Wait, Who Are The Criminals Again?

I spent this past weekend relaxing and catching up on some episodes of CNBC’s “American Greed” that I DVR’d several months ago. One of the episodes was about Barton Watson a con man who cooked the books at his Tech Company (A PC VAR), in order to procure lines of credit from banks that he used to both run the company and finance a high-flying lifestyle for him and the company’s executives.

I.e. he overleveraged his company on the back of faux assets.

Doesn’t this scenario sound rather similar to companies using regulatory arbitrage to escape capitalization requirements, valuing debt securities (and other derivatives) via “mark to model” and then borrowing money against same?

Mind you the frauds committed by Barton’s company were a bit more involved than just inflating the value of an asset and taking out a loan against it (inventing customers, false invoices, setting up fronts for banks to call, creating fake computer equipment, etc), and Barton and company weren’t even using much of the funds received for legitimate business purposes.

I.e. I’m not arguing that what Barton did wasn’t a crime (because it certainly was), I’m just arguing that what many of what the banks, hedge funds, AIG (AIG), et al, did was definitely in the same neighborhood as far as corporate malfeasance. Because at a certain level if you replace borrowing against a fake P/L, with borrowing against “mark to myth” derivatives there isn’t a real fundamental difference.

Funny how one act is a crime and the other is just bad judgment, especially when you can argue that many of the banks, hedge funds, etc, had faux balance sheets too.

Posted in Categories: Contributor, External Research, Financial, Stocks.

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