The bankruptcy report on Lehman is both revealing and damning. Once again, the investing public learns — after the fact — the basic truisms of modern markets:

-Major accounting firms are worthless to investors. They were either unable or unwilling to detect fraud amounting to 50 billion dollars. The incompetents at Ernst & Young deserve the same fiery death as Arthur Anderson; Whether they are hired guns or paid whores, they — like the rating agencies — are worthless to investors.

-Corporate management engages in fraud all too regularly: Am I reading this correctly — that Dick Fuld’s defense will be “I didn’t know that Lehman was a giant Ponzi scheme, and I was unaware we were hiding billions in bad debt and leverage off balance sheet?”

Based on the release of the bankruptcy court report, LEH was technically insolvent perhaps years before it collapsed;

-The Shortsellers turn out to be the good guys. Consider the absurdity fraud of “protecting” the bankster frauds — fromt he truth, as revelaed by Einhorn et. al.

-The SEC is utterly incapable of comprehending how markets function. They believe the criminals who commit the fraud, and  ignore the whistleblowers who uncover it;

-The ban on short selling is an indictment of the inability of the SEC to understand WTF is going on, and a reward tot he criminal corporate management teams;

-The Media did a terrible job uncovering the fraud as well. Some media folk were used by CEOs. Some of the TV press who relied on access to their subjects, actually rallied to the defense of these CEOs, including Fuld, and trashed the short sellers. Most notably Charlie Gasparino from his CNBC days, but their were others as well.

-The Analyst community, for the most part, failed as well.  The few who publicly acknowledged the debacle were notable for being so far outside of the herd. 95% of them were wrong.

Pathetic

All in all, the entire system failed. The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me . . .

Category: Bailouts, Legal, Markets, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

67 Responses to “Accounting Fraud, Short Sellers & the SEC”

  1. markwax says:

    Looking at AUM at the largest aggregators, it is happening. Leading me to believe that current level of stock prices is just the carry trade. I’m dubious that the little guy is going to step in and buy at the top this time. Does anyone here think that the P/E’s projected for the S&P will actually happen.

    Watch for more deflation in assets over the second half of 2010.

  2. “The SEC is utterly incapable of comprehending how markets function. They believe the criminals who commit the fraud, and ignore the whistleblowers who uncover it”

    It may not be as simple as whom they believe. I think the SEC is loaded with too many lawyers who don’t understand anything – except perhaps for the letter of the law.

    The SEC must be staffed with traders – people who understand that which is being investigated.

    Regards,

  3. Well, at least the movie may have a happy ending

  4. Robespierre says:

    You forget the most important bullet:

    Armani wearing crime does pay! None of these people will be ever charge with any thing or lose any of their fraudulent gotten money. So my advice to thugs out there is join an IB to get away with it

  5. jritzema says:

    The rating agencies and auditor are very similar models. How does it make sense to work for someone (third parties) and be paid by the people who don’t want the third parties to know the truth (companies)? Who is the customer? Unfortunately the people writing the checks control the auditors when disagreements arise. I couldn’t stand the slimy things I saw in the 2.5 years I was in auditing.

  6. wunsacon says:

    >> Pathetic. All in all, the entire system failed. The situation is utterly disgusting,

    Yes…

    >> and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me . . .

    …but might be dangerous for the public to sit in cash/bonds as bankers next (try to) destroy the currency.

  7. dead hobo says:

    Who exactly is the “Analyst Community?” At one point many years ago I respected the idea of them as people who were smarter than me and it probably was good to at least pay attention to what ‘The Analysts” said.

    Today, the word “analysts” makes me think of sell side shills who always always undershoot on their predictions so that the sell siders can shout “IT BEAT EXPECTATIONS!!!!”. Has there ever been a time when “analysts” weren’t optimistic or has there ever been a quarter where their expectations weren’t beat?

    I suppose it ads credibility to an incompetent business reporter’s work when they can write “Analysts Said” to the headline the story being concocted,

    Does anyone anymore actually think the phrase “analysts Said” has credibility with anyone anymore? People I talk to don’t believe government statistics any more. Is the phrase “Analysts Said” becoming an automatic dis-qualifier for anything that follows that phrase?

