Dollar for Dollar - Toxic Assets and the Games Bankers Play

I think I may have found a good use for at least some of those toxic assets that government paid top dollar for, but first let’s look at what made news.

On January 31, 2010 it was reported in the Wall Street Journal that investment bankers in the US have been successful in circumventing the new guidelines on remuneration which were aimed at preventing bankers from cashing out bonuses for at least three years.

Apparently, the bankers have been using “over-the-counter equity derivatives strategies such as call options, put options, and collars to monetise their shares.”

This is a short post as I only wish to make one observation, ask one question and propose four recommendations.

My observation is to the effect that it was only a matter of time before a loophole was designed to side-step the guidelines. Please note that I have used the word designed and not discovered. The boys in suits and their well heeled lawyers do not waste their time trying to find a crack in the wall. They already have an armoury of devices and precedents that have repeatedly been used for the avoidance of tax, and/or the concealment or camouflage of transactions. After each close shave with the law they simply modify such devices just enough to put the authorities behind the eight-ball until the next run in.

My question is as follows – how many more regulations, guidelines, rules, laws and directives are similarly circumvented by clever lawyers, right across the whole spectrum of governance that we are not aware of?

Do I need to remind anyone of how the Bush administration hired Professor John Yoo to provide a legal opinion which would deprive enemy combatants in Afghanistan of prisoner of war status pursuant to the Geneva Convention? The reasoning resulted in Bush and Cheney having the legal justification to apply water-boarding and other advanced interrogation techniques. The fact that they did not seek a second opinion was probably an indication that Yoo may have been the only lawyer willing to sell his principles. I doubt that it was done for cost containment.

My recommendations are therefore as follows:

(a)   Require all bonuses to be lodged with a regulatory body for the period of the restriction or

(b)   Place a catch all clause to the effect that any circumvention of the three year rule will result in loss of the bonus, a jail term and an additional monetary penalty  of 50% or

(c)    Provide a reward to any whistleblower that provides authorities with any information relating to any scheme or attempt designed or implemented with a view to avoiding the intent of the law.

(d)   Pay bonuses from the pool of “toxic” assets held by the Federal Reserve at the end of three years at the price at which they were originally sold to the Federal Reserve. In short, the bankers should be made to eat the poison mushroom pie they cooked in the first place, dollar for dollar. Valuations should be good in both directions.

It appears to me that no administration will ever have the fortitude or integrity to make anything other than noises for the purpose of placating the masses. At the end of the day, we must remember that it was a previous Federal Government that pushed to one side the definition of what actually constitutes a dollar pursuant to the constitution and has since that time printed dollars with manic consistency. If a Federal Government can intentionally circumvent the Constitution in relation to its own currency, then what expectations can the rest of the people have?

Despite such wanton damage to the financial system, poor old Bernie Madoff is still without a high-ranking cell mate from the banking community and the Government’s only response to the economic chaos is to raise the government’s debt ceiling whilst heralding lower deficits based on wishful improvements in the economy.

The only change the people of America can hope for is the change that arrives in actual results rather than anticipated results. Until then, announcements of intent will be heralded with such intensity that people will continue to believe the lies, as one by one, they lose their jobs, their homes and finally hope itself.

If there ever was a time for gold to be bought, then this is it. When nations reach the point of being defined by their printing presses rather than their constitutions and institutions, it is clear that a period of great stress and distress will follow. Every dip in the price of gold is not a sign of economic improvement. It is simply one more opportunity to prepare.

I can see the day when a second Mt Rushmore is created with the faces of the four men who unwittingly (to say otherwise would be to call them criminals) destroyed a nation by first cutting the umbilical cord of its currency from gold (Nixon), proceeded to cheapen it with ridiculously low rates of interest (Greenspan), continued to print it at record pace (Bernanke) and finally proceeded to spend it like a mad gambler (Obama).

Many of you have become accustomed to watching the rise and fall of the stock market as nothing more than the tide of business. Rest assured the incoming tide will return one day as an all consuming tsunami unless real change and real sacrifice are embraced.

Peter Souleles B. Com LLB