Friday, June 4, 2010

A Little Light Reading – accounting’s role in the banking scandals

I decided to do a little delving into the audits of the banks that folded during the first phase of the financial crisis of 2008/09. Let me tell you that I was not shocked to see not a single warning statement among the lot. Everyone passed the GAAP audit with flying colors. Not a single warning to consumers and investors that the whole house of cards was tilting towards catastrophe.

Should this come as a surprise? If you believe the nonsense about professionalism and integrity then it should. If like me, you simply observe their behavior – it should not. Going all the way back to the collapse of Penn Central Railroad in 1970 to the latest bank failures the accounting industry has failed to serve any purpose other than that required by the corporations who use accounting to cheat, deceive and misrepresent the very core of their business transactions.

After the Enron debacle the big five accounting firms became the bigger 4(sound familiar?) when Arthur Anderson was convicted and sold its assets to another huge firm – Deloitte etc. A new law was enacted (Sarbanes-Oxley Act of 2002) and everything was supposed to be fixed (again – sound familiar?)

Congress passed SOX overwhelmingly and Bush called it the greatest reform of business in US history. What impact did it have? - Apparently none other than to employ more bureaucrats. The same kind of off the books accounting tricks were used in some of the better financial scams recently played on the public.

What did the great accounting firms do? Did they report any trace of Maddoff’s games? Any hint of AIG’s 34 to 1 overstretch? A shadow of the debt dragging GM into bankruptcy? No, not one scintilla of warning or real useful accounting data was projected by the accounting giants. Not this time, not last time, not next time – not ever. The FASB regulations and GAAP rules have been twisted to the point where it is actually a breach of professional conduct to report fraud. Generally accepted accounting principles has become shorthand for give the client the audit he wants for the price he pays.

Accounting rules used to state that auditors HAD to alert the public to any threat of fraud. Then in 1996 the rules were changed to raise the trigger to $5,000 before the auditor COULD report fraud. Additional to the $5000 limit the new law required the incident to be “KNOWN” fraud before it could be reported. Now in today’s legal world nothing is “known” until a court has ruled it so. In other words we went from language requiring auditors to report any fraud to language making it a breach of professional conduct to report any fraud unless it was major and already proven. In non bullshit - fraud was off limits as long as the client paid his bills. The accounting profession has skated by untouched by this latest scandal as it usually does. But be assured there are more rascals in the business world than banks and CEOs. Next time you see an accountant remember you are looking at the essential enablers of all the business scandals for the last 40 years.

Thursday, May 27, 2010

TOLD YOU SO - Oil and hurricanes, drilling defies moratorium

I thought I would just take a moment to reinforce two previous post one regarding hurricanes and oil and the other about drilling despite the moratorium. Nothing much can be added to either post, but in our busy disaster cycle things tend to get lost in the latest calamity. 

NPR reported that NOAA is predicted a busy hurricane season this year. The water in the Atlantic region that spawns hurricanes is 4 degrees hotter than normal. This will add energy to the normal cycle. The prediction is from 14 to 23 tropical storms with 8 to 14 of them reaching hurricane strength. The more storms we have the more likely one of them will interact with the gulf oil spill. Even if it does not pick up oil from the subsurface and oil rich hurricane is a brand new disaster for the record books. Even just normal storms can drive the surface slicks far into the wetlands and river inlets even if oil is not picked up as rain and carried inland.

Secondly, the New York Times has been doing a series of reports on the fact that MMS has continued granting drilling permits despite the alleged presidential moratorium. At the time I had reported that 15 permits had been granted and that number has continue to rise. After my post the agency even approved a permit in the arctic refuge. After a meeting with oil and MMS officials the participants set down to eat a cake decorated with “drill baby drill”. This sort of episode would be edited out of a cheap movie conspiracy thriller as too over the top to be believed.

Well, the American meltdown continues. BP treats the coast guard as their personal employees, defies EPA official and even advises them to contact the industry before issuing any further statements. It does not get more pathetic than this. This must be what Nigerians feel as the oil corporations exercise sovereign authority in there nations replete with a huge army of mercenaries to enforce their will. Also remember, while we are busy watching this disaster on TV, the other calamities are moving forward – debt, corporate lobbyist writing “reform” laws, failing infrastructure, global warming – the beat goes on.


NPR - Big Hurricane Season Expected

NYT - Big Drilling continues despite “moratorium”

Tuesday, May 25, 2010

Bank Reserves Are Phony

The United States has long required that banks keep 10 percent of their total assets in what we broadly call cash. This is usually fiat currency – i.e. paper money either physically at the bank or on reserve with the Federal Reserve. The purpose of this reserve is to guarantee the liquidity and safety of the banking system. Theoretically this will allow any bank to meet the demand to pay out liquidated deposits with cash. Sounds good enough I suppose, although 10 percent is not all that much,  But at least it is some safety margin right?