  8. cognos says:

    What?

    BR — This post is insane. Korean bank offered Fuld $20/shr equity infusion when the stock was trading $26. Fuld turned it down. Korean bank did an analysis around 1-yr anniversary and determined the trade would’ve been highly profitable. Barclays benefits massively (as much as $20B) from their “purchase” of Lehman piece. So did others. Frictional costs were huge.

    Financial markets are ALL ABOUT THE FUTURE.

    If you saw the future as “Q4 2008″ then things looked 1 way (Einhorn’s view). If you only saw the long-term (Q4 2009, today)… then fundamental values, bank solvency, etc were fine.

    “Uncertainty” in markets and prices is not “fraud”. Its sad and stupid to conflate the two.

  9. dead hobo says:

    Shit, if you come right down to it, Larry freaking Kudlow is an “analyst”, or would he be considered an “economist” when those hacks are quoted to support the “analysts”?

  10. bondjel says:

    I agree the short sale rule is counterproductive, Robert Shiller recommends more encouragement of short-selling not less. However, in judging the SEC in general you have to take into consideration how Congress has utterly failed to provide the funds and manpower the agency needs and of course Republicans like W only pick business whores who will go even further in emasculating it.

  11. Julia Chestnut says:

    I’ve been out of the market for more than a year. I looked at the market then and the fundamentals were lacking – and the rally was being led by financials that I knew to be insolvent. I got out, and I haven’t looked back.

    The problem is, we’re all stuck in 401(k)s that we can’t really control. I have a money market option in mine, and that is what I’m in. At what – zero interest? But government employees who have TSP? Their options are extremely limited – treasuries is the only out. Granted, when the US government defaults on its debt, you have bigger fish to fry than whether your TSP account just evaporated. Indeed, government employees are probably the least diversified for government default/crisis risk in the whole country: after ENRON, nobody else can have their entire pension fund in the company’s bonds/stock. But in effect, that is what government employees have their money in! TSP participants can either get into bonds, stocks, or treasuries. If all three of those markets are rigged/staring into the abyss? I find it depressing.

    The penalties for pulling our money out of tax-deferred retirement plans and sitting in cash make it incredibly difficult to get safely away from the fraud being perpetrated with our money. And the people pulling the strings know that all too well. There are ways, but it is difficult and interest rates are at zero. Try convincing people that losing money on a zero interest rate is the only way to staunch that huge, flowing wound on their leg. . . .while they float in the middle of the Pacific Ocean surrounded by sharks. Lots of them can’t distinguish the bleeding from the surrounding water. Talking to my parents about this goes better when they don’t turn on their hearing aids, if that tells you anything.

  12. destor23 says:

    Is Einhorn still under investigation? Shouldn’t the SEC issue some sort of public apology to him?

  13. crunched says:

    And… um… maybe, uh… GEITNER and BERNANKE?? You think those idiots didn’t know what was going on? Geitner was only head of the FBNY at the time, which was heavily involved in analyzing Lehman’s books/situation.

  14. thebondgurl says:

    Very well said BR! I think the most shocking of info revealed in this story is the fact that the auditors are just as incompetent/shady as the ratings agencies.
    And for Fuld to say that he “did not know what those transactions were – he didn’t structure or negotiate them, nor was he aware of their accounting treatment” is just insulting. I take personal offense to this. One of 3 things is going on here…1)he stupidly thinks that this is an acceptable excuse 2) has he just thrown in the towel as it pertains to defending his personal public image because after all he was at the head of the biggest bankruptcy in history and will forever be remembered for this or 3) he really thinks that everyone is stupid because he’s so full of himself because he pulled off a (as you put it) “ponzi scheme” for so long without getting caught?
    Choose your poison. Either way, this disgusts me.

  15. Marcus Aurelius says:

    BR says:

    “. . . if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me . . .”
    ___________________

    If you don’t get out in time, I’ll bet you’ll be surprised. Who could have known?

    thebondgurl:

    I’ve attended board meetings where the CEO and/or President of a publicly-traded company blatantly asked for nothing but “plausible deniability” in making decisions to adopt policies that were illegal and/or unethical and/or fraudulent.

