Re: [gang8] Structured Finance On Trial

["j.schukte.baeuminghaus" <cresscourt@xxxxxxxxx>]

"The problem is that while Enron's bankers are in the hot seat,
structured finance is on trial.  But structured finance in so widespread
that if it is stalled by full disclosure, the financial system as it
currently exists will end."


This is a deeply disturbing message; but what is even more disturbing is
that it is almost certainly true and it is something we have suspected for a
long, long time.
It is not just one or two major corporations that have indulged in practices
which distort and deceive.
Those practices are so "widespread" that they - and their eradication - must
have a devastating effect on the whole system.
How devastating?
What range of people will the devastation hit?
It won't be only those who invest in the stockmarket - although they are
enormously important, especially in the United States but also around most
of the developed world.
But, if riches didn't trickle down much during the boom years, poverty seems
likely to trickle down a lot more when the bust is in full swing.
Indeed, the trickle is likely to be a shower - or a flood.
The poor and the poor countries will suffer along with the rich and the rich
countries - and all those in the middle.
Meantime, governments, international agencies, central bankers, economic and
financial gurus do little more than look on and click their tongues...
The panic hasn't really started yet.
If it does - when it does? - how much of the whole political, social and
economic system  - not just the system of structured finance - will it tear
apart?



James Cumes
http://VictoryOverWant.org

----------
>From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
>To: "pkt@xxxxxxxxxxxxxxxx" <pkt@xxxxxxxxxxxxxxxx>, "gang8@xxxxxxxxxxxxxxx"
<gang8@xxxxxxxxxxxxxxx>, "TheNewForum@xxxxxxxxxxxxxxx"
<TheNewForum@xxxxxxxxxxxxxxx>
>Subject: [gang8] Structured Finance On Trial
>Date: Wed, Jul 24, 2002, 9:06 am
>

> The Leven Subcommittee in the Senate fingered Morgan Chase and
> Citigroup, two of the world's largest banks, as culprits in helping
> Enron Corp. arrange billions of dollars in loans that disguised its
> deteriorating financial condition, and  worked to hide the details of
> some deals from investors. The banks used "prepay forward commodity
> transactions" (PFCT) to turn loans into incomes for Enron. PFCT is a
> common form of structured finance.  Senator Leven had the smoking gun in
> an internal e-mail of Nov 1998 within Chase describing Enron "loves
> these ptct deals as they allow Enron to hide funded debts from equity
> analysts".
>
> The thrust of the hearing is that there should be more disclosure of
> off-balance sheet debts or liabilities.  The focus on disclosure is
> misleading.  With more disclosure, these deals would not have been made
> because their whole purpose was to evade disclosure. Several witnesses
> remarked that there was nothing wrong with these deals if full
> disclosure was made. Its like saying that murder is ok if no killing is
> involved.
>
> Derivatives can be used to restructure transactions so that liability
> positions can be moved off balance sheet, floating rates can be changed
> into fixed rates (and vice versa), currency denominations can be
> changed, interest or dividend income can become capital gains (and vice
> versa), liability can be turned into assets or revenue, payments can be
> moved into different periods in order to manipulate tax liabilities and
> earnings reports, and high yield securities can be made to look like
> convention AAA investments.
>
> So what is full disclosure? To tell the investing public that structured
> finance is an elaborate arrangement to change the appearance of the real
> financial condition? By the way, before you invest in this company, we
> would like to tell you that the income reported is not real?
>
> The problem is that while Enron's bankers are in the hot seat,
> structured finance is on trial.  But structured finance in so widespread
> that if it is stalled by full disclosure, the financial system as it
> currently exists will end.
>
> Finance capitalism is operating with less and less reliance on capital.
> Capital has become a notional value in structured finance. Credit is no
> longer anchored by equity but by circular hedges. Debt-to-equity ratio
> is no longer a relevant consideration. Practically all US major
> businesses nowadays, with their high debt leverage, would have negative
> real equity if the price/earning (P/E) ratio were to return to
> historical norms. Blue chips are being shut out of the unsecured
> short-term commercial paper market. Corporate credit ratings are
> inflated by exorbitant market capitalization value, which in turn
> reflects irrational P/E ratios. Even now, during what many on Wall
> Street contend to be a savage bear market, the Standard & Poor's 500
> Index yields 25 times earnings. It would have to fall by another 41
> percent to reach the median valuation prevailing since 1957.
>
> Such a decline can happen in a period of days in this age of program
> trading and socialized risk, even with circuit breakers and trading
> curbs. When that happens, structured finance will be a sea of dead and
> wounded in counterparty casualties, regardless of who won and who lost.
>
> The day of reckoning has arrived.
>
> Henry C.K. Liu