Wrong – in the mangled beanie baby swap meet which is the American economy most banks routinely meet their reserve requirements by borrowing money at the end of the day and then paying it back the next morning. In this manner, the Federal Reserve will consider that its reserve has been met and all is fine and dandy. They "rent" their security by the hour like hookers getting a room in a sleazy hotel.  Seems appropriate really.

In other words banks commonly do not actually have anywhere near 10 percent of assets in safe cash form. It is all another spun sugar fantasy like most of our finance system. If there was ever a serious run on the banks they would not be in any position to cover any the puny 10 percent reserve mandated by the Fed.

Oh and just to make you feel even better – the Fed waives reserves entirely for the really big money. Things like US corporate time deposits and all deposits made by foreign governments or overseas corporations. Additionally anything in a Eurocurrency deposit is also allowed to have zero reserve.

In other words in a serious financial panic our banks are no more secure than in the 1920s. This little update should take your mind off the destruction of the Gulf of Mexico and the abdication of national sovereignty to BP.  At least for a little while.

Monday, May 24, 2010

BP Defies EPA, Ursurps Coast Guard

Is our government totally under the control of big corporations? Is the power of money so great that the express rule of law is meaningless?  The EPA issues a cease and desist order to BP to stop using corexit – its chosen dispersant which test show to be marginally effective and highly toxic. BP chose to ignore that order. That is it – they say umm nope and the EPA whimpers away. No thunderbolt from the White House, no federal marshals ceasing control of the equipment, no fines – no nothing.

On May 20, the EPA issued an order to select a new dispersant from numerous approved formulas within 24 hours. BP declared that they were going to continue to use corexit which is banned in Europe also. Not only did they ignore the BP deadline, but they scolded the agency on daring to issue orders to BP at all. “Before the Coast Guard and EPA issue further directives a change in dispersant products or monitoring, we would like the opportunity to meet with you to discuss the option…”

Just the day before BP contractors ordered CBS reporters to stop recording film of the spill under threat of arrest. Two US Coast Guard officers were with the BP crew and told CBS “This is BP rules – not ours” Nothing I can say can expand upon this outrage. The day BP sets rules for the press is the death knell of what little access to truth the public has. Apparently, the entire US government is at the beck and call of BP as they handle this “incident” in the manner most conducive to BP interests. A local blog Is This Utopia? tried to contact the USGC regarding local volunteers making “hair booms” to help clean up the oil. When told she needed to talk to higher authority, the Coast Guard transferred her to a BP official.

I for one am done with this pathetic charade. Either the elected government rules this nation or it does not. If Washington is out of business please let me know and I will cease paying taxes. I gave Obama a chance to show otherwise, but he has proven to be as openly in the pocket of corporate interests that any President to date. Apparently corporate takeover of America is complete. This level of inaction is tantamount to abdication of the government to the moneyed elite.


EPA orders BP to change dispersant


CBS reporter threatened with arrest by BP

"Is This Utopia" Blogger told BP is running the USCG

Friday, May 21, 2010

Tax System Will Pass BP's Spill Cost To Taxpayers

In one of the earlier phases of the American meltdown, the IRS gave the big banks a special tax cut. They were given an exemption from tax law that will give them up to 20 years of tax deductions. BP may not get the sweet heart deal the IRS gave to the big banks because after all Secretary Geithner worked for Goldman Sachs, the company that funneled nearly a million dollars into the President’s campaign. But even without the perks of bought influence they can still write off the cost of cleaning up the disaster they created. Every penny they spend will be recorded as an extraordinary business expense and go to reduce their tax burdens. Ultimately, this means that the taxpayers will foot the bill for BP’s gross neglect.

As usual in America they claim that profit is due to the efforts of the capitalist class. It is deemed the product of their individual skill and is the sacred right of the rich. Expense on the other hand is the worker’s problem. Like risk it must be borne by the working class taxpayers. Whether that expense is the normal cost of business or the burden of cleaning up yet another disaster wrought by the stupidity, greed and hubris of the few – the cost is passed on to the many.

The result of this twisted logic is that 72 percent of corporations pay zero tax. Remember, this includes only corporations that paid zero $0.00 in taxes – if they paid a dime they were not included in this number. What percentage of corporations pay more than zero but far less than fair is not known. As you may have noticed, Government spending does not decline to meet this loss in revenue. It continues and most of it is spent on contracts with the very same corporations. For every dollar business evades paying, the working taxpayer has to make up for the taxes lost to the government. It is a brutally unfair system at its very core and minor tinkering here and there will not address its basic injustice.

Thursday, May 20, 2010

Oil and Hurricanes

Oil and water do not mix - I wonder how it will do with hurricanes.  Hurricane season is almost here and this could be the most interesting Summer ever.

Frantic over tar balls in the keys, dead pelicans in Pensacola? Don’t be. There are more interesting things to ponder. Here is a headline from the future: Hurricane Betsy coats east coast of Florida in Toxic black rain” Remember when the scientist were all repeating what they did not know about the oil spill? Well the one thing they did seem to know was that we were only interacting with less than 10 percent of the actual spill. No one of course was sure where the other 90 percent was going.

But it is a good as any bet that it is floating someone in the gulf below the visual level. Either scraping the bottom clean of life or floating suspended halfway below the surface in a great pool of semi dispersed, black death. Now, imagine along comes a hurricane churning up those waters and suspending them in its rain bands. Then said hurricane carrying billions of gallons of petro laden water scatters them all along the Florida coast and hundreds of mile inland. What fun we will have then.

The rain bands from a large hurricane can cover half the state and run its course inland for hundreds of miles. Oil and water do not mix so when the rains of the hurricane finally soak into the soil or run into the rivers and lakes we will have a nice even coat of oil all over – well everything. I would think even our Oil industry scientists can imagine the dimensions of that problem. Oil contamination of soil cannot be readily exposed to the “make them so small no one can see them” magic that passes for cleanup at sea.

Huge swaths of homes contaminated, groves, cropland and pastures poisoned, water supplies rendered non potable. This is just one of the nightmare scenarios that have been left out of the Government’s handling of this disaster. Or should I say MMS and BP’s handling of the “incident” Some incident. Well look on the bright side, maybe the Federal Reserve will have just enough paper left to print up one more bailout. I would love to sell my land and move to Canada.

Oil and water do not mix. Neither do deep sea environments and shoddy engineering. Nor do wild experiments with limited knowledge and even less ability to correct. But apparently corrupt government, bought out scientists and greedy corporations do just fine together.

Wednesday, May 19, 2010

MMS Oil Fines Are A Joke

What to know the difference between the EPA and MMS? Under the EPA, if you spill 25,000 gallons of gas in the soil of Maryland, you will pay $4,000,000 in fines and over $34,000,000 in total other cost. Under the MMS you can spill between 275,000 and 2,000,000 gallons a day and have your fine limited to $35,000 in fines and $75,000,000 in total cost. But as always the devil is in the details.

Interior department rules limit MMS to maximum $35,000 fines per incident. Of course these can be added up but the basic unit of infraction is a joke. We will not even discuss the collusion and corruption which is being exposed in the relationship between MMS and big oil. The odds of actually receiving any type of fine at all are miniscule. As reported in a previous post, in the last 18 years, the agency has levied a bare million dollars a year in fines. This is the amount charged; the amount collected was a fraction of that. All this on an industry drawing billions in profit from public lands. Offshore drilling racks up over 3 major violations a month and has a safety record among the worst industries. BP has paid barely $580,000 in the last decade – it made over $5,600,000,000 in the last 3 months. Equalizing those numbers to a monthly rate BP which had over a 12 major incidents in that time paid barely $4,100 a month while making $1,866,666,666 a month. That is 0.0000002589 percent of profits while committing major violations 10.00 percent of the months.

I realize those numbers are hard to grasp and that is part of the magic MMS and their corporate buddies use to get away with theft and corruption. They overwhelm the public and we have to fall back upon a trust that the regulators are doing their basic jobs. MMS is clearly not doing its job, in fact they appear to be more a public relations and cost control arm of the oil industries than a servant of the American people.

Unfortunately this “cozy” relationship as Obama puts it was not limited to Bush politics. Even the normally responsible EPA has become less and less likely to punish corporations with fines that would actually punish behavior effectively. In 2001 Exxon was fined $4,000,000 for spilling 25,000 gallons of gas in Maryland. A month ago the EPA fined and received $418,000 for a spill of 45,150 gallons of gas in Oklahoma. That is a huge degradation in the punitive impact. For an industry that rounds its financial statements up to the nearest million a $418,000 fine will not even be a footnote on their profit report.

The best way for the Obama administration to let the corporations know he means business is to start by cleaning up his own house. Starting with MMS officials need to be sacked wholesale and criminal investigations begun on them. The fine limits of $35,000 per incident and $75,000,000 total need to be scrapped. Not raised but done away with. In an industry of unlimited profits the risk for flagrant abuse needs to be unlimited.


EPA, $418k fine for Magellan oil

$4 million dollar fine for Exxon

The American Meltdown, MMS fines since 1990