    Plausible deniability is these fellows Get (Stay) Out Of Jail card.

  16. Mr.E. says:

    “Major accounting firms are worthless to investors. They were either unable or unwilling to detect fraud amounting to 50 billion dollars. The incompetents at Ernst & Young deserve the same fiery death as Arthur Anderson; Whether they are hired guns or paid whores, they — like the rating agencies — are worthless to investors.”

    “The SEC is utterly incapable of comprehending how markets function. They believe the criminals who commit the fraud, and ignore the whistleblowers who uncover it;”

    I believe major issues remain originating from (a) the conflicts of interest between accounting firms and ratings agencies and those who are paying them (don’t bite the hand that feeds you), and (b) the independent authority of regulators who are prisoners of a political process that itself is corrupted by multiple conflicts between the interests of businesses and the people at large. Until those issues are resolved the system will continue to fail.

  17. Invictus says:

    It is all sickening beyond words, so I need to leave it at that.

  18. Money Mischief says:

    All of the government programs aimed at protecting investors have failed…the SEC, accounting rules, disclosure rules, market regulations, government-certified rating agencies…the list goes on. The fundamental problem is that government regulators always eventually get captured by the industries they regulate. Transparency and empowering investors to be able to force disclosure is the only viable solution. We need an investor “freedom of information” act.

  19. Marcus Aurelius says:

    “We need an investor “freedom of information” act.”
    _____________

    Put some teeth into the “public” part of “Publicly-Traded Company.”

  20. Cromag says:

    jritzema has it right, but there is little reason to expect the model to change. Technical analysis is tricky and imperfect but I have a lot more faith in price action than in make believe financial statements.

  21. mochoajr says:

    I agree with Invictus.

  22. karen says:

    You mince no words in this post, BR.. Thanks for one of your best ever! I love it when you don your Patrick Henry mantle. You are one of the loudest voices around. We need you!

  23. call me ahab says:

    “The Media did a terrible job uncovering the fraud as well.”

    dude- the media and business journalist are nothing more than a marketing tool for the corporations including big banks

    cognos- your words “sad and stupid” must really hit home

  24. 32 Feb says:

    This was as bad if not worse than Enron.

  25. Chief Tomahawk says:

    Charlie F-ing Gaspardrino strikes again!

    And to think he was “rewarded” by FOX Business for his crap.

    I hope he melts down and delivers a mea culpa which brings down (clawbacks anyone?!?) and cleans up the Street! Capitalism should’ve been protected by those who hold it most dear; they should’ve self-regulated to preserve the golden cow instead of whoreing it out in a Ponzi scheme.

    I wonder what those who are buried in Arlington National Cemetary and died in service to their country would feel about the behavior by those who “inherited the flame”? Would the vets who charged up the beach on D-Day done so knowing there’d be such an ungrateful bunch of b*tch-ass punks in charge someday presiding over the lives of their children???

  26. 32 Feb says:

    Barry – your comments above were dead on. It looks like we’re set to get another Sarbox type law that does nothing. Chris Dodd and Chuck Schumer are Wall Street’s best bets. Difference between Enron and Lehman, Houston vs. New York and the media could go after President Bush because of past relationships. Media will remain silent on this issue because there is no direct link (yet) to a big name Republican politician.

  27. ashpelham2 says:

    I started my career with PricewaterhouseCoopers in North Carolina, across the street from then Nationsbank, later to be Bank of America. we did their taxes until they hired away all the tax folks and paid them in-house. No real point to that except to say that I could easily see the conflict of interest back when I was 22-23-24, a new CPA and college grad. Think we wanted to do anything to lose that account? Millions that they paid us to do their taxes? Wine and cheese tasting events just because the Nasdaq was up that day?

    The common denominator to all of this is greed. It was prevalent in 1999 and 2000 when I worked at PWC, and common in 2002 when my wife lost her job at Arthur Andersen, as Enron brought them to their knees. And “greed is still good” today. Nothing has changed.

