How the 1% are cleaning out the rest of us: Part I

Occupy Wall Street posterThe Occupy Wall Street movement seems to be gaining momentum and there are people with a good track record of predictions—Dr Ravi Batra for instance—who believe that the time has come for such a movement to change the world. The non-productive money manipulators have broken the free market capitalist model and I’m hoping that pay-back time is nigh.

Where I part company with the Occupy Wall Street folk is that I don’t believe capitalism is the problem. Capitalism works well when adequately contained. It’s the failure of governments to regulate it that’s the problem.

Here is one of the ways the fat cats are creaming the system and destroying the world’s economy for the rest of us.

“Window Dressing”

The money managers borrow short term and use the loans to finance big risks without their shareholders’ knowledge. Then, prior to balance sheet publication, they sell the most toxic of those investments and pay back those borrowings. With luck, they make a killing on the dodgy assets without getting caught. The managers’ bonuses are earned on short-term gains, so their interests are not in line with the interests of their clients who want medium to long term gains on their investments.

The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund’s holdings are made public, in order to give the appearance that they’ve been holding good stocks all along.

The deceptive practice of using accounting tricks to make a company’s balance sheet and income statement appear better than they really are.
Investorwords.com

From The Wall Street JournalIt doesn’t always pay off as MF Global Holdings may discover very soon. The Wall Street Journal found such activity among “primary dealers,” major banks and securities firms that trade directly with the Federal Reserve are borrowing big during the financial quarter to invest in short-term high-risk investments to maximise their bonuses.When the end of the quarter looms they temporarily reduce borrowings by substantial amounts to hide their dodgy dealings.
Furthermore, the Journal reported in 2010: WSJ uncovered this dodgy practice at MF Global Holdings Ltd, who are filing for bankruptcy protection.

A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.

Wall Street Journal 2011

Unfortunately the gambling hasn’t paid off this time:

From Reuters:

Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must find some $1 billion in additional collateral almost overnight, or be forced out of their trades.

Next: How the 1% are cleaning out the rest of us: Part 2