Could Wall Street Banks Be Worse Than Enron? by Nomi Prins
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Michael Nagle / Getty Images Wall Street’s big banks are playing dangerous new accounting games—and this time taxpayers are on the hook for hundreds of billions. Nomi Prins uncovers a scandal in the making.
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.
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.
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:
Bank of America: The firm reclassified its filing categories upon acquiring Merrill Lynch, but it doesn't break down the trading vs. investment banking revenues of Merrill. This either means the firm doesn’t truly know what's going on inside its new problem child, or doesn’t want to tell. (No wonder no one’s jumping for the upcoming CEO vacancy.) That said, despite the obvious information clouding, new acquisitions generally don’t have their activities broken out, which makes it a lot harder for regulators, shareholders, or we, taxpaying subsidizers, to know whether the merger was a success or not.
According to Scott Silvestri, Bank of America’s spokesman, “On our second quarter's earnings release, there was a note explaining why we changed reporting structure. But, with every quarter that passes, it's harder to unscramble the egg. It's been a merged entity since January 1, 2009.”
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What a handy little quote to keep around: "...accounting process is "dynamic" and, not "necessarily comparable with similar information for other financial services companies." Con-men BS artists. No different than the corner loan shark. Second thought, access to our lawmakers makes them a lot different. Thanks for the excellent explanation of how things get to work for the rich in our country.
When Enron crashed I wrote an article then and sent it to all the news network CEOs and to over half of congress. Those that did acknnowledge the article simply said that Enron was just a badly managed company and the nation had nothing to worry about. In September of this year I sent annother "warning" to congress. this letter simply put is a prediction of the crash of the first quarter of 2010. By the end of the 1st quarter, possibly April or early may, this economy will go into a tailspin that will make this last one look puny. It is beyond stopping now. I know things can be slightly corrected. But not if those that have the power refuse to listen. Everybody needs to be financially careful with their funds, don't go out on any limbs, and don't buy things you don't need. Now you may say what does this jerk know??? So I say to you just be careful and If I'm wrong you're money ahead. If I'm right you're far ahead of those that wouldn't listen.
What is the basis of your second crash theory and where do you come up with 1Q10? Right now so much money is being printed it's hard for anything to go down in value. In my thinking we may have an issue once the stimulus ends, but not likely before then and not to the extent that you describe. And let's not forget that Congress will almost certainly get approval for continuing the printing presses should it be warranted. This may not be the right thing to do for long term economic health, but it would certainly help avoid another collapse. Are you basing this on insolvencies of our banking system?
In 1983 the republican's changed the law, allowing the " The Speculation of Revenue " The WSJ said " you can expect nether ethics or Integrity if this bill becomes law " / Republican gave America this horror , self severing get rich LAW !
No need to point fingers at specific parties. There's plenty of blame to go around. Let's not forget the enabling of Fannie and Freddie from the Democrats to provide loans for anyone and everyone. The Republicans loosened regulations and lending requirements. This is not a specific party issue, but more of a who's in bed with whom. We elect these officials and they take marching orders from big corporations and special interest groups. That's where our anger should be focused. Let's all get on the same team so we can push real reform.
The congress wasn't controlled by Republicans in 1983....sorry.
In 1983, Reagan in WH, Reps running the Senate, Dems in control of the House. You think it was Ted Kennedy who was calling the shots?
Who's doing the banks projections....the CBO????
really great article......thank you.
Once again, we're waiting for the other shoe to fall--or another BIG string of banks and financial institutions. And I tend to agree with those of you who say "we ain't seen nuthin' yet." All the financials are doing a fast dance so we can't see their moves, and the government lacks the control they need to hold them accountable. The longer the dance goes on, the more convinced I am that 2010 will NOT be a very happy new year.
Thank you! I've been poring over these banks' financials for the past week and a half, and I thought I was going CRAZY!!! I was looking specifically at executive compensation, and I realized that 1) they have significantly changed the way they tabulate that over the years, 2) banks change the terminology (i.e. non-equity incentive plan vs. bonus) or what each line item represents (one year all other compensation will be various types of retirement contributions, the next year it will include home security systems/guards and corporate jet usage), and 3) there is no consistency between banks
Same thing happened to me when i was studying, starting at business policy and strategy, it looked like the whole thing was going to crash in 2007, and it went on in auditing, accounting theory, nothing was going by the book.
*oops* there is no consistency between banks on what each term represents, and 4) over the years, their compensation structure has become more and more diversified (i.e. they think of more and more ways to pay themselves off). The Cuomo report did a great job of comparing revenues and profits to compensation structure. But quite frankly, in terms of revenue and trying to establish how risky a given stock is for investors, it's ridiculously hard to decipher. Thank you again for this insightful article and useful resource on banks' SEC filings.
We should make Nomi Prins the banking regulator, she would sort them out. The problem is, no one really wants to know what is really going on. All the wondrous things are easily explained. They are 'miracles'. The Roman Catholic Church uses this word for the inexplicable, so should Wall Street as they are doing 'Gods Work'.
Naomi, I really appreciate your writing this. I did not slog through it all, but it gives examples to my feeling that things are more serious than what the government says.
Here we go again ??? . . . followed by WE need to bail them out, because they're . . . " TOO BIG TO FAIL " . . . Again, etc., etc., etc . . .
Johnnyaces: The basis for the prediction is the retail market. Right now the retailers are giving a "good" estimate of the holiday profits. This is fluff. The only markets that are moving are those who have devalued their product. When we go into that 1st quarter the real truth will come out. Those who normally lead the economic sales for special times of the year, are not doing well at all. If that continues there is little doubt that a decline is coming. Most shoppers are being frugal this time. And I believe it will reflect markets to come. Closures are "fense sitting" now. Any way I hope I'm wrong. But I'm not taking any chances.
Thank you Nomi. This is important journalism. Please keep it up.
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