    My full faith in capitalism as an economic philosophy is not blind to the constant grab for money and power that is taking place as I write this. The bigger question is “What am I doing to make myself more wealthy at anyone’s expense?” Why am I on a message board vilifying people for their greed and stupidity, even though they will be laughing all the way to or from the bank, to or from the prison, while I get up and shill away every day, with “honor”?

  28. “…It is a mark of adulthood that the mature individual accepts hard truths. He is no longer protected. He has “put away childish things.” He no longer believes in the Tooth Fairy, the Easter Bunny, or Santa Claus. It is a reversion to childhood, however, if he believes in big government entitlements. In that case, there is nothing to be done. The adult has become a child and lives in the protected world of the child, absorbed in a childish fantasy. On this note, it is fitting to end with an excerpt from E.Y. Harburg’s famous lyrics, written for The Wizard of Oz:

    Somewhere over the rainbow
    Way up high
    There’s a land that I heard of
    Once in a lullaby.

    Copyright © 2010 Jeffrey R. Nyquist
    http://www.financialsense.com/stormwatch/geo/pastanalysis/2010/0305.html

    “…”Every kid grows up in a fake world,” noted Graham, highlighting the fountainhead of our latter-day neuroses. To protect a child may be a good thing, but modern suburbia protects its children by fostering a sterile and “fake” impression of the world. According to Graham, the biggest, most recent lie told to children is how special and smart and savvy they are: “and every year you get a new crop of 18 year olds who think they know how to run the world.” And so, the child becomes an adult, accustomed to flattery, shielded from the truth, and ready to believe that government is obligated to take care of everyone. Genuine self esteem attends the acceptance of responsibility and the fulfillment of duty, while today’s false self esteem correlates with the government accepting more and more responsibility for the individual.

    Speaking of school, Graham noted that children are taught “a complex of lies” in school. “Public school textbooks represent a compromise between what various powerful groups want kids to be told. The lies are rarely overt.” He then offers compelling examples, such as the inclusion of various ethnic nobodies placed side by side with notable geniuses. “As subjects got softer,” he explained, tracking the degenerative spiral of suburban coddling, “the lies got more frequent. By the time you got to politics and recent history, what we were taught was pretty much pure propaganda.” And perhaps the most shocking statement in the whole of Graham’s essay touches on “the biggest lie told in schools”; namely, that people succeed by following “the rules.” Sadly, the rules of our day are mostly concocted — as Graham says — “to manage large groups effectively.”..”
    from the, above, link..

  29. emailcraigs says:

    Well said. How can the average investor have any faith in a system that has repeatedly show them that it is willing to use their hard-earned money as collateral damage to save its biggest, and often times most corrupt, members. Clean up the corruption and you might find that the system actually works. Probably the same thing with health care and any number of despotic institutions running rampant in America.

  30. awilensky says:

    We need a super citizens agency made up of volunteers. The only function of the board is to render up / down on agency practices and legislative policies and laws. We can call it the “WTF” board.

  31. call me ahab says:

    Chief Tomahawk-

    love that last line

    MEH-

    great post- as I tell my kids- question everything- especially their teachers-

    much of school curricula is full of feel good nonsense

  32. Chief Tomahawk says:

    Thanks, Ahab.

    It sure would be nice for Gasparino to take a stroll through Arlington National Cemetary every morning…

  33. VennData says:

    Dear Voters,

    You got what you voted for.

  34. awilensky says:

    9 Years ago, especially – we got what we voted for.

  35. “..The problem is, we’re all stuck in 401(k)s that we can’t really control..”

    Julia, how do you see it that way?
    ~~
    “All of the government programs aimed at protecting investors have failed…the SEC, accounting rules, disclosure rules, market regulations, government-certified rating agencies…the list goes on…”

    and, staying consistant with the idea, re: UI, “We need a role of those on the dole.”, the Employee-Rosters, of these various ‘gov’t agencies’, should be broadly circulated..

    that kind of Program would be helpful in understanding who, exactly, the Players are, on the field..
    ~~
    Ahab, yes, for sure, one needs to: “Learn more than they’re Taught.”, to begin with..

