Thursday, December 03, 2009

worse than enron?

Common Dreams | Enron was the financial scandal that kicked off the decade: a giant energy trading company that appeared to be doing brilliantly-until we finally noticed that it wasn't. It's largely been forgotten given the wreckage that followed, and that's too bad: we may be repeating those mistakes, on a far larger scale.

Specifically, as the largest Wall Street banks return to profitability-in some cases, breaking records-they say everything is rosy. They're lining up to pay back their TARP money and asking Washington to back off. But why are they doing so well? Remember that Enron got away with their illegalities so long because their financials were so complicated that not even the analysts paid to monitor the Houston-based trading giant could cogently explain how they were making so much money.

After two weeks sifting through over one thousand pages of SEC filings for the largest banks, I have the same concerns. While Washington ponders what to do, or not do, about reforming Wall Street, the nation's biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.

I was trying to answer the simple question that you'd think regulators should want to know: how much of each bank's revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry-so you can contain all that systemic risk? Only, there's no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren't easy to answer.

Goldman Sachs and Morgan Stanley, for example, altered their year-end reporting dates, orphaning the month of December, thus making comparison to past quarterly statements more difficult. In the cases of Bank of America, Citigroup and Wells Fargo, the preferred tactic is re-classification and opaqueness. These moves make it virtually impossible to get an accurate, or consistent picture of banks ‘real money' (from commercial or customer services) vs. their ‘play money' (used for trading purposes, and most risky to the overall financial system, particularly since much of the required trading capital was federally subsidized).

Trading profitability, albeit inconsistent and volatile, is the quickest way back to the illusion of financial health, as these banks continue to take hits from their consumer-oriented businesses. But, appearance doesn't equal stability, or necessarily, reality. Here's how BofA, Citi and Wells Fargo play the game: