Madoff - life in jail. Citi and AIG - Billions in bailouts.
Back in December, we predicted that we would be seeing more and more frauds in the real estate and financial services sector coming to light. It is far easier to hide a fraud in a booming market (see Mr. Madoff – who is looking at life in jail) and more are surfacing. Most are centered around real estate and mortgage “investments,” and although you could argue AIG and CitiBank et al have perpetrated the biggest frauds, the simple fact of life is – these people and organizations are above the law. They have no need whatsoever to consider any ramifications should they be found of any wrongdoing.
The same cannot be said for the smaller fish, and I am waiting for some one to use the argument that this was actually standard business practice condoned by the government in the country concerned. If AIG can circumvent the rules to write insurance policies they had no hope of covering – surely that is a license for anyone else to do as they please?
This is by no means a local issue, and in the last few weeks, frauds have come to light all around the world. The US, the UK, Spain, Dubai – almost all the previously-active real estate and investment markets. Not good for consumer confidence and coming at a time when confidence in the banks and financial system is at an all time low – despite Mr. Bernanke’s assurances that large institutions will “not be allowed to fail.”- Cold comfort – when the unspoken “regardless of the cost to the taxpayer,” can be read between the lines.
Nine people were arrested in London last week over a £40 million buy-to-let fraud scheme involving the purchase of 500 properties that “Eastbourne Financial Services,” deliberately over-valued for the purposes of borrowing far more than the property was worth. Still, the victim in this case was the Bradford and Bingley bank, which ended up being nationalized last year, so it is difficult to be too sympathetic. One does wonder if any of these bankers are familiar with the term, “due dilligence.”
The same day, “Cattles,” a consumer loans group, in the UK, admitted that it had breached it’s banking covenants and suspended three more directors for falsifying their annual financial statements and claiming a 25% rise in profits – which has now been replaced with “a substantial loss.” Auditors are combing through the paperwork to find out how substantial.
In Dubai, yet another case of corruption has been referred to the courts. This one involving five businessmen and two former senior executives of the Dubai Islamic Bank who conspired to defraud the bank of $500 million. Two other similar cases against Sama Dubai, and Mizin are still awaiting trial, and the number of Australians under arrest in Dubai has now risen to 13. They join Mr. Marcus Lee, who was, until recently a senior executive with Nakheel and a former executive of Jones Lang LaSalle. And if you were thinking of making a few dollars in Dubai in a similar fashion, it is worth bearing in mind that UAE law allows suspects to be held indefinitely without charge, and Mr Lee has been held in solitary confinement for the last two months.
CitiBank, HSBC, Banco Santander and Barclays bank now stand accused of of aiding corrupt regimes by Global Witness, a human rights and environmental campaign group which was co-nominated for the Nobel peace prize in 2003. If you are interested in some un-due dilligence this is a link to the report. The release of this report is obviously timed to co-incide with the upcoming G20 summit. Gordon”no more boom and bust” Brown will be facing yet another round of awkward questions and it is only a matter of time before he is ousted.
The real estate market is facing considerable challenges, not least of which is trust – otherwise known as “confidence,’ in the banking world. I am not usually a big fan of government interference, but until we can establish a trust base in the financial sector, we are going to continue to struggle. My thinking is that if we continue to have financial institutions that are “too big to fail,” and therefore, “not accountable,” we are not going to get there. They do not even trust each other – which is the root of the current lack of lending. These banks and institutions should be nationalized, broken up into pieces that are not “too big to fail,” and sold off. The shareholders deserve to lose all their money for failing to take note of their directors’ actions. Discussion welcome in our forum - Too big to fail?
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