  36. WFTA says:

    Loved E&Y’s “hurricane” defence.

    It takes a lot of gall for an industry that invented, and sold, synthetic collateralized debt obligations to piss and moan about short sellers.

    I would so like to see somebody’s ass in a cell with Big LeRoy.

    Have a swell weekend.

  37. scharfy says:

    Hate on Bush all you want, lefties.

    But when Enron, Worldcom, Healthsouth, Tyco and others folded – people went to jail and Aurthur Andersen was shut down.

    Eric Holder seems to be more concerned with the civil rights issues at Gitmo while our citizens are heisted in plain sight.

  38. alfred e says:

    @BR: great post. Dead on.

    The SEC is worse than useless.

    And it is a sad fact that if everyone could get their 401k’s out of the market they would.

    IMHO 401k’s are the last great hope for Wall Street from the little guy. Otherwise it’s just a big casino for the algo’s.

  39. budhak0n says:

    I was in some ways one of the people who initially knee jerked into the empathy for the bank vs the short seller but in all honesty after having read your analysis BR, I can see exactly your point in this case.

    A ban on short selling is not the correct way to handle a free and open market.

    There is however the issue of whether it not it’s proper, as was suggested at the time for large corporate clients to pull their accounts which had funds in them generated by their relationship with the bank , and then at the same time short the stock.

    Now that it’s been revealed that there was major accounting fraud going on, however, I can completely accept your argument that in the end , the short sellers were actually correct and that they cut through the nonsense and identified the problem much better than any regulator.

    I don’t think anyone has any problem with this in an individual circumstance but it was the domino effect that then led people’s commercial and personal finance partners to react with such fear .. that really screwed up a ton of things that had been good and steady in the market for years.

  40. Moss says:

    Well at least now we have actionable evidence of criminality. The question really now is who will take action. Also I guess we can throw all the books in the garbage now especially Paulsons since most are fairly tales.

  41. Expat says:

    I don’t think the system failed at all. The system was corrupted to achieve pretty much exactly the ends which we are seeing.
    Huge bonuses and salaries for Ponzi schemes.
    Wall Street jobs for government employees who toe the line while working for the Fed, Sec, etc.
    Bribes and kickbacks for politicians in the form of campaign contributions and lobbyist payments.
    Fees and insider tips for analysts who lie and cheat for their clients.
    Ditto for accounting firms that structure the schemes, hide the debt, and confuscate the books.

    CNBC and Bloomberg are “media” in the sense that Gilligan’s Island is media. If the producers of Gilligan were engineers or ex-SAS, the show would have lasted two episodes, the time needed to repair a very small hole in the Minnow. CNBC made money because they sold “money sex” and “credit dreams”.

    The system was a stunning success for everyone, even individual investors who have seen their bacon (house prices and stock prices) saved by the same mechanisms which bailed out the bankers.

    So, who pays? Well, we all do a bit now and a lot later…except for the rich and powerful who will not suffer…ever. At least until we storm the palace gates and start sticking heads on pikes.

    Twenty years of trading speaking here.

  42. ashpelham2 says:

    it probably is unfair to reap all of this on Bush II’s plate as his fault. Many of the excesses began in earnest 20 years ago, and the Dems danced through it all during the 90′s under Clinton. But the de-regulation mess began with Reagan early in the 80′s. Carter oversaw a miserable economy that he didn’t start, but only added to its misery with price ceilings and floors and walls and everything else. So, when did it begin? Probably about the time we declared independence from England. :D

    In all fairness, there is no one to blame in particular. We as Americans have let ourselves down, refusing to demand more from each other and ourselves. We’ve settled into simply taking a paycheck and performing at 25%, while Asia has it’s nose to the grindstone working for less than peanuts.

    Question is, is our fate sealed or can it be reversed?

  43. Marcus Aurelius says:

    scharfy:

    With all of the crony capitalism going on between Bushco and Enron, it’s surprising and telling that Bush himself didn’t end up in the pokey.

