It helps to know-though few people seem to realize it-that these toxic assets are related to, and in many cases the same thing as, "derivatives." And here Chittum has done yeoman's work as well, by interviewing the granddaddy of all derivatives doomsayers.

Way back in 1994, James Bothwell and a crew of smart people penned a balanced and reasonable report for the General Accounting Office which said, in effect, "watch out." The report said derivatives, which were then sort of a newfangled thing and not a big market, should be regulated before they could create "systemic risk" in the banking system. Bothwell (as CJR's Elinore Longobardi discovered a few months back), foresaw everything that happened.

So why did no one listen?

As Bothwell explains, the answer is, as usual, money. The forces of Alan Greenspan had too much of it. The Clintonoids were hardly different from the Bushies in this respect, though the Democrats at least just ignored Bothwell's report. The Republicans deliberately neutered his agency, he tells Chittum:

The other thing that kills me-after our report came out and I was director of this group of about 120 people-some people in New York, Chicago, San Francisco-most in Washington. They did an amazing amount of work in the four or five years I headed that group. When Republicans took over the House, they cut GAO's budget like 40 percent, partly I think as payback. They pretty much gutted the GAO's ability to do this kind of work. TA: Has it ever recovered? JB: No.

But the worst of it is happening now, Bothwell says. The changes being made ("reforms," they're called) are designed to deflect criticism and restart the big casino:

JB: I think the same thing that happened (back in 1994), is going to be the same thing that's going to happen now. The industry is already fighting back against anything really meaningful, but they'll-as they did back then-they'll form a study group and come up with some marginal stuff that won't impinge upon their fees and upon their profitability. And that will be it.

Won't someone start some kind of movement already, of regular people, to prove him wrong?

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