Oct 8, 2008 0
fraud as status-quo
What’s most difficult to fathom about the demise of global capital markets is how dependent it is on the mass legitimization of fraud. Not just individual fraud, but a calculated system meant to promote fraudulence. One built on rules and regulations and the standardization of practices designed to counter accountability.
Abuse of mark-to-market accounting principles, a technique dating back to the 19h century, is one of the main factors that has guided the failure of the housing market and its subsequent impact on the economy at large. The collapse of AIG for instance, depends very heavily on fraudulent use of mark-to-market accounting principles in concert with unregulated credit default swaps. Brokers were allowed to insure bad loans (under the pretense that they were good) against default, book hundreds of millions of dollars at present-day value without putting up the collateral, and collect hefty personal yearly bonuses as a result. As the value of homes declined, the bad loans went into default and AIG was unable to back up the insurance they sold. They just didn’t have the money. (Not that any of this is new, of course).
A few years ago – back when “Peak Oil” dominated topicality (I just realized how futile it is linking to the Peak Oil wiki…) – I came across an article (which I haven’t been able to find) which decried OPEC nations for their obfuscation of the true nature of the quantities of oil-reserves they declared. I found a 2004 article in Asia Times that discusses the same issues, albeit with much fewer details. In the 1980s, OPEC implemented a production quota system that permitted member nations to produce as much oil as they declared, irrespective of having to present any proof that their declarations were backed by new sources, thus casting a shadow on the main driver of oil production and future revenue: oil discovery. By all accounts, discovery of new conventional oil supplies began drying up a long time ago as nation-states belonging to OPEC have seldom been acquiring new geographical real estate, but, due to a lack of accountability, are still allowed to maintain their production quotas.
From this point of view, the connection between credit default swaps and oil production quotas as mechanisms of maximizing capital returns by blurring the means which generate that capital isn’t so far-fetched. Brokers at AIG and energy ministers in Kuwait knowingly stifle accountability. By legitimizing fraud on global scales for the stated purpose of accruing wealth, and developing standards and practices meant to further those aims, the consequences typically seem to include gargantuan disaster.
Even in the face of catastrophe, there are still calls championing opportunism. I don’t have to look beyond the concluding statements of the dailywealth.com and the Asia Times’ OPEC articles for proof of that:
How Porter Stansberry concludes his lambasting of AIG:
How can you take advantage? First, make sure you have at least 10% of your net worth in precious metals. I prefer gold bullion. World governments’ gigantic liabilities will vastly decrease the value of paper currencies … Keep the fraud of AIG in mind when you form your investment plan for the coming years. By following these three strategies, you’ll survive and prosper while most investors sit back and wonder what the hell is going on.
How Bill Power caps off his piece on Peak Oil:
Clearly the scenario laid out by Campbell is not a pretty one. However, in every crisis lies opportunity. Astute investors should recognize the implications of declining worldwide oil production and adjust their portfolios accordingly.