    __________________

    On the same day in May 2003 that the SEC announced a proposed penalty for the biggest accounting fraud in history (estimated at $11 billion), the Pentagon awarded WorldCom a $45 million contract to rebuild Iraq’s wireless network (even though the company had no previous experience with wireless technology).

    http://www.multinationalmonitor.org/mm2004/05012004/may-june04corp1.htm

  44. leftback says:

    Criminality. Good post, Barry. Call ‘em like you see ‘em.
    and remember… there is never just ONE cockroach.

    Short sellers simply uncover the truth – price discovery is the essence of free markets.

  45. flipspiceland says:

    @ashpelham2

    Signed, sealed and delivered.

    Only two entities will have some real chance to thrive and prosper: 1) those who managed to ‘capitalize’ on the once in lifetime opportunity that last March presented and only if they went all in are exempt 2) the plutocrats like Lord Blankfein and his minions, Little Dickie Fuld, Hank Paulson who arranged it all and continue to do so, going scot free for their acts of financian jihad on the rest of the world.

    At times like this, it would be a balm to believe in Dante’s 9 rings of hell wherein Betrayal is the worst of the suffering they could experience once they thankfully die.

  46. EAR says:

    Can’t a brotha get a perp walk?

  47. mgkurilla says:

    So now Fuld is facing the Ken Lay dilemma: either he was an evil Darth Vader-like CEO seeking to bleed everyone he came in contact without regard for ethics or laws OR he wa complete moronic village idiot type who had no clue what was going on in his company. But it has to be one or the other.

    I actually think that many Wall Street CEOs due to their narcissitic personalities are likely to go with the former and take their chances with possible jail time (capitol punishment with double bunking alongside pedophiles does sound attractive), rather than claim stupidity.

  48. leftback says:

    Dick will go for the Village Idiot defense, or hide behind Jimmy Cayne’s dope-smoking bridge-playing defense.
    It would be much more efficient (and cheaper) to take the Chinese or Sicilian approach.

  49. TakBak04 says:

    (The London Guardian’s reporting)

    Lehman Brothers bosses could face court over accounting ‘gimmicks’
    by Andrew Clark

    • Former chief Dick Fuld and accountants Ernst & Young criticised in 2,200-page report
    • Claims that buyer Barclays received assets it was not entitled to
    • Fuld tried to involve Gordon Brown to fast-track Barclays rescue

    A senior Lehman vice-president, Matthew Lee, tried to blow the whistle by alerting top management and Ernst & Young. But the auditing firm “took virtually no action to investigate”.

    During the bank’s final hours in September 2008, Fuld tried desperately to strike a rescue deal with Barclays but the FSA would not allow the British bank an exemption from seeking time-consuming shareholder approval. The chancellor, Alistair Darling, declined to intervene and Fuld appealed to the US treasury secretary, Henry Paulson, to contact the prime minister.

    “Fuld asked Paulson to call prime minister Gordon Brown, but Paulson said he could not do that,” says the examiner’s report. “Fuld asked Paulson to ask president Bush to call Brown, but Paulson said he was working on other ideas.”

    In a “brainstorming” session, Fuld then suggested getting the president’s brother, Jeb Bush, who was a Lehman adviser, to get the White House to lean on Downing Street.

    Barclays eventually bought the remnants of Lehman’s Wall Street operation from receivership for $1.75bn – a sum that has enraged certain bankruptcy creditors who believe it was a windfall for the British bank.
    http://www.guardian.co.uk/profile/andrewclark

  50. super_trooper says:

    @BR, complaining and pointing out the errors are all good things. However, the biggest thing I have learnt is that most of the time nothing gets done. One can not rely on politicians or bureaucrats to get things done without massive pressure. How about posting your “path forward”. A key part in the path forward is citizen participation. What could we as readers do, you do have a following and to make changes the masses need to be mobilized.
    It’s time to take action.

  51. torrie-amos says:

    one more time

    a. more insanity

    b. 85 oil kills all

  52. WFTA says:

    I’m not a complete Marxist, but I now question whether any firm involved in financial arbitrage (maybe any sort of trading) should be publically traded.

