Why the World Economic Forum and Goldman Sachs are Capitalism’s Worst Enemies

Published on naked capitalism, by Bill Black, JANUARY 26, 2013.

… Criminogenic environments for Accounting Control Fraud:

1. The dogma that control fraud cannot be material
2. The three “de’s” – deregulation, desupervision, and de facto decriminalization
3. Modern executive and professional compensation
4. The ability to grow quickly      
5. Extreme leverage
6. Ease of entry
7. Assets that lack readily verifiable market values
8. Weak accounting requirements, particularly on allowances for loan and lease losses ALLL
9. Distressed banks

Each of these factors need not be present. I discuss here only the first three environmental characteristics, which are the most important.

Fraud Deniers: … //

… Only Regulators and Prosecutors can Break a Gresham’s Dynamic and Save Markets:

In its 2011-2012 Global Competiveness Report, the WEF conceded that effective financial regulation is essential to a safe and sound financial system.

–In order to fulfill all those functions, the banking sector needs to be trustworthy and transparent, and—as has been made so clear recently—financial markets need appropriate regulation to protect investors and other actors in the economy at large [p. 7].

Its GCI, however, has no index category for effective financial regulation – only securities law regulation. The WEF has several more general indices that refer to regulation. Each of them assumes that regulation is inherently harmful – rather than essential. The WEF encourages Nations to use its indices to engage in a competition in regulatory laxity. It makes the financial environment deeply criminogenic.

The key potential of regulators and prosecutors is that we are not employees or agents of the banks we regulate. Control frauds use their powers to hire, fire, promote, and compensate to suborn the supposed internal and external “controls” (such as auditors). As Akerlof and Romer noted, accounting control fraud is a “sure thing” that will promptly produce record (albeit fictional) profits. Creditors love to lend to highly profitable borrowers. Private markets do not “discipline” accounting control frauds – they fund their rapid expansion.

Control frauds have shown strong abilities to suborn even elite financial players, such as audit partners at top tier firms. George Akerlof was the first economist to apply the concept of Gresham’s law as a metaphor to explain how control fraud can create a competitive advantage that drives honest firms out of the markets. In his famous article on markets for “lemons” he explained … //

… Exhibit A:

(Photo): The Faces of Desupervision in the U.S.: “Chainsaw” Gilleran and friends – America’s leading bank lobbyists act together with their faux regulators to destroy effective regulation and supervision.

… (full long text and photo).

(Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City).

Links:

Allowances for Loan and Lease Losses ALLL, on Office of the Comptroller of the Currency (U.S. Dept. of the Treasury);

British Economy Is WORSE than During the Great Depression, on Washington’s Blog, January 26, 2013;

Broad unemployment in Europe, third quarter 2012. A disaster in southern Europe, rising unemployment in the UK, on RWER Blog, by merijnknibbe, Jan. 26, 2013;

Distressed securities on en.wikipedia:
… are securities of companies or government entities that are either already in default, under bankruptcy protection, or in distress and heading toward such a condition. The most common distressed securities are bonds and bank debt
… see also the External links.

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