Eye-Opening Perspectives for Heroic Hearts

Eye-Opening Perspectives for Heroic Hearts

Tuesday, September 29, 2015


2016 To Be 2000 Revisited?

 From Enron In 2001 To the Paulson Bailout in 2008
By Carly I. Bernanke for CPW News Service

     The 2001 Enron meltdown was the laid out by one U.S. businessman writing to members of the FASB (The Financial Accounting Standards Board), Jerry Baty, whose letter provides a fine overview of the Bush/Enron/Merton/Bailout problem.   While Baty acknowledges that "lying and cheating" may continue under any accounting method, the problems inherent in the rise of the "Mark-to-Market" method that served as prolegomena to Jeffrey Skilling's "Hypothetical Future Value" method as it was evolving, or devolving, as the case proved, receives Baty's attention.  With the prospects of another Bush in the White House in 2016 it is critical that people revisit the Enron debacle.  "Sensible regulation of financial markets provides a guard rail over which the rail cars of American financial markets must jump before shattering on the crags below.  Removing this regulation has been the Reagan/Bush agenda using squirrelly leprechauns spewing the free market and "invisible hand" of voodoo metrics like Milton Friedman, Robert Merton and Federal Reserve Chairman, Alan Greenspan, who promoted within the halls of government and the accounting and investing firms which are suppose to add confidence to the nation's business enterprises, a whole level of demoralizing bamboozle.  
     With the potential meltdown of current leading Republican candidates for the 2016 Presidential election, specifically Donald Trump or Ben Carson,  JEB Bush could sadly become the front runner, but what might that mean to the U.S.?

     JEB has promised to reconstitute a new era of deregulation like the one that was ushered in during the last year of the Clinton Presidency with the repeal of a longstanding governing dynamic called Glass-Steagall. The Glass-Steagall Act forbade the marriage of Wall Street banks and Wall Street investors and its repeal opened the door to business mountebanks like Jeffrey Skilling of Enron, Robert Merton the progenitor of the Black Scholes credit default formulas, the WorldCom, Tyco and other poster children of business gone wild.   What followed was the 2000-2008 rape of the U.S. economy as was done to the California energy market in the newly deregulated George W. Bush Presidency when the Black Scholes formula of Nobel Prize winning son of Columbia University’s “father of applied sociology”, Robert Merton, sold Wall Street on the incomprehensible Black Scholes credit default formulas that provided the basis of Enron’s accounting moves.   Enron's was headed from the questionable “mark-to-market” accounting principle promoted by the FASB's ASB 718, the butt of many a Wall Street joke,  to what Skilling called “Hypothetical Future Value” or HFV.
      You have only to follow the money to see the Bush family culpability.  Start at the beginning. Merrill Lynch Pierce Fenner and Smith, shortened to Merrill Lynch, fired the only Enron critic from their Wall Street Investment and Banking team in Houston.   With no adults to oversee the party the well-lathered copulative assembly under the repeal of Glass-Steagall that allowed the "financial butt raping" that Skilling engendered along with Ken Lay at Enron ensued.  "The documentary by Mark Cuban’s film company The Smartest Guys In The Room, shows the mutual admiration of George Herbert Walker Bush and George Walker Bush for both Lay and Skilling," said the wife of a former Enron trader.   Skilling got Merrill Lynch to embrace the "Mark-to-Market" accounting procedures that some FASB board members rejected while Skilling went one further with his “Hypothetical Future Value” or what some have called the “Alice In Wonderland Rabbit Hole Accounting Principle” that had Arthur Anderson shredding documents at the once powerful energy trader's offices.
       By 2008, Robert Cox Merton had already received his Nobel Prize for economics back in 1997 for his Black Scholes financial metrics which tanked the U.S. economy as well as Merton’s Wall Street hedge fund forcing Alan Greenspan to claim before a Senate Committee that he had been wrong in his hands off approach to the market which he called something of a hiccup.  “Hiccup, hiccup,” said one former Enron employee who lost his pension and retirement savings.  “Greenspan, Lay, Skilling and the Bush family vomited all over us! Hiccup, sxxx! Green slimy vomit.”

