U.S. Economic/Financial News
Tapes Reveal Enron Manipulation in West's Energy Crisis
The Snohomish County Public Utility District (PUD), north of Seattle, announced on May 17 that it had received 2,000 hours of tape-recorded conversations between Enron employees from the Justice Department, that could implicate former Enron execs Jeff Skilling and Kenneth Lay in the illegal schemes the company used to steal millions from California and Washington states, during the 2000-2001 energy crisis. West Coast papers reported May 18.
On the tapes, employees brag that they have stolen up to $2 million a day from California. Enron's California director of regulatory affairs, Susan Mara, states on the tapes that she is collecting information on how well the company's schemes are going, for an in-house presentation to corporate executives, naming Skilling and Lay. Skilling has already been indicted on a range of fraud charges, although none are related (yet) to California, and Lay has not been charged (yet).
The 54 CDs were delivered to the PUD in exchange for providing the DOJ with a complete transcript. The PUD plans to use the transcripts in an ongoing lawsuit against Enron, and Washington state utilities will use the evidence to file anti-trust suits against the company, and request rebates, which the Federal Energy Regulatory Commission has made it almost impossible otherwise to recover.
Fed Vice Chair Confronts Financial Crisis in Brussels Speech
Federal Reserve vice chairman Robert Ferguson focussed on the ongoing financial crisis in a speech in Brussels May 17, to a conference sponsored by the National Bank of Belgium, on the role of central banks in promoting financial stability. Ferguson addressed an issue which has become a recurring theme in several speeches byand undoubtedly debated in closed door discussionsFederal Reserve Board governors during the past two months: What will cause a global financial crisis, and what should the Fed do to stop it?
Ferguson first identifies in monetary gobbledygook, "a variety of imperfections inherent in markets," which, he fears, "can become so widespread and significant as to result in outcomes that threaten the functioning of the financial system and adversely affect real economic variables. History suggests that these imperfections reach this advanced and disruptive stage when they are exacerbated by large external shocks. Such outcomes include panics, bank runs, severe market illiquidity, and excessive risk aversion. These outcomes are highly undesirable for society because they can be accompanied by a variety of economic distortions."
Ferguson identifies some of the trends that could lead to this instability: "One clear trend, in many countries is an increase in market concentration in the banking sector and in other sectors of the financial services industry. In the United States, for example, the share of [all banking] assets held by the top ten commercial banks has risen from about 30% in 1995 to about 45% today." Another trend is the growth of derivatives, which Ferguson, for the most part, tries to present as positive instruments. Still, Ferguson reports that according to the Bank for International Settlements (BIS), "the notional and market values of all over-the-counter foreign exchange and interest rate derivatives contracts ... have nearly doubled in just the past two years." Thus, "increased global financial integration carries with it some new risks ... as we learned all too well following the Russian debt default in August 1998."
While rejecting greater bank regulation, and promoting the impotent BIS program of requiring commercial banks to carry greater tier I capital reserves (which will prove completely valueless during a crisis), Ferguson addresses what the Fed must do during a crisis. "My experience ... suggests that at certain timesgenuine crises, particularly those with a global dimensionthe central bank must act to avert disaster," he tells the assembled central bankers and finance ministry officials. In a section of his speech labeled "Crisis Management and Liquidity Assistance," Ferguson states, "Assistance from the central bank may involve expanding the liquidity of the entire financial system through open market operations [i.e., the federal funds overnight market], or it could entail direct loans [to commercial banks] through the discount window to meet the liquidity demands of specific institutions." He notes that the Fed has recently restructured its lending programs through the discount window, in order "to make the discount window even more effective in a crisis."
To meet "cross-border liquidity needs," he promotes a crisis doctrine of "coordination among central banks in providing liquidity assistance."
Fannie Mae's Haute Cuisine of Cooking the Books
During the last few years, home-mortgage colossus Fannie Mae has spewed out confetti, which it has presented as its "accounting books," submitted to the Securities and Exchange Commission. A new, lengthy study by Barron's magazine, published May 17, shows that in 2002, Fannie Mae reported earnings of $6.4 billion. However, had Fannie been forced to report losses from hedged derivatives positions of $8.9 billion that it incurred in 2002instead of reporting them as deferred cash-flow hedge losses and spreading them over several years, which is the practice Fannie followedthen Fannie would have had a $2.5-billion overall loss in 2002. This would have severely shaken the housing and financial markets, and could have popped the housing bubble.
Author Jonathan Lang discloses the following:
Both Fannie Mae and sibling Freddie Mac, end up in a very difficult position any time that interest rates move sharply up or down. Fannie has taken out derivative hedges (usually in the form of interest-rate swaps), to cover itself against such interest-rate movements. These hedges can be exotic, and Fannie has played them with a lot of leverage. In 2001, the Financial Accounting Standards Board (FASB) imposed new accounting rules, demanding that companies mark their derivatives portfolio "to market"i.e, to what they are actually worth, not what they were worth historically when originally bought. This would accurately reflect the derivatives gains and losses. The FASB made an exception, so that companies would not have to mark their derivatives to market [??], if they were "cash-flow hedges" to guard against sudden movement of interest rates. Under this special exception, a company's losses (or profits) from "cash-flow" derivatives could be put into a special category called AOCI"accumulated other comprehensive income"and the losses, instead of having to be reported when they occurred, could be spread out over as many as 10 years.
Fannie used this loophole to drive a truck through. It accounted for many of its cash-flow hedges over several years. Second, it bought out some of its cash-flow hedges that were losing money, by issuing new swaps. Through this fancy foot-work, Fannie plowed a staggering $12 billion in derivatives losses into the accounting black hole called AOCI.
Furthermore, Fannie holds $8 billion in mobile-home loans, a quarter of which are now in junk status. 70% of Fannie's mobile home loans were bought from Conseco company, which is now in bankruptcy.
A sudden jolt to the system could cut through Fannie's papered-over accounting fraud, which has been used to cover up Fannie's real bankruptcy. In turn, that would bring down the financial system.
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