Credit Crisis Solution

The Future of Fraud

If it looks like a fraud, smells like fraud, and smells like fraud…it is fraud? Is it legal?

Below this post are a few notes on mark to market, the FASB changing the rules, and the banks buying more of the “toxic assets” to mark up their earnings. CITI bank issued a statement stating that the accounting changes would not affect their Q1 earnings, this says one of two things 1) the rule change wasn’t necessary, or 2) CITI banks lying, which would lead to better than expected earnings.

Like the potential fraud in the mark to market, credit default swaps (CDS) may not be what we thought they were. Ritholtz.com did an investigation on CDS and AIG and made some surprising finds:

1) There was a significant diverge between the risk assumed and the premium paid for CDS.

2) There were indications that AIG believed that a lot of the companies CDS’s were issued for were beyond going concerns.

3) Indicators show that AIG may not have had any original intention to make good on the CDS contracts.

4) As a result of the regulation on mark to market, essentially these securities would be “dressed up” to fool regulators and meet liquidity ratio’s. Replacing the revocable “side letters” of the past.

5) It was essentially a global ponzi scheme.

The government is assuming 100% of the risk, on these CDS, however knowledge is power, and once this information is more popular, there will be action.

This entry was posted on Friday, April 3rd, 2009 at 5:43 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.