“Those who cannot remember the past,” said philosopher George Santayana, “are condemned to repeat it.”
Ain't it the truth? When it comes to our money, we apparently can't remember a thing.
The Enron-era accounting scandals took center stage just nine years ago, bringing with them billions of dollars in lost wealth and astounding new regulations via the Sarbanes-Oxley Act. Lessons were learned and vows were made never to repeat those same mistakes.
Those promises lasted all of about five years.
Remember Enron's devious sleight of hand? The company lost money hand-over-fist, yet somehow it was able to report astounding profits and push its stock price into the stratosphere. How? In part, by hiding its debt in an elaborate series of self-created special-purpose entities. Enron created companies out of thin air, then moved its debt onto the books of those companies in a ruse that made its own books look spectacular.
Even more spectacular was the company's implosion when Sherron Watkins blew the whistle.
Fast-forward to 2006. Housing prices skyrocketed and investment banks sold collateralized debt obligations, or CDOs — backed in part by the now-notorious sub-prime mortgages — as fast as they could package them. Everyone made money. Life was good.
Then, a strange thing happened. Home prices started falling, homeowners began to default on their rotten mortgages, and the folks who had been investing in CDOs begin telling the banks, “Thanks, but no thanks.”
In a fascinating interview with NPR's Planet Money team, ProPublica reporter Jake Bernstein tells it this way:
“When investors stopped buying CDOs, (investment) banks had a choice. They could have decided to stop selling this stuff, to write it down and take a loss (and say), 'We have to admit this is a bubble. It's not sustainable. We have to stop and do something else.'
“But they don't do that. What they do instead is create investors for their product. The customers they (create) are, essentially, themselves. They create new CDOs, and those CDOs bought the pieces of the old CDOs that they couldn't sell.”
In essence, the banks in question began selling these unwanted CDOs to themselves.
Sound familiar, Enron historians?
Eventually, of course, the inevitable happened. When the implosion came, the investment banks were left holding a bag full of garbage that they had helped create … and then bought from themselves.
In other words, as Planet Money host Adam Davidson so eloquently put it, “The customer that's being screwed is the bank that's doing the screwing.”
Check out the Planet Money podcast in its entirety here.
My question is this: How long before we un-learn this lesson once again? How long before another spectacular opportunity to make obscene amounts of money arises, and someone takes a shortcut, and we all pay a price as a result?
Maybe I'm just being too pessimistic … but I don't think so.
What do you think? What, if anything, have we learned this time around?
Learn more at the International Business ForumYou can learn more about the issues that impact our increasingly global economy by attending the International Business Forum on Oct. 4 in Washington, D.C. A few of the topics to be covered include Standard Business Reporting, eXtensible Business Reporting Language (XBRL), how to begin working internationally and the inevitable International Financial Reporting Standards. Get complete details and register here.