Citi Saved, Nation Destroyed
By Kalidas Ref: 0905-027 of 4-May-2009
So they did it again. The investors applauded. CNBC reported that the financial sector appears to have bottomed out, and the market is up 10% in just under 3 days. The market could not have been wrong. They say the market is ahead of the events by 6 months. If that was so, why did we lend into deepest recession in post-war history. Who remembers that? The people’s memory is like RAM (Random Access Memory) which remains so long is the power up and running. The moment the power is switched off, the memory is gone forever.
It was carefully planned conmen’s game. The crooks are always suggestive so that the target does exactly what is required of them.
Look at the past events, only 2 months back. Note the following:
1. Citigroup was in dire trouble. The President and Senate were obliged to release $ 45 billions in cash in the form of Preferred Perpetual Shares with 10% coupon. It was Paulson’s brilliant idea. He may have told the President, Senators and American tax payers that they would earn 10% income by way of dividend, in addition to rights to subscribe to Citigroup’s shares under warrants attached.
a. Everyone believed them. Wow, we are getting 10% return when we are getting only 1% while lending to various banks. Excellent. And we will make money in equity too. What a fantastic idea.
b. No one asked them how Citi is going to earn when dividend servicing cost of this deal alone will be $ 4.5 billions annually. This is in addition to similar servicing costs payable to other large Middle East investors.
c. Money was released in the name of TARP. As soon as this purpose was achieved and the money was already in the kitty, these guys allowed a few days to pass. They observed that direct injection of cash was not helping them. The losses will have to be written off in the books of the bank and any money they receive from the Fed or Treasury will straight away go to write off that debit. No money will go to the market by way of lending.
d. The trio thought that this was a problem. We do not want to write off the amount from the Citigroup’s books. It also needs another does of $ 300 billions. The President and Senate will not simply release more funds if Citi goes on showing more and more losses.
e. The devil’s mind started working. Target: to get $ 300 billions; Aim: Not to show any losses in the books of Citigroup, otherwise it will be officially bankrupted. What to do?
f. IDEA – a Great Idea – Paulson appears to have screamed in the sound proof cabin.
i. Hey, Pandit – you do the following:
1. We will not give you cash, because it is impossible.
2. We have given you $ 45 billions. You better give the treasury $ 7 billions of guarantee premium and we (US government) will guarantee your obligations falling due.
3. Those junk assets when backed by the AAA rating of US government will soar. Those holders can discount those bonds with their bankers because they are backed by the guarantee and full faith of the US government.
4. Since these bonds have become realizable assets, you do not have to make any provision in your books. Although it is your bad assets, it will not be bad assets any more. They are now fully insured by the US government.
5. So you will not write off these bad assets in your books. They will now be US government’s troubled babies.
6. When you get the demand for payment under these bonds, simply redirect them to US government and ask them to pay under the guarantee for which you paid guarantee premium of $ 7 billions.
7. Pandit: Wow, great. You gave us the brilliant idea; we no longer have to write off any more bad assets. But US government will have to write them off one day in their books.
8. Paulson : Yeah, one day. By then, you will not be there, I will not be there, and perhaps this Bernie too may not be there. And who cares?
9. Pandit: Excellent. But what do I do for $ 45 billions already borrowed. I do not have money to pay even 10% dividend, forget the principal.
10. Do not worry… Bernanke will take care of it. Hey, Ben, you better convert those PPS (Perpetual Preferred shares) into common equity immediately so that Pandit does not have to bother about the dividend servicing.
11. DONE. I will take care of that. Said the Bernanke
12. Now Pandit, since you do not have to make any provision for $ 306 billions and you do not have make any payment of dividend on preference shares, you can write a memo to your staff that you have the best quarter since 2007. Your stock will soar.
13. Did you buy any? Pandit asked.
14. I have the right to remain silent, said the other guy.
This is what appears to have happened a day before.
When the Citi lost $ 45 billions and Fed gave them $ 45 billions as capital, following entries could have been passed.
