Just a few weeks back I happened to catch a few parts of the documentary, Enron: The Smartest Guys in The Room. I was shocked at how closely Enron’s actions paralleled my understanding of how the banking system generates profits. The only real difference? Enron traded “energy”, banks trade debt.

One of the things I do fairly well is reverse engineer business models. As an entrepreneur and investor this is probably the most important skill you can have. Anyone can be a copycat, but that just doesn’t mean anything. If you are truly good at doing this it allows you to copy best practices while ignoring the stuff that doesn’t matter.

When comparing Enron with American investment banks I saw underlying business models that were disturbingly close. In itself that is worth a post, but I don’t have the time to make it (this one is a stretch in itself but I feel it needs to be made.) Here specifically I am interested in how both hid and continue to hide liabilities off the balance sheet.

Truthfully I suspect a ton of companies have done or do similar things Enron did. The companies Enron dealt with didn’t seem to have a big problem helping them out (anyone remember Arthur Anderson?) The banks are more or less doing the same thing, except they can spend billions of dollars on lawyers to ensure everything follows ever single law while gliding through the loopholes. Enron’s mistake was playing dummy while leaving the job up to an amateur. Oops.

It was no surprise to me last night when the following story popped up on Bloomberg.

Bank of America Corp. Chief Executive Officer Kenneth D. Lewis may face scrutiny by the U.S. Securities and Exchange Commission for failing to disclose mounting losses at Merrill Lynch & Co. because of pressure from federal regulators to complete the takeover.

…

Cuomo revealed in a letter yesterday to Congress and federal regulators that Lewis testified in December that then- Treasury Secretary Henry Paulson may have threatened to remove the bank’s management and directors if the lender tried to back out of buying Merrill. Lewis said he was instructed by federal officials not to disclose Merrill’s losses, his desire to back out of the merger or the intervention of regulators, according to Cuomo.

(By the way, did you know when Hank took the job as Treasury Secretary he had a net worth of around $500 million? I have no idea what it is now.)

There have probably been a whole lot of illegal things going on within the federal government in regards to the banking bailout. This can not be the first or the only.

What makes this story even exist is that there are regulatory checks and balances in place. The SEC has a job to make sure laws are being followed. They have the authority to enforce those laws and they will.

The Federal Reserve along with the Treasury, on the other hand, act alone and are pretty much making up the rules as they go along. The elected representatives who should be watching over them may or may not have any idea what is going on. Hell, it sounds a lot like Abu Ghraib.

In all of the businesses I have examined and studied I have never seen so many smoke and mirrors. Henry Paulson, Ben Bernanke, and Timothy Geithner are delivering the lies and bullshit by the boatload. I am a complete loss how anyone in the news media actually believes what any of these guys are saying. Anyone remember this guy?

I am not naive. Unlike nearly everyone protesting the bailouts and intervention I know all too well what would happen if regulators and the Fed stood back. Countless bank accounts, retirement accounts, life insurance pools, insurance pools, and pension funds would be heading straight to zero. Many have already gone to zero, most have taken serious haircuts.

Will the alternative path we are taking be less painful or shorter? I don’t know.

Pay attention what banks you do business with. If necessary, consider placing bank failure clauses in your contracts. Irregardless of what the FDIC does a few shake ups in the upcoming could very well bankrupt your company. If you are overseas, you should be paying even closer attention. Chances are your bank is holding some of the horse shit debt US banks minted.