The Enron Legacy (Click box to enlarge)
      Indeed, Merrill Lynch, formerly Merrill Lynch Pierce Fenner and Smith, with the Pierce being the family of Barbara Pierce Bush, found Bank of America’s President Ken Lewis being forced to accept Hank Paulson’s bailout money in 2008 and 2009.   Lewis said his bank did not need, but was forced to take it or else face future banking reprisals.   Hank Paulson, now selling the U.S. to China with many of his former Goldman Sacks colleagues taking the lead on oil and land sales to the Chinese Nationals that's not unlike the Dubai Ports deal or the Bin Laden ownership of the Houston Gulf Manor Airport right up to the 2001 September 11th attack is sure-fire flake-off of the paint-peeling Wall Street meltdown.  
    In 2008 Ben Bernanke and Henry "Hank" Paulson commanded Ken Lewis to use the taxpayers’ money, the nation's sovereign dollars, to force Bank of America to buy Merrill Lynch at a premium with Merrill Lynch paying out record executive bonuses in spite of the financial collapse and in spite of Merrill Lynch's mismanagement of Enron's accounting and financing procedures which ML endorsed.
    “You put another damn Bush in 1600 Pennsylvania Avenue again, America, and I’m moving to Pongo Pongo,” said another former Enron Employee who provided the letter to the FASB Board  of Directors from Jerry Baty, June 30, 2004 decrying the obvious misadventures of the entire FASB relationship to the Enron, Mark-to-Market and Black Scholes system that had Robert Merton’s mentor at MIT, Paul Samuelson, calling Merton's creation a “Feindish, Frankenstein-ish monster of financial engineering" that we never encountered even during the Great Depression.  Samuelson, an unapologetic centrist, said the 1999 removal of Glass-Steagall was begun in 1980, so it incorporated both the Reagan-Bush and Clinton-Gore, Republican and Democratic, administrations.

     Jerry Baty's letter to the FSAB Director articulates the fact that the FASB's endorsement of the Nobel Prize winning Black Scholes formulations are incomprehensible mumbo-jumbo.  What the letter does not do is explore the effects of awarding a Nobel Prize to a bogus investment model, adding to the long list of embarrassing and demoralizing Nobel Prize blunders.  This letter to the FASB from a modest American businessman, Jerry Baty, follows:

Stock Options




Jerry Baty Ubaty@Transavelnc.com]

Wednesday, June 30, 2004 6:09 PM

To: Director - FASB

Subject: Stock Options


Letter of Comment No: S718'

File Reference: 1102-100

I am not going to bore you or waste my time filling this letter with a pile of rhetoric from BIO. Basically, I have a few strong concerns about expensing stock options. They are simple and straightforward, so shall be this letter.

1. Value - Any method, Black-Scholes or otherwise, that includes a volatility factor, not to mention other subjective factors, will inherently be very difficult to explain and provide info not useful to the investor. In an age when auditors are under intense scrutiny, it seems counterproductive to havc them buy into subjective measures that when used will create a substantial change to the financials of the company. Can any member of FASB really say that the individual  investor will understand this disclosure? The average investor does not understand the existing 123 footnote. Putting it into the income statement will certainly make it less understandable and muddy the income statement as well.

2. Presentation - For those investors interested in compensation of officers and directors, the proxy and financial disclosures in place presently are more than adequate and create plenty of confusion as is. More non-cash postings to the income statement will only make things worse. The problems Enron and others have has had little to do with

options and everything to do with management lies and deceit, coupled with shotty auditing. The information is there.

Make it easier to understand by standardizing the calculation and increasing explanations. Don't make it worse by increasing technicalities. The employees at Enron lost their shirts because the government closed Andersen instead of letting them operate and pay off the restitution over many years. The employees made a decision to load their 40lK with stock and no one force them to do it. Yes, they were victims, but this disclosure would not have prevented it, nor will it help save the next bunch who do the same thing when management is lying and cheating.

3. Comprehension - The SEC implemented the plain language requirements in order to make the various filings more understandable to non lawyers. The financials will be understandable to only accomplished accountants if this is implemented.

4. Industry - I urge you to review the impact this rule would have on companies such as mine, when we are public. With the volatility in our industry of nearly 100% and the usual wide range of option pricing resulting from that, I have seen where a companies EPS would change by 50% or more just as a result of this inclusion. In an industry that is viewed on cash burn, these income statement figures will give readers of the financials the wrong information on bum rates. Actually causing more confusion and the wrong idea of performance is not the right idea. I am all for full disclosure and comparability, but since the average investor has no clue what the cash flow statement even says, they rely on the income statement for primary info on performance. This rule does nothing to increase usability of the financial info. The public will eventually complain and the legislature will not be there to support you when the mud starts flying.

Just a few thoughts from the front. My company is private and has only 25 people. It is the options and the prospect of monumental returns that has allowed us to recruit people from all over the country. Our investors will look past the disclosure because they know it is worthless. They are sophisticated investors. Please step forward as an industry and do what is right, not what is popular.

Jerry Baty

Vice President, Finance
Transave, Inc.

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