1. Debit : $ 45 billions -Cash account (being sum received from the Fed)
2. Credit : $ 45 billions -Perpetual Preferred Share Capital (to US government @10% div CPN)
3. Debit : Profit & Less Account $ 45 billions (Amount written off)
4. Credit : Toxic Assets (Toxic debt assets – also contra of Toxic liability)
5. Debit : $45 Billions – Toxic Liability to Customers (could be X? We do not know)
6. Credit : $45 billions – Cash withdrawn to make the payment to the creditors
7. Debit : $45 Billions – Perpetual Preferred Shares (to US Government) to convert to common.
8. Credit : $45 Billions – Common Stocks issued to US government
9. Debit : $45 Billions – Common Stocks Issued to US Government (Capital written off)
10 Credit : $45 Billions – Profit & Loss Account (Under Item 3)
Final result – TARP fund issued by US government for issue of Perpetual Preferred Shares is finally written off by first converting into Common stock and then by way of reduction of capital of common stock to write off the debits in profit & loss account (now intangible assets)
Under above scenario, the losses are written off in the books of Citigroup because the TARP fund issued for PPS capital were required to be shown in the books of Citigroup. Also note that there was no need to convert Perpetual Preferred Shares into Common Stock in the name of boosting capital of Citigroup because both were Capital – one was Preference shares and other common stock. (Equity). Under the law, both were acceptable form of the capital, ranking subordinated to debt. What was the motive? Here is the possible answer.
While seeking approval of $ 700 billions under Paulson’s Plan, the Senators and President were told that they were going to give the funds to Citigroup with 10% dividend coupon. That is, US government was to earn 10% from Citigroup, that is, $ 4.5 billions per year (on $45 billions lent). By transferring to common stock, the dividend coupon was compromised, and the US government’s priority for preferential treatment of asset distribution in the event of insolvency was also compromised or watered down.
So first, these guys tell the Senators and President that US government or Tax Payers will earn 10% on amount lent to obtain their approval under TARP funds. Then, these guys convert PPS to common stock to forego 10% dividend, and then reduce the Equity capital to write off the debit in the Profit & Loss Account. In short, US government loses $45 billions within 6 months.
Now, see the interesting part for guarantee of $ 306 billions issued by US government for toxic debt held by the Citigroup. In this case, the guarantee was designed in such a way that the losses are not written off in the books of the Citigroup. As result, the Citigroup would not be showing any losses for next 4 quarters. The losses would be ultimately written off in the books of Federal Reserve as under:
Current Position in the books of Citigroup:
11. Debit : Toxic debt of $306 billions held by the bank (market value Zero)
12. Credit : Toxic liability of $ 306 billions payable to other creditors (could include X)
The item under 11 will need to be written off to the debit of Profit and Loss account if direct funds were received from US government under TARP.
To avoid the writing off such huge amount in the books of Citigroup, Paulson/Bernanke designed the guarantee route. They showed to US government that Citigroup would give $ 7 billions as guarantee premium to US government for arranging its guarantee. The US government is led to believe that it is just getting the income without letting out actual funds, because the guarantee does not involve movement of funds until it is invoked.
It is like we pay insurance premium to insurance company to obtain their guarantee for insured act. If the insured act materializes into real liability, then only the insurance company would be required to pay.
So these guys Paulson and Bernanke showed “moon” to the US government that they will get a premium income of $ 7 billions without telling them what it was getting into – massive deferred liability of $ 306 billions in near future.
As soon as the Toxic debt is guaranteed, the worthless junk securities are elevated to AAA credit due to the guarantee of US government.
When the Citigroup faces the claim from creditors for $306 billions,
- It will hand over the corresponding toxic debt now guaranteed by US government to the creditors.
- It will pass the contra entry in its own books as under:
a. Debit : $306 billions Creditors Account in discharge of obligations
b. Credit : $306 billions of Toxic debt transferred to the creditors.
c. In short, the Citigroup balance sheet size is reduced by $ 306 billions (both assets and liability of equal amount are reduced)
- The creditors have two options -
a. either to demand the repayment of the Citigroup’s liability
b. OR sell the Toxic debt to the market.
- When the ultimate market beneficiary of the guaranteed toxic debt needs payment, it will approach the Citigroup for payment. Citigroup, instead of making payment, will direct the claimant to the US government to demand the payment under its guarantee.
- In short, Citigroup will no longer need to write off the massive loss of $306 billions from its own book. There will be no longer losses every month. It will begin to show the profit showing the world that recovery process has started working for Citigroup which is a myth.
- The US government when facing the claim of $ 306 billions under the guarantee, will need to write off the amount in Fed’s balance sheet. In short, the debit-able losses of Citigroup will be finally written off in the Fed’s balance sheet, not Citigroup’s balance sheet.
- Supposing a top Investment Bank (X) is owed by Citigroup by, say, $ 30 billions. Citigroup will hand over the US government guaranteed debt to X. X has two choices:
a. To seek the payment of $30 billions from Fed under its own name. However, it will expose its name for scrutiny later in the event of any enquiry.
b. To sell the securities of $30 billions to the market players say, A, B, C, D. These market players will ultimately demand the payment from Fed under their own respective names. Even if there is any enquiry, the name of the penultimate holder, that is, X, will not be disclosed. It can therefore avoid any scrutiny.
c. The name of X as one of the creditors or counterparty of Citigroup is strongly suspected because the Treasury Secretary Mr. Paulson belonged to that group earlier in highest executive capacity.
d. In short, Citigroup (and possibly X or its associates) were saved by the above exercise of “US government guarantee of Toxic debt held by Citigroup”. But the final victim would be the US government or American Tax Payers. They were obviously defrauded by the antics of Bernanke, Paulson and Pandit without the knowledge of the Senators, the President of the United States of America. Or American Tax Payers.
e. When the $306 billions become finally payable, no further approval of Senate or the President would be required because the deal was already approved earlier for guarantee. US government, Senators or the American Tax Payers would not know what had hit them when they have to ooze out $ 306 billions at that time. It may happen 6 to 9 months from now on depending on the maturity profile of guaranteed debt.
It will be observed that good quarterly numbers of Citigroup or JPMC or BOA are not necessarily due to easing of credit crisis or recovery of the economy. These are the acts of window dressing. The balance sheets of most of the large banks are being white washed to look them better and more palatable to the investors. The credit crisis is in fact worsening.
It is therefore not too much to say that the “Citi is saved, the nation is destroyed”. It is a fact.
Kalidas, Hong Kong
4-May-2009 Ref: 0905-027
India’s Stinking Auditors – Satyam Scandal – Part Two
Cheaper money worldwide for over 10 years has forced Investors scurrying for yields. It created enormous demand for equities and high yield bonds. Almost everyone wanted to become “instant reach” in the instant age of Instant coffee (Nescafe), Instant Mail (eMail), Instant money (ATM Card), Instant Credit (Credit cards), Instant car or scooter (Car loans), Instant girl or boy friend (Internet Chat), Instant Baby (Instant pregnancy via artificial insemination), Instant Marriage (before Registrar), Instant food, Instant death (in bomb blast) etc. We are now living in an instant age.
God and nature has taken a back seat. The demand for “instant return” created another breed of crooks and scoundrels, Con Men, who labeled themselves as self styled “Professionals”.
When I was a stock broker, however good I was, I detested my clients calling me a “professional”. I used to tell them – “you made money in your life, so you are the real professional not me. If we had money as much as you had, we would not need any client”. We brokers always look for OPM, pronounced as Opium, a drug, a narcotic that is equally addictive. It reminded me Danny DeVito’s witty movie OPM = Other People’s Money. He tells everyone about money “Easy come, Easy go”. Our forefathers used to advise us – “Hard earned money never disappears, Easy one does.” The instant coffee does not taste or smell better than slowly brewed percolated coffee. Hard earned money follows same pattern.
The crooks that have surfaced now are seen in every country. You found Rama lingam Raju of “Satyam” in India. He was still better than other two crooks that have just surfaced in USA. Madoff who stole $ 50 billions from investors and Alan Stanford $ 8 billions by selling bogus CD or Certificate of Deposit promising 14% return in US dollars.
This reminds me again, the case of CRB Capital from India that went bankrupt a few years ago. Many investors in Hong Kong were lured to invest into this company promoted by a Chartered Accountant Mr. C R Bhansali. He had approached me to find clients assuring 30% return in US$ for investing into India when the market was teetering around 2800 level. My best client asked for my opinion and referred him to me for follow up. I asked him the following questions for which he did not have any reply.
