Fraud in the Detroit Bankruptcy and the Role of Investment Banks

I read an interesting analysis of what's happening in the Detroit Bankruptcy proceedings. In a nutshell, it appears to be another case where the investment banks were able to take out millions of dollars in fees as they structured deals that ended up crippling the economy. In this case, the deals may be considered fraudulent according to this analysis. This seems to be business as usual in the investment banking world for about two decades or more.

Enron and WorldCom were frauds that were fueled by investment bankers and ended up becoming the largest bankruptcies in history. The mortgage meltdown was also fueled by investment bankers and that led to even larger bankruptcies and the world economy being brought to its knees in what is now known as the Great Recession. Now, the largest municipal bankruptcy in history also appears to have been fueled by some cleaver investment bankers who undoubtedly made out like bandits as it appears that they structured deals that gave them huge fees.

Wall Street Justice: An Oxymoron?

It looks like the U.S. Department of Justice has decided to give Wall Street firms and their top executives a "get out of jail free" card over the last several years. The latest example of this is the MF Global scandal with the former governor of New Jersey, Jon Corzine, and company appearing to get away with $1.6 billion of customer assets that are "missing." An Op-Ed in the NY Times explains Corzine's crimes this way:

Olympus is Accused of Massive Financial Statement Fraud

The camera and electronics company, Olympus, is being reported to have engaged in a massive financial statement fraud. Reports are pretty ambiguous right now but this could be one of the largest financial reporting frauds we've seen in a long time. Here are some excerpts from the NY Times article today:

Most crooked CEOs

Time Magazine online lists their top ten most crooked CEOs (Criminal Executive Officers). At the top of the list is Bernie Madoff. Also on the list are the CEOs of the major financial statement frauds of the past decade including Enron's Lay and Skilling (2nd), Tyco's Kozlowski (3rd), Adelphia's Rigas (4th) and WorldCom's Ebbers (10th).

SEC to require disclosures on global warming risks

Yes, that's right, the SEC has announced that it wants public companies to try to estimate the risk that global warming poses for their assets or operations! No, I didn't get this off The Onion News Network either! Just do a Google Search and you will see articles in The NY Times and elsewhere.

So what does this mean? I suppose, for example, if the company believes it is too close to the rising oceans and could be under water sometime in the next millennium then it needs to disclose that risk! Also, if a company believes legislation on global warming could negatively impact future earnings then the company needs to disclose that risk.

I personally think that the effects of global warming are so hard to predict that companies could comply with this requirement in one sentence: "The effects of global warming or legislation related to global warming on the Company's assets or operations are not estimable in any reliable way." Seems like some wasted ink to me. Maybe the SEC wants companies to say something like: "The impact on the environment from the extra paper necessary to disclose the possible effects of global warming will not lead to any serious litigation since the company is required by the SEC to go through this silly exercise!"

We can only assume that the SEC will be spending time and money reviewing these disclosures to determine if companies are sufficiently complying. Never mind that they had their hands full and failed to regulate some huge Ponzi schemes such as those operated by Bernie Madoff and R. Allen Stanford before investors lost tens of billions in these schemes! Is this really a priority?!

It seems that investors have serious risks of fraud in this world. Scammers such as Madoff, Pang, Stanford, and companies such as Enron, Worldcom and Satyam need to be regulated and shut down. The SEC needs adequate resources to do these jobs and it has appeared to lack the necessary funding for decades. However, if this is their focus in the future then I question whether voters will sympathize with their calls for additional funding!