Update 2009

Sorry I haven't been posting the past couple of weeks. Put it down to my young grandson on holiday until next week (Feb 9th) . After I get him packed off I'll get right back to work. There is so much to write about.

Accounting for Profit

The Economic Crisis has become a crisis of trust between people, business, banks and government - and now you can add accountants into the mix.

Recent changes to the way the global body on accounting, the IASB, keeps books, will soon show a global recovery that is non-existent. Last October, the IASB, changed the rules to enable companies more leeway in disclosing assets and liabilities to favour the balance sheet. Deutsche Bank, for example, shifted $32b off their balance sheets. This enabled them to post a profit of $120m istead of a loss of $970m. When the profit was announced shares in the bank's stock soared 19%.

The accounting changes were made because of pressure from the EU. The IASB was formed to standardize accounting practices globally so investors and auditors could compare apples with apples. 130 countries have agreed to the new international standards - the major holdout to date is the US.

In the US, accounting standards are maintained by the Financial Accounting Standards Board. The FASB standards are considered more conservative and transparent than those elsewhere in the world, because of the larger number of lawsuits in the US. But pressure is being brought to bear on the US to change their standards. The SEC has ordered all companies to adopt the new standards by 2016, but 100 selected American companies can use the standards in 2009.

If Deutsche Bank's experience with the change is any indication, US banks will report startling turnarounds in Fiscal 2010. If just one of the major banks, probably Citigroup, accepts the new standard and reports a profit, then the other banks will be forced to follow. Just like derivatives trading, nobody will want to be left behind. Pundits and spokespeople will celebrate the end of the recession and the start of a new bull market. But in fact, it will be a bull with no balls.

Pause to Reflect

The global recession happening around us will leave very few people untouched, but rather than focus on the negative, there is an opportunity for people to make major shifts in their lives for the better.

From birth, we soon learn the words, "I want!" or "It's mine." Through our developing years we were rewarded by getting things. In adulthood we measured our success in terms of the stuff we have accumulated: like houses, cars, and electronics. But in truth our families have not prospered. Drug and alcohol use is problematic for many families; just as crime and violence has become the cultural norm in many of our communities.

Here in Godzone , New Zealand, young people are roughly divided into three categories; gang prospects, athletes, and victims. Although I live in a moderately affluent part of town, weekends are binges that see roving groups of drunken youth chasing the next event. Fights break open when these groups collide and generally the nights are occassioned by girls screaming and cars squeeling around town. Dogs bark and the sound of breaking glass and assaults on such things as street signs and mailboxes ring out.

I wonder how parents can sleep at night knowing their children are out there. Probably, they have become acclimatized to the whole scene and are generally content when the morning comes and their kids are back home. Two weeks ago there was an incident when one drunken teenage girl returned home in the company of three older boys at 3:00 in the morning. The mother came out and ordered her daughter inside the house. The daughter rained abuse at her mother who stepped in and grabbed her daughter. The daughter's screams prompted calls from to the local police, but as soon as they pulled up the daughter ran down the street in a great drama. She cried out for help to the police, saying her mother had assaulted her. The mother was arrested. I wonder where the father was?

As the economy forces us back to basic living, I hope many of us take a fresh look at our values and take stock of what is truly important. Family time and activities are generally cheaper than handing cash to the kids and telling them to have fun. At a time when stock dividends are becoming worthless, perhaps now is the time to invest back in our families.

The sun also rises

Just a little something to remind us all of the symbiosis between hope, spirit, and music.

Bonfire of the Vain and Stupid

The Dow is up for the third consecutive day. No doubt some are thinking the bottom was reached last week and we have a long slow recovery ahead of us... but I'm not one of them.

I am reminded of 1929: The stock market crashed and came back then too. It wasn't until 1932 that the impact of a mangled manufacturing base hit with full force. It's easy to look back at Harry Hopkins and FDR as heroes for getting the nation out of the Great Depression, but it took a full ten years of fiscal tweeking and a wartime economy to get millions of people back to work. It was hardly a miracle.

In the end it was greed that got us. For once in recent history, the market was allowed to operate without intervention or regulation. The past decade has been the story of manifest entitlement by the privileged few. The creation of new investment facilities that enabled investment bankers to multiply their profits by selling MBS's to second tier entities that later repackaged and sold the risk to trusts and corporations in the form of CDO's and Credit Default Swaps. Complicit, and critical to all of this were the bond and rating agencies - like Moody's, that assigned AAA ratings to these trusts and corporations - the "shadow bankers" a requirement before shares of these products could be sold to thousands of pension funds, hedge funds, and municipal and state fund managers.

That any third party - completely unrelated to any of these transactions, could later take out insurance policies that paid off in the case of a default of these trusts and corporations is clearly bordering on, if not outright criminal. These derivatives paid massive returns to holders of the paper so long as people kept borrowing and buying houses. They paid even more when the bottom dropped out of the housing market and millions of new homeowners defaulted on their mortgages. Those betting on a collapse could then cash in their default swaps for insurance remissions from companies like AIG.

Perhaps the best first-person account of Wall Street culture, written to date, is a story written by Michael Lewis in Portfolio.com, entitled "The End of Wall Street's Boom".

The solution is far from a done deal. There is an old saying, "use a thief to catch a thief." If there is any truth to that then President-elect Obama has assembled a first class team to lead the nation through the crisis, because most of them had a hand in creating it. As for me, I am growing weary of reporting on the ups and downs of it all. I'd like to get back to writing about the sorts of things that contribute to the growth of the human spirit. But, I'm an addict, and as such will no doubt be drawn back to what is the biggest story of my mature years. In the meantime, I am going to get on to some other subjects.... if I can.

"Too big to fail."

Citigroup should be getting split apart today, but it didn't because it was deemed too big to fail.

The $25b taxpayer handout proved insufficient to stem confidence among shareholders who tripped over each other to unload their stock last week. When Lehman Brothers were allowed to crumple, the damage gained force the further it spread from the host - such was the tangle of debt. But Citi crossed every country's border, dominating financial markets in everything; from student loans to credit cards, Mortgage Backed Securities, Collateral Debt Obligations, Hedge Funds and placed massive bets on Credit Default Swaps.

If Citi had gone down then more than $3 trillion dollars in paper assets would have been exposed as worthless, affecting every country in the G20. Too big for anyone but the Chinese to buy it out, it would have taken years to sell off the individual tentacles that made up this giant.

Of course it helped to have Robert E. Rubin on your Board of Directors. Rubin was Treasury Secretary under Clinton and has acted as the principal advisor to Barack Obama through his election campaign and with the transition team. His proteges will run the Treasury and Federal Reserve in the next administration. Rubin also chairs the Council on Foreign Relations.

TARP, Market chaos, Automakers and Hedge Fund Managers in front of Congressional committees, and Cabinet appointments have all captured our attention while a much bigger, more dangerous game is taking place behind closed doors in Washington and New York. The Federal Reserve and Federal Deposit Insurance Corporation have pledged a further $7.76 trillion dollars to guarantee corporate short-term paper and deposits. Not in the headlines is the $139 billion in loan guarantees for General Electric (no wonder their stock went up) . Not in the headlines is a further $200 billion for Freddie Mac and Fannie Mae.

The total amount of bailouts from all Agencies would run New Zealand for 100 years or pay off half the mortgages in the United States. Incredible.

So as the United States commits the equivalent of half its GDP to saving the finance industry, the question has to be asked: Is the United States too big to fail?