Investigators of subprime crisis should look offshore

By Lucy Komisar
Dec 1, 2007

When there’s a financial crisis tied to lack of transparency, follow the culprits offshore. Evidence comes out now that this is true about the subprime debacle.

A Reuters story from Frankfurt, Thursday, reports, Troubled German bank IKB again delayed release of its first-half results while it implements accounting changes including consolidation of an offshore conduit whose soured investments triggered a government-led rescue of IKB.

Reuters wrote: The consolidation (of Rhineland Funding) is extremely complex because it includes more than 30 companies of the conduit, which publish their own annual and interim financial statements. The changes affect both the financial year 2006/07 and the current financial year 2007/08, it said in a statement.

And, to the point: IKB said on Thursday its core business remained stable, but fears of rising losses on Rhineland Funding, an offshore operation which it set up to invest in subprime mortgages and which is now housed at state development bank KfW, put IKB’s shares under renewed pressure this week. Hmmm. Why did the bank put its subprime mortgage operation offshore? To avoid scrutiny? To evade taxes?

Citigroup has $55 billion of subprime exposure and said it would write down up to $11 billion in subprime losses. Goldman Sachs downgraded Citigroup stock from neutral to sell and said the bank may have to write off $15 billion.

An article Wednesday by financial analyst Pam Martens in Counterpunch points out that ousted CEO Chuck Prince had to own up to approximately $17 billion in write downs and Cayman Islands’ black holes…. Why did Citigroup put their wonderful investments — subprime and others — offshore? To avoid scrutiny? To evade taxes?

She says, Citigroup, is discovered to have stashed away over $80 billion of Byzantine securities off its balance sheet in secretive Cayman Islands vehicles with an impenetrable curtain around them. Citigroup calls this black hole a Structured Investment Vehicle or SIV. Wall Street insiders call it a sieve that is linked to the breakdown in trading of debt instruments around the globe and the erosion of wealth in assets as diverse as stock prices to home values.

Martens, who spent 21 years on Wall Street, reminds us that Federal regulators allowed [Citigroup] to grow fat and sassy by playing dirty, including collecting massive fees for hiding debt for bankrupt Enron, WorldCom and Italian dairy giant, Parmalat. Those cases all involved offshore secrecy and manipulations.

Finally, Prem Sikka, professor of accounting at the University of Essex, writing in The Guardian (London) Thursday, says, The deepening sub-prime crisis can, like past crises, be laid at the door of opaque accounting practices. The pre-Enron technique of off-balance sheet accounting, which enables companies to understate assets and liability and flatter their profits, is widespread. He adds that, None of the watchdogs barked.

Where is the accommodating place for opaque, off-balance sheet accounting? Offshore, of course. Well, now we’re getting to the reason why those SIVs were offshore.

Sikka, a prominent critic of the offshore system, writes, The corporate dominated [British] Financial Services Authority (FSA) admits that it did not pay enough attention to the build-up … of assets off-balance sheet. The Financial Reporting Council (FRC), responsible for good corporate governance and financial reporting, towed a similar line.

Does the US Securities and Exchange Commission check into banks’ use of offshore vehicles? Especially after Citigroup and JP Morgan Chase set up fake offshore shell companies to help Enron cook the books? I asked several high-ranking SEC officials that question in recent months. No, it’s just not something they look into. Maybe they should.

Added on Dec 16, 2007

Paul Tharp, writing in the New York Post on the collapse of a $40 billion money market fund for the rich at Bank of America, notes that the bank “tried to soften the negative publicity of liquidating its cash fund, which was dragged down by the bank’s offshore shells containing possibly worthless junk mortgage paper, or so-called Structured Investment Vehicles (SIVs).

He said that “BofA, the nation’s second-largest bank, said the pool’s net asset value had plunged to $12 billion due to withdrawals and the declining value of the SIVs, which no one will buy currently, even though the shells may hold worthy assets in the end.”

When will smart investors become wary about putting their money in offshore shells?

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