Q: To make 30% post tax return, you must make 35% gross. In that case, you should make at least 50% to make 15% return for yourself for handling the investment. If you can make such an easy return in highly depressed market, why do you need clients from Hong Kong? You can invest your own money and take all gains. Why settle for 15%?
Within months the company folded up. Hong Kong investors lost over US$ 10 millions!
Satyam’s Raju was better than Madoff and Stanford in USA. A British soldier investor killed himself for losing his life savings with Madoff. Hey, why did you kill yourself, soldier! You could have gone to USA and shot that bastard instead of killing yourself.
A royal family’s member in France, a billionaire, also killed himself for investing his client’s money into Madoff. He must be a decent guy. The name of the criminal Madoff was not inspiring either. What did the US government do? Nothing. How could he have lost $ 50 billions? It is not small money. It should be easily traceable. But nay, the agencies like FBI is useless. It would not take more than 10 days to find out where the money had gone.
Robert Allen Stanford, the banker, was not even arrested nor criminal charges filed against. He was under house arrest, not even formally charged. That scorpion was smiling with big eyes, baggy s suits, and monkey teeth. Look at the US government. They could throw into Guantanamo Bay jail some bearded British Islamic guy for suspected role in terrorism, hold him without trial for 7 years, and torture him to the extreme third degree, whereas fully documented and complained about fraudster of $8 billions, Allen Stanford, goes unnoticed. Such hypocrisy in the name of democracy, human rights and justice? A person like Stanford should have been stripped and flagged publicly in a baseball stadium.
Watch here Businessweek’s Video report on Stanford Scandal
What is the common factor in above frauds? The Auditors or so called Chartered Accountants in India or Certified Public Accountants in USA. The Institute of Chartered Accountants of India takes pride in strict graduation result of 2% to show the world that they are breeding the best persons as Chartered Accountants. Is this the quality they are churning out? The institute itself must be condemned for not enforcing strict accounting standard on its members.
As rule, I never invest into companies headed by Chartered Accountants as CEO or Chairman or Executive Director. They know very well where they can follow the practice of “green accounting” called creative accounting. In layman’s language it is called “Fraudulent Accounting”. Almost all mega frauds are clearly abetted by the members of this noble profession – that is what they call. Even prostitutes call their profession as noble profession.
- LTCM (Long Term Capital Management , tagged $ 1 trillion)
- Enron (tagged billions of dollars),
- WorldCom (also tagged for billions of dollars)
- Satyam Computers Services Ltd.
- Madoff
- Stanford International Bank Ltd. and Stanford Trust Company Ltd. in US /Antigua / Barbuda)
were all audited by the CPA of large and reputed companies. The CFO of these companies was all CPA. The investors should trust the accounts of companies headed by these Chartered Accountants or CPA with extreme caution. I do not even touch them or even look at them.
Let us now look at the role played by the statutory auditors of Satyam Computers.
The annual report of Satyam also make interesting reading. Their accounts were audited by Price Waterhouse in India which is a branch or audit arm of reputed International accounting firm Price Waterhouse Coopers. Look at the following figures extracted from the Audited Annual Report for 2007 of Satyam Computer Services Limited.
The subject matter of the fraud is that the company never had Bank deposit of Rs 3308 crores (=US$ 750 millions at then prevailing rate of exchange) reported in its balance sheet for several years. Such huge balances are never held in cash – they are always in bank accounts. How could they have misses such major item from their audit trail?
If the $ 3308 crores of bank deposits were not verified, how about rest of Rs 683 crores in cash? How could a company keep cash balance of Rs 683 crores in 2007 and Rs 1,194 crores in 2006? It would require 7 room of the size 10’ x 10’ x 10’ to keep such huge cash in popular denomination of Rs 100. It will require 119.4 million pieces of Rs 100 currency note or 1.194 millions of Rs 100 bundle (100 pieces per bundle). It will require storage space of 7,773 cubic feet or 6 x20’ shipping containers.