    1) I think it is unlikely that privately held companies would have grown too big to fail. 2) Privately held would not have levered 30X, and 3) it being his money, the boss would have known what his positions were.

    I’m not a finance type so I ask: Are the financial behemoths doing something that multiple smaller companies cannot?

  53. SiValleyEE says:

    Wow!

    What i learned from this blog post:

    - How many times have we heard that if Lehman Brothers was “saved”, the system would not have melted down, that leaving Lehman Brothers die was the mistake that precipitated this financial crisis?

    This report says it was not able to be saved, it was rotten to the core. It doubled and re-doubled down on bad bets rather than being forced to unwind them. Under a system that worked, and enforcement of the regulations, this firm would have been shut down as soon as the bets started to go bad, more than a year earlier.

    - How much of the lack of enforcement was from the philosophy that “Regulation is bad. Enforcement of regulation is bad.” that permeated our country’s government over the last decade?

    - The auditors, and the auditing system really needs to change also. Not catching this and stopping it was inexcusable. One thing i don’t understand is the relationship between the auditors and the SEC. It looks like something that is much needed is to have much better flow of information from the auditors to the SEC and regulators. Multiple lines of communications between them, SEC regulators able to sit in on auditing meetings, open communication and whistle blowing lines between the the low levels of auditing groups and the SEC. Encouragement of the auditing companies for their people to talk openly with the SEC. …

    - On auditing, I still don’t believe the slime going on with PriceWaterhouseCoopers auditing of Satyam in India. Even though PwC failed to report that 94% of Satyam’s $1 billion cash didn’t exist, a situation that went on for years, both companies just got a slap on the wrist. And they’re still trying to blame it on just a couple of people, yeah, right. Both PwC India, and Satyam should get the corporate death penalty and be forced to close down in shame. Info: http://www.atimes.com/atimes/South_Asia/KA10Df02.html

    - Given the influence of big money and corporate lobbyists in DC, which was made even greater by the recent Supreme Court decision on no limits on corporate funding of political ads/programs for an election, the system isn’t going to be fixed.

  54. tammy says:

    wow, you sound a bit sour on the industry…what would you tell grasshopper today?

  55. I would tell him this post is me speaking as an outraged citizen.

    But as a trader, I would keep my eye on volume and equity exposures to see if in fact the public is walking away from the markets.

  56. KMC says:

    I left the audit department of a big public accounting firm in 1987. Even then, audit budgets were getting squeezed and the audit was being treated like a commodity. There was just not enough time to look at everything properly. The really big firms, like Anderson, would lowball the audit fee so they could get their consultants in the back door. Although I could not foresee Enron or WorldCom back then, it was obvious that the audit function was being comprised.

    I have been a financial advisor for over 20 years now, and always advise clients to vote against retaining the CPA firm. It is not efficient to turn the firm over annually, but I believe it would avoid the good ol’ boy network that evolves over time. In my opinion, the SEC should form a pool into which each publicly-traded company contributes, based upon some time of formula. Audit fees are paid out of this pool, not from the company itself. The audit firms should be rotated every 5 years to get a fresh set of eyes on the books. Create an independent relationship between public accounting and corporate America, which has not really existed for about 25 years.

    Not an absolute cure, but a start.

  57. rustum says:

    Timmy is the common name popping out every time i read these sort of issues.

  58. TakBak04 says:

    Barry Ritholtz Says:
    March 12th, 2010 at 4:54 pm

    I would tell him this post is me speaking as an outraged citizen.

    But as a trader, I would keep my eye on volume and equity exposures to see if in fact the public is walking away from the markets.

    —–

    As Bruce Springsteen has in an old Song…(I think from Pete Seeger…but maybe not…(don’t have time to search link)

    “KEEP YOUR EYES ON THE PRIZE.” In your profession that’s what you have to do…….

    We small wee investors..gotta do that, also.

    Thanks for the input…”Trading or Investing …ALL ALONE!”

    But, watching…and reading.

  59. philipat says:

    We never seem to learn.

