It’s Not Just Enron

Enron is just one of a long series of scams starting back in the 1960’s with changes in the rules that prompted Abromoff to Write Unaccountable Accounting. The essence of the scam is simple: put the risk on some unsuspecting schmuck and take all the money. It is the middlemen — the accounting firms, the law firms, the rating agencies, the investment bankers, and yes, the banks that clean up. They never take the loss. It is the small investor and the fund manager desperate to show short-term performance that support the scam. There are several segments of the economy that are empty shells — business plans composed of smoke and mirrors. Whether it is Boston Market which gave the money to the franchisors to pay for the franchise, or Enron or WorldCom who posted huge profits in tight margin industries, or the late spate of derivative securities many of which by their very name imply high sophistication to mask their low-down fraudulent nature.Some Chinese workers get paid a total of ten bucks to make a stick of furniture. The Chinese company that employs them gets 50 bucks. The Chinese manufacturer, sells the furniture to a jobber for $75. The jobber sells the piece to an American Distributor for $100. The Distributor sells the piece to a retail furniture outlet for $150. The retail store sells the piece to a customer for $800 with no money down and no payments until 2012. The customer signs — and here is where the real fun begins — his signed document is sold by the retailer to XYZ factoring, Inc. for $425. The factoring company sells the debt to an investment banker for $500. The investment banker packages an income fund and sells it through retail brokerage to Joe Schmuck (investor) on the street for $600, as a derivative security (collateralized debt obligation, which sounds very safe), with a return of 12%. The truth is no money exchanged hands until Joe Schmuck ponied up the $600. Then it is sent down the line and everyone gets paid. But the companies are allowed under current accounting rules to report the “sale”, the income from the sale and later the write-down when some of the paper goes bad — and they do this without the first dollar put up by either the consumer who “purchased” the furniture or the investor who will purchase the CDO security. And then these “middleware” companies report higher earnings and more people buy their securities and on it goes. The frenzy continues and prices increase because nobody dares to get out, and people fool themselves into thinking they are rich from this paper trail — until it collapses, which is exactly what is about to happen in our boom and bust economy.Joe Schmuck is the one who actually bought the furniture and doesn’t even know it much less use it. Nobody cares whether the customer who received the furniture ever pays because they are not at risk (Joe Schmuck has all the risk), and nobody cares if Joe Schmuck loses all his money a couple of years later when the pyramid collapses, because he bought pursuant to an incomprehensible prospectus that is mind-numbing even to experienced securities attorneys. The disclosures are all in there, couched in language that probably nobody understands including the author who plagiarized it from another prospectus which itself was created from cutting and pasting the work of others who cared all about form and nothing about substance. Whether it is “mortgage-backed securities” or anything else if you create free money people are going to chase it and take it. Lots of people made a lot of money on this scheme and variations of it. They are all based on hiding risk, and skirting the intent of disclosure requirements. They all produce ridiculous sums of revenue and income for middlemen in exchange for merely showing up. None of the middlemen provide value added. That is the weakness of our economy and the culture behind it is what is pulling down our quality of goods and services, our expectations and even our hopes and dreams.The reason why costs have gone down and prices have gone up is not just that the companies we see and know are making more money, which they are, but because, we have institutionalized it into a feeding frenzy that invited more middlemen in to share in the bounty. The more people in the chain, the more complex it appears and the thus the more legitimate it appears (or at least, there is considerable doubt arising from the confusing array of transactions, that anyone can prove that anyone did anything wrong).The net result is that consumers and investors get screwed. Consumers are lured by “free stuff” (like houses) and investors are lured by too good to be true returns. Nobody else puts up any money. And if the Consumer actually pays part or all of the price of the furniture, then there is even more money to split up with transaction, handling and customers service fees attached. It all comes down to a simple code of marketing in the investment banking world. If you are selling, make it complicated — then you can call it whatever you want and price it anyway you sell it. If you are buying make it simple and pay only when you understand what you are paying for.  

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