Being honest always makes things more difficult

The Reality-Based Community: Keating 5 anniversary: Did McCain just call for more “government-induced accounting fraud”?

Black writes further:

“In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses. Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.”

The second sentence is the portion Krugman (rightly) criticized.

Black and Krugman are both being too polite about that “adequate capital” passage. In the current context, where enormous losses are yet to be disclosed, the purpose of raising additional capital is to prevent the current set of investors from being completely wiped out by adding money from a bunch of new suckers so that all of them together will be only mostly wiped out.

Why, other than being lied to*, would someone put their money in that kind of investment? Hence the need for fraud. And mind you, it’s even worse than that, because every billion dollars that gets tossed down this particular rathole right now is a billion dollars that can’t be invested in something useful.

*OK, there are some reasons. One is that the investor is getting a really good deal, either a very low share price or a very high interest rate — but when you cook the books, the investor will settle for a higher price or a lower interest rate than they properly should. Two is that the investor imagines some long, long time horizon over which the investment will actually perform better than alternatives, but once again cooking the books muddies the waters. Three is that the investor wants something else, perhaps power over a particular sector, or a favor that can late be called in, or access to resources that will make some other investment of theirs more profitable. In that case, good luck to them, but cooking the books will make the quid pro quo that much less visible to the public at large.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: