Not a bad apple but an infected orchard

If the case against Goldman Sachs was a one off it would be an ugly ‘bad apple’ story. It would be quoted by bankers as a cautionary tale and evidence of their own horror at such ‘isolated’ bad practice. No doubt perpetrated by some ‘rogue traders’.

But it isn’t a one off.

There are currently investigations into the dealings of all 4 of the world’s biggest, global accountant firms, who along with the banks they ‘audit’, make up the muscle and sinew of the financial world. And within these investigations is a charnel house of financial butchery and mayhem.

Deloitte is being investigated over its relationship with and work for Bear Stearns and Washington Mutual which when it collapsed was the largest bank failure in US history (even bigger than Bear Stearns) . Deloitte had not noticed or reported anything amiss in either of the banks and given them clean bills of health.

In turn WaMu is being investigated by a senate committee whose members have documents showing that Washington Mutual deliberately included loans in securities that were likely to suffer a high rate of default – but didn’t tell the investors who bought them. Sound familiar? (See the Goldman post above.) And we’re not talking about a few bad loans that crept in. The evidence is that in the bubble states like California and Florida (but not only there) the fraud was epidemic.

According to Senator Levin of the committee,”They [Wamu] also allowed loans that had been identified as fraudulent to be sold to buyers, again without alerting buyers when the fraud was discovered.”

What we see is Mortgage brokers NOT checking on the real ability of their buyers to actually pay the mortgage. The banks NOT checking on what was being brought to them. The bank’s accountant NOT checking on their clients. The bank or broker who securitised the loans NOT checking the real quality of the loans. The Ratings agencies NOT checking on the real quality of the securities and what underlay them but willy-nilly stamping anything brought before their desk as AAA guaranteed. Every person, and it’s people we are talking about here, not some faceless automated ‘system’, every person in the chain chose to ignore the law, lie and seize their share of the rotten profit. The financial system has become a haven for the morally corrupt. It has become a self rewarding system for people to lie and steal and cheat. It is a corrupt system set up by the corrupt for the corrupt.

So it’s not just Goldman Sachs bankers. Not just one bad apple. Not even just one bad tree. What we see is corruption from the very ground, up to the very top of the financial system. Greed and corruption stains the hands of everyone involved.

Meanwhile Ernst and Young are being investigated over their role in the Lehman’s collapse. Why didn’t the clever, smart and ‘honest’ accountants at E&Y not spot Lehman’s repo 105 fraud, for example? Could it be because the two companies had such a long and lucrative relationship? So add another accounting firm and another bank to the list of rotten trees in the orchard?

KPMG is also being investigated, over it’s dealings with Allied Capital. It seems KPMG chose to ignore the warnings of its own expert when he asked questions and voiced warnings the valuable client didn’t like. Is the entire orchard rotten to the marrow?

And last but by no means least, PricewaterhouseCoopers is being investiagted over the Satyam affair. The huge Indian company’s boss is accused in India of – would you credit it – accounting fraud!

All these cases show how the accountants seem blind to the very things they are supposed to be looking for. They also show how banks, their accountants and even their regulators (the SEC) are all too often, in fact, the same people who revolve from one position to another.

Any horticulturist will tell you when an orchard is infected you cannot prune or simply remove the odd tree. You have to tear every last tree out by the roots and burn the lot. I’d say this is good and sound advice.

We need to recognise that the financial system has become systemically corrupt. It is no longer fit for, or even designed, for the purpose of spreading wealth. It has become a means of looting wealth from those foolish enough to still observe the laws and transferring it to those who regard themselves as so clever, and smart, so far above the reach of the laws which bind the rest of us, that it is their somehow almost, in their eyes at least, an evolutionary process of the ‘fit’ (the bankers) preying on the weak (you and me).