The Biggest Financial Deception of the Decade
( Jeff Clark in Daily Reckoning – 13 Jan 2010)
Enron? Bear Stearns? Bernie Madoff? They’re all big stories about
big losses and have hurt a lot of employees and investors. But none
come close to getting my vote for the decade’s most dastardly
First came Enron, with $65.5 billion in assets, going belly-up and
becoming the largest bankruptcy in US history at that time. The
stock went from a high of $84.63 in December 2000 to a whopping
26¢ one year later. And what had we been told by the media?
Fortune magazine dubbed Enron “America’s Most Innovative
Company” for six consecutive years.
Next came WorldCom filing for bankruptcy in 2002, their assets of
$103.9 billion dwarfing Enron’s. Tyco, Adelphia, Peregrine
Systems…also made headlines for their acts of fraud and
A few years later, Bear Stearns set us all up for the Big Meltdown
of 2008. It was B.S. (no, I mean Bear Stearns) that pioneered the
asset-backed securities markets, and we all know how that turned
out. Later we learned that as losses mounted in 2006 and 2007, the
company was actually adding to its exposure of mortgage-backed
assets. With net equity of $11.1 billion supporting $395 billion in
assets, Bear leveraged itself up to an astonishing 35-to-1.
And during it all, Bear Stearns was recognized as the “Most
Admired” securities firm in a survey by Fortune magazine (there’s
that Lower Manhattan tabloid darling again). Frequent sightings of
company executives on country club fairways assured the public
that all was well. And CEO Alan Schwartz told us there was “no
liquidity crisis for the firm” and insisted he “had the numbers to
back it up.” His company was sold four days later to JPMorgan
Chase at $10 per share, a 92% loss from its $133.20 high.
Lehman Brothers, the 158-year-old investment bank, was next and
still today holds the title as the largest bankruptcy in US history.
L.B. succumbed to 2007’s Word of the Year, “subprime,” and its
$600 billion in assets all went poof! In just the first half of 2008,
before the meltdown, Lehman’s stock slid 73%.
And what did CEO Dick Fuld tell us in April of that year? “I will
hurt the shorts, and that is my goal.” He must have been referring
to the attire of his tennis club buddies, because the ones who
actually got hurt were numerous other banks, money market funds,
institutions, hedge funds, REITs, brokers, private and public trusts,
foundations, government agencies, foreign governments,
employees, and investors.
Moving on to the largest US government bailout recipient by far,
AIG’s troubles spawned my favorite placard of the decade: seen
outside their Manhattan offices stood a sign that simply read,
“Jump!” Maybe its creator heard what I did from AIG’s financial
products head Joseph Cassano: “It is hard for us, without being
flippant, to even see a scenario within any kind of realm of reason
that would see us losing one dollar in any of these [credit default
Topping off our list of the infamous debacles of the decade is
Bernie Made-off (er, Madoff), who scammed $65 billion over 20
years from unsuspecting institutions and wealthy investors…
By now you are probably wondering… What’s bigger than all
these debacles? He’s covered the major frauds and scams of the
past decade – what could possibly be left?
To quote my favorite sleuth, Hercule Poirot, “When all the facts
are laid before me, the solution becomes inevitable.”
Here are a few clues…
Federal Reserve Chairman Ben Bernanke said on July 16, 2008,
that Fannie Mae and Freddie Mac are “adequately capitalized” and
“in no danger of failing.” Then-Secretary Treasurer Henry Paulson
declared on August 10, 2008, “We have no plans to insert money
into either of those two institutions.”
– Both Fannie and Freddie were nationalized 28 days later, on
September 8, 2008.
Ben Bernanke claimed on February 28, 2008, “Among the largest
banks, the capital ratios remain good and I don’t expect any serious
problems of that sort among the large, internationally active
banks…” Henry Paulson added on July 20, 2008, that “It’s a safe
banking system, a sound banking system. Our regulators are on top
of it. This is a very manageable situation.”
– Since the recession started in December, 2008, 144 banks
Paulson informed us on April 20, 2007, that “All the signs I look at
show the housing market is at or near the bottom.”
– The number of foreclosures skyrocketed shortly thereafter
and will now any day surpass those during the Great
Ben Bernanke announced on June 20, 2007, that “[The sub prime
fallout] will not affect the economy overall.”
– Less than one year later, the stock market crashed, losing
53% of its value, and is still down 25% despite one of the
biggest bounces in history.
Those in charge of our country’s finances not only failed to see the
crises developing and then bungled the handling of the recovery,
they’ve deliberately misled us about what they’re doing to our
currency. In spite of emphatic promises, flowery speeches, pat-on-
the-back assurances, and continual reassurances, here’s what
they’ve actually done to the dollar:
Since September 1, 2008, the monetary base has ballooned
from $908 billion to $2.0 trillion. The current monetary base
is now equal to bailing out General Motors 23 times.
Bailout funds in 2008 and 2009 total $8.1 trillion. That’s
almost 78 WorldComs. It’s over 123 Enrons.
US debt has risen sharply, from $6.2 trillion in 2002 to $12.1
trillion today. That’s over $39,000 per citizen.
David Walker, the comptroller general of the Government
Accountability Office from 1998-2008, warned that the US is
on the hook for $60 trillion in unfunded liabilities.
Independent analysts peg the figure at near twice that.
Whatever the number, it is incomprehensibly large. The only
way we will meet these liabilities is to print the money and
inflate them away.
We’re bailing out corporations that should fail, making financial
promises we can’t keep, and adding layers of debt we can’t
possibly repay. And the real killer is, if we don’t have the cash, we
just print it. It is, by any reasonable account, the “blunder that will
plunder” the next several generations. It is changing America
permanently, and the problems will persist long after you and I are
laid to rest.
Bottom line: after all the bailout programs, housing initiatives,
rescue efforts, stimulus schemes, bank takeovers, wars,
unemployment benefit extensions, and numerous other promises,
the biggest financial deception of the decade is what the US
government is doing to the dollar. Nothing else even comes close.
This reckless activity has spooked our foreign creditors, weakened
our global standing, diluted our currency, is punishing savers and
retirees, and ultimately sets us up for a level of inflation this
country has never seen before.
Yet, what is the guardian of our economy and money telling us
“Will the Federal Reserve’s actions to combat the crisis lead to
higher inflation down the road? The answer is no; the Federal
Reserve is committed to keeping inflation low and will be able to
do so. In the near term, elevated unemployment and stable inflation
expectations should keep inflation subdued, and indeed, inflation
could move lower from here.” (Ben Bernanke, December 7, 2009).
This is pure rubbish. If inflation could be controlled by just
thinking stable inflation thoughts, then Ben should be able to grow
a full head of hair by just thinking scalp follicle thoughts. This is
so ridiculous, it’s insulting.
Government actions make a mockery of their words; what they say
and what they do are diametrically opposed. It’s clear that inflation
is not a question of “if,” but “when.”
Any level-headed individual has to conclude that there will be a
steady – and likely accelerating – decline in the dollar’s purchasing
power. It’s inevitable.
The great masses don’t quite understand it yet, but they will. There
will be no escape from the cold, hard slap in the face citizens will
receive when a high level of inflation arrives. And when it does, it
will make a mockery of any opposing viewpoint.
So the question before you is simple: Will you be a prepared
survivor for what lies ahead, despite what our government leaders
tell us, or will you be a complacent victim of the biggest financial
deception of the decade?
For me, there’s only one solution. Don’t kid yourself into thinking
a man-made asset will protect your purchasing power. This is the
time to be overweight gold and silver. I advise letting them serve
their purpose for you.
for The Daily Reckoning