Banks - the next Enron?

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I wonder what size a financial collapse has to be before people learn their lesson from it. Enron investors incurred losses of over $50 billion. Thousands of employees lost their job and the market lost faith in many other energy companies. Most of the losses were hidden in off-balance sheet investment vehicles or Special Investment Vehicles (SIV) until they were uncovered in 2001.

Fast forward 6 years and now we have banks in a situation with subprime losses. Citigroup has upped their total writeoff to somewhere in the neighborhood of $14-19 billion. HSBC, one of Europe’s largest banks announced losses of $11 billion.

Financial Voodoo - SIV’s

Their solution? The big banks are pushing a $100 plan to avert a credit crunch. Led by Citigroup, the group will create a colossal SIV to deal with the mess. SIV’s aren’t exactly what Enron used, but they bare a very striking resemblance, allowing the damage to stay off the balance sheets of the respective banks.

SIV’s enable the banks to make money from risky deals without actually assuming the risk. They’re legally seperate entities that issue their own debt and use the proceeds to buy high-yield investments. They are merely paper entries. SIV’s are independent on paper, but the banks control them allowing them to keep the risk off their books.

The Power of Lobbying

So you must be thinking by now. Didn’t the government close this off-balance sheet accounting? Of course, but they excluded banks. Our current Treasury Secretary Henry Paulson came from Citigroup, one of the big players in Enron SIV’s and they have problems with subprime. Paulson is pushing for SIV’s as the solution to the current situation. This time the banks that setup the SIV’s will skim a profit off the top for managing the super-SIV which will show up on their balance sheets while keeping the losses off.

The SIV’s are leaking and we have a plumber named Henry Paulson ready to help the speculators once again. I’m a free-marketer, but you can’t allow this sort of irresponsible behavior to go unpunished. You screwed up Citigroup. Pay the consequences ON YOUR BALANCE SHEET. Your investors will vote with their pocketbooks (as the market intended) and you will change your ways.