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Monday, July 16, 2012

A Tale Of Three Financial Scandals

Hey, long time, no see.... sorry, folks.

Any-hoo, these past couple of weeks, I've been tied up in finances.  The PM store fiscal year ended a couple of months ago, the firearms training fiscal year ended last month, and the sales tax for the second quarter are due the end of this month.  In short, I've been up to my armpits in different tax preparation issues.

During this time, there have been a number of financial "scandals" that have hit the news pipelines.  What I find interesting is that the least important of the three is getting the largest amount of press.  Smoke and mirrors, folks....

The largest single item - in terms of its impact on most Americans - is likely to be the LIBOR scandal [link:  The Worst Banking Scandal Yet?].  Most folks may have seen a quick mention of this on the news, and then POOF!  it's pretty much disappeared.

In short, LIBOR is one of the many interest rate "benchmarks" that banks use to set their internal rates.  LIBOR is mostly used for home loans, but a bank can choose to use it for any lending product.  The banks that set this rate were artificially forcing the rate downwards.

That might seem like a good thing - the rate you get on a home loan would be lowered.  That may or may not happen, as the bank can charge any margin - a spread above the LIBOR rate - that they wish. 

How this has a good chance of negatively affecting you personally is if you have any kind of retirement account.  By the banks colluding to suppress rates, they ended up paying much less in interest payments on bonds they've issued, and your retirement fund may have purchased for the interest income stream.

How much less?  How does THREE HUNDRED BILLION DOLLARS A YEAR grab you?  And that's the low estimate.  It could be as high as seven hundred and fifty billion dollars.

Put this into your personal data banks:  All of the banks doing this are regulated by some sort of federal banking agency (either here or abroad).  How's that working out?  Smoke and mirrors...

Scandal number two is like Groundhog Day.  We've seen this one before - and will likely see it happen again.  And again.

Like the Bernie Madoff scandal, and the MF Global/Jon Corzine scandal, a company called PFGBest reached into the pockets of their customers and stole their money.

So far, this is the smallest of the rip offs.  It ONLY looks to be around $250 million dollars.  Guess it would suck if that was my $250 million....

How did this financial mastermind pull off this theft?  With a PC and an inkjet printer.  The CEO would cut-and-paste information from various checking account statements, and present this information to..... wait for it..... FEDERAL REGULATORS [link].
Wasendorf wrote that he quickly learned how to falsify online bank statements amid the rise of Internet-based banking, and that "regulators accepted them without question."

Know how they caught this guy?  He didn't show up for work, so someone went by his house and they found him sucking the tailpipe of his car.  The razor-sharp regulators decided to re-check the information from their recent audit, and THEN they figured out they'd been hoodwinked.

For all of these years, their "federal audit" had consisted of taking the word of the entities they are "regulating".   No need to verify the information.

Like the LIBOR scandal, this is getting little public notice.  Wouldn't want to embarrass the administration or its top-notch watch-dogs keepin' your money safe.

More smoke and mirrors....  Gotta divert the attention of the masses....

Our third scandal is the smoke and mirrors.  Like Congress huffing and puffing over the Roger Clemens steroid scandal (something over which they have no Constitutional control), JP Morgan is being drawn and quartered in the public press and before Congress.

For an insignificant loss as a result of a failure in their internal controls.

Chief!, you may be saying, they had a loss of nearly $6 billion dollars!  Well, yeah, they did.

So what?

They have assets totaling nearly $2.5 trillion.  A six billion dollar loss is equal to about ONE QUARTER OF ONE PERCENT of their asset base.  To put that into perspective, if you had $100 in your pocket, it's the equivalent of losing twenty-five cents.

It's nothing.  Unless you're Congress and the administration in charge of financial regulation, and see yet another opportunity thump your chest and shake a bony finger at some rich-assed banker.

And to divert attention away from your real failings.

You see, the LIBOR and PFGBest scandals cost real people real money.  The only people potentially hurt by the JP Morgan incident were the shareholders.  How did the markets react last week after JP Morgan discussed the changes they've made and reported their most recent earnings?
Investors cheered the bank for capping losses and taking steps to ensure it avoids similar bad bets in the future. JPMorgan's shares rose 6 percent on Friday.
Yeah.  Scandalous. 

Accept The Challenge

I think I have a new Rule Of Thumb.  If Congress is holding hearings, it is probably a diversion away from a real problem.  When hearings happen, I'm going to start sniffing around the edges to figure out the real issue.

Sure, sure, sure, occasionally, Congress actually does its job.  The Fast And Furious hearings are a perfect example of Congress performing its oversight duties.  The Administration is in full CYA-mode, but Congress is at least trying to do its job.

It would sure be nice if the Compliant Press devoted as much air time and column inches to real scandals and instances of law-breaking, as they do to issues which are used to get Americans to take their eye off the ball.

I know.  Keep dreamin'....

No one but YOU is responsible for your education.  If you choose to take what's being fed to you, you are responsible for the end result.  They want to feed you the hot-and-juicy burger, and you're slurping it up.  Don't complain when you end up a fat, listless blob.

Copyright 2012 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.

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