    I thought that Enron taught us that “Off Balance Sheet” items, Conduits and the like, should not be permitted for Public Companies. Then FASB, quite contrary to logic, bent to pressure from Wall Street (Actually Congress but, well it’s the same thing) to abandon Mark to Market accounting principles.

    The Accountants, the Ratings Agencies, Companies,m Regulators, Congress; it’s the same everywhere. I continue to believe that the US has an ethical and moral crisis first and foremost.

  60. DC says:

    – To Julia Chestnut…

    I feel your pain. In truth the whole point of the 401k was to get people “stuck” in equities. It’s part-and-parcel of TBTF.

    If the Street hadn’t been able to regurgitate talking points such as “90% of Americans own stocks” then the public would have been much less inclined to let Hank Paulson give away the national Treasury to save his cronies.

    Tax-advantaged savings and investments are good ideas. But pretending that throwing darts at a few mutual funds is “good for America” is Grade A crapola, particularly since any sane investor now buys a sizable quantity of non-US equities, bonds, and currency anyway.

    Maybe all this is just an example of the Law of Unintended Consequences. And maybe I’m the bleedin’ King of England.

  61. DL says:

    On his show today, Kudlow made numerous references to Barry Ritholtz and this blog, and to the truth that is so often revealed by short-sellers.

  62. ftobin says:

    I would agree that short selling is useful in providing a tamper on equity prices, but there are definitely situations where short selling is not an independent activity. For example, when used in combination with credit default swaps, which also have their own positive characteristics, one can manipulate the result of contracts, especially since many contracts have boolean characteristics — they are either triggered or not, in contrast to having more gradient effects.

    It is important for us to determine reasonable rules for distinguishing and curbing short selling, CDSs, etc. when they are used for non-productive means.

    One other negative of short selling is that it can incentive non-productive behaviors. For example, my employer reasonably prohibits me from taking short positions on my employer’s stock (via equity or option). This is a reasonable request, as otherwise there may be incentive both incentive and opportunity for employees to decrease the value of the company’s stock price.

  63. arthur.i says:

    Nice to see you up on your soap box, Mr. Ritholtz. You wear it well.

    You can make money in these markets. You can make money in Las Vegas playing craps, blackjack or roulette. For joe six pack, which has better odds. The financial markets are now completely and totally a shame. You can most certainly make a trade and profit from it. Your profits are going to be someone else’s losses. How long do we think a system that is so broken, corrupt and disgusting is going to last? A year, ten years? When this mess comes to a dramatic conclusion I hope that what ever money we “won” is enough to protect us from the screaming starving hordes.

    If we are not part of the solution we are part of the problem. Just because you can do something, just because everyone else is doing it and just because there is no law against it – Does Not Make It Right. Pay back is a bitch and pay back is always just around the next corner.

    When the French had their revolution it was not pretty. This 30 year old massive explosion of “greed is good” mind set and philosophy which has a strangle hold on our society will need to be put to rest. In my opinion when the inevitable happens, it too will not be a very pretty sight to see.

  64. [...] Accounting Fraud, Short-Sellers & The SEC (TBP) tweetmeme_style = 'compact'; tweetmeme_service = 'bit.ly'; tweetmeme_source = 'ReformedBroker'; View the discussion thread.blog comments powered by Disqus [...]

  65. [...] Accounting Fraud, Short Sellers & the SEC by Barry Ritholtz at The Big Picture [...]

  66. soloduff says:

    Barry Ritholtz says, “All in all, the entire system failed. The situation is utterly disgusting . . . .”

    I regret if I sound cynical, but it strikes me that the system performed quite successfully for its real beneficiaries, the financial establishment–from Wall St. through USG regulators great and small to the humblest bond rater and accountant. What failed was the cover story to the effect that regulators protect the public from the occasional excesses of the greatest financial system history has ever seen.

    Consider that Jamie Dimon was channeling Big Capital when he recently said that we should expect financial crises every five to seven years. Call it a cost of successful business as usual. Collateral damage.

    But I’ll agree with you that the situation is utterly disgusting.