Unlike US con men Madoff and Stanford, Mr. B Ramalinga Raju was an honest thief. The thieves also have unwritten code of conduct, and perhaps Mr. Raju was following that conduct.
Until today, no one knows whether he really siphoned off the cash or just inflated the balance sheets to boost his status in the info market and boost share prices.
He was also trying to glorify the image of Satyam in the market place. He valued his own company in glorifying way. Read the following extracted from the same annual report (for YE 31Mar2007)
According to self evaluation conducted by our great B Ramalinga Raju who is smiling at us alongside, the Satyam’s enterprise value was US$ 18 billions (using exchange rate prevailing then).
There were about 42,000 employees working for Satyam who were valued collectively Rs 65,668 crores. If you divide this sum by 43,000 employees, each employee of Satyam was valued at Rs 1.53 crores or Rs 15.30 million rupees or US$ 332,600 approximately.
Who says India is poor? We have 42000 Slumdog Millionaires in Satyam alone.
Now. Look at the Human Resources valuation by Satyam as follows. This is part of their Audited Annual Report for YE 31-March-2007. It is self congratulatory and self glorifying. However, it does go to show that Mr. Raju was mentally sick and was trying to project image larger than life
Conducting Audit – An Art, Science or Commerce?
Accounting is a commercial subject. However, accounting presentation is an Art and also a science. This is a new branch of commercialism. “Hybrid commerce” we should say.
How to conduct the Audit – some basic rules
These are my rules from experience. I was an investigator and vigilance officer in a nationalized bank in Mumbai – India. The very first rule is that ignore the obvious. Try to audit that area which does not attract much attention.
Most of the time, the fraudster is suggestive. He will take the Auditor for a lunch or drink and show him the important books the Auditors should see. The Auditor should do only the opposite. Everyday, before the Auditor goes for inspection, he should think what the other guy did not want him to see or verify. He should mentally make a list and check those items especially when that guy is not around.
My Experiment with Lies in Mumbai, India
I detected one major fraud in terms of number of entries, not by amount and also worked with CBI. The amount involved was only Rs 250,000 at that time (1980) but the number of fraudulent entries were over 2000 – most of the rolled over from one account to another to cover up the original fraud. Same thing is happening in Citigroup now in my opinion.
The fraud was at one of the five star hotels financed by the bank. The bank also had small branch called extension counters. Being a hotel, bank used to get lot of foreigners for encashment of travelers cheques or checks (Credit card was not popular in 1980). The branch manager will ask the visitor to open the account before he could encash the TC giving bank’s policy as reason. Since the tourist will remain there only for a day or two, the manager will start using their accounts as dummy account for his various needs.
I also used to check even ladies toilet asking woman helper to check the inside of the Female Restroom. The reason is that most of the time, the Auditors or Inspectors are male and would not dare to go that place for fear being labeled “sex maniac”. Read the following actual example in same bank in Hong Kong.
Hong Kong
I was transferred to Hong Kong in 1984 and used to head Legal and Internal Inspection department. Our Deputy General Manager was in habit of entertaining the government officials especially from finance ministry, because the bank was owned by the Government of India. He was seeking quick promotion through such measly favors.
One fine morning, we got a message that our bank’s senior General Manager was visiting Hong Kong from Singapore. He was very strict administrator, and never liked our DGM (HK). Our DGM was terrified. The reason was – he had used bank’s advertisement budget to buy over 200 brief case and suit cases of Samsonite and other local brands to give them away to visiting officials from the Ministries. One room was full of such suitcases. He discussed with his deputy on same floor (we were located in lower floor) who showed him the great idea. He was pleased.
In the evening, we found suitcases coming down to our floor one by one, and going into “Ladies Restroom”. All suitcases were transferred there on previous evening. I asked my senior Manager what was going on. He replied that our visiting GM had habit of inspecting every inch of our premises. But he would not dare to go to Ladies restroom. So the bags and suitcases were being transferred there.
I realized at that time that I was right in inspecting Ladies Restroom in Mumbai which was being laughed at. I was 4 years ahead of other Auditors or Inspectors.
Anil Selarka (Kalidas),
Hong kongMarch 7, 2009 Article Ref: 0903-026A
Blog: http://anilselarka.com
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