Enron on Steroids!
The Federal Government is representing a fiscal budget and spending model that is strikingly similar to what Enron did in the 1990's to make it appear that their business was performing fabulously when in fact it was a disaster waiting to happen. Enron knowingly and intentionally created "off books" companies and financial structures to conceal their fraud and make it appear that the company was growing rapidly and profitably.
The following is from Wikipedia:
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure.
Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, by the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions of dollars in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.
Enron shareholders filed a $40 billion law suit after the company's stock price, which achieved a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the next year.
Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the company had lost the majority of its customers and had closed. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.
The Federal Government is Reporting like Enron
Since fiscal year 1969, the Federal Government has been incurring a much more significant fiscal deficit than it has been reporting to its citizens (and the world) and as a result has created a massive liability that we cannot possibly pay. When LBJ started this inaccurate accounting it was a little white fib that erased his Vietnam war debt problem (sort of) but set in motion a budgeting and reporting process that obscured the fact that we were creating this massive long term fiscal problem. If you read the Government's recent financial disclosures you will find references to the fact that our fiscal situation is not sustainable which of course is true. But I find it almost amusing that the people writing this report are including CYA (Cover Your Assets) statements in the report now to protect themselves when USAPonzi finally implodes.
When Enron misrepresented it's financial condition, many employees thought they had a good job with a promising future, an investment in their company stock that was appreciating as the company grew, and a pension plan (401K) that would help support their retirement. Investors in the company thought they were putting their hard earned capital into a promising company. This all went up in smoke when the accounting fraud was exposed and the company went bankrupt.
The Federal Government is doing something quite similar by the way it is representing our financial status. All that the general populous (and the world) has heard about for now decades is the cash accounting deficit and the national debt. Oh yes, some people know about the "Unfunded Liabilities" but that gets passed off as something that Congress will fix some day so don't worry about it. But I would guess that not 2 people in 100 would know within $50 Trillion the true magnitude of the Federal Government's Obligations.
Even people that do know about our nearly $1 Trillion deficit and $17 Trillion national debt would likely be shocked to find out that if the Government was telling it like it really is that our GAAP-basis Deficit is 5 times as large as the Government routinely reports and our financial obligations are also nearly 5 times as large as the national debt that the Government reports.
Why is this a problem? While people are buying our debt knowing that we have a massive $17T national debt, they may not know that our real obligations are in the range of $73T to $85T. People are buying our debt thinking that the Government is spending $3.5T a year when we only have $2.5T of income when in fact in fiscal year 2012 (ending Sept 30, 2012) we effectively spent $9.1T (according to proper GAAP accounting) yielding a $6.6T GAAP-basis Deficit!!!
However, the bigger problem, in my opinion, is that many people that are or were employed either directly or indirectly by the Government or that are receiving or are promised to receive entitlement benefits do not know that the Government is misleading them by saying that these promises can be kept when obviously they cannot be. These jobs, pensions, social security, healthcare, and other promises are being counted on by now nearly 50% of the U.S. population and right now we have a known but not widely disclosed shortfall on the order of $60-70T. Also people that are counting on these jobs and benefits in many cases have transferred these promises from the Government into their own promises to pay for home loans, car loans, boat loans, student loans, substitutes for retirement savings, substitutes for healthcare insurance, etc., etc. When the economy and financial markets begin to recognize that the Government will have to default on these entitlement commitments and possibly even the national debt, there will be a cascade of defaults on much of the total U. S. debt structure ($60.1 Trillion source www.usdebtclock.org) and a multitude of personal and corporate financial crises will occur.
USAPonzi is 1000X larger than Enron Fraud!
While the Enron fraud resulted in one of the largest corporate bankruptcies in history it is dwarfed by the size of USAPonzi. Enron at it's peak valuation had a market cap of over $60 Billion, 21,000 employees, and thousands of investors. The investors lost all of the equity value. The employees lost their jobs, their equity holdings in their Enron stock, and their healthcare benefits. Many of the employees were even restricted from selling their stock as the stock price plummeted. While several of the senior management were complicit in the fraud scheme, some of the senior managers and board members claimed to the very end that they did not know about the fraud.
It is for this reason that I am convinced that the Federal Government must convert to GAAP accounting so that all of the principals in the Government have no excuse for not recognizing the criticality of the problem that they have created over the last 45 years. Also the citizenry must be made fully aware of the problem so that they can come to accept the changes that must occur to get our Government on a sustainable fiscal path. Even though everyone in Congress should be aware of what is going on, there must be communal acceptance of just how serious the fiscal problem is for the United States.
While the Enron fraud affected a lot of employees (21,000) and thousands of investors the bankruptcy was essentially a total loss. Loss of equity. Loss of jobs. Loss of retirement funds. Loss of heathcare coverage.
The result of the imploding of USAPonzi should not be a total loss for everyone involved but it will likely have dramatic impact on most of the 150 million or so people that will be directly touched by the problem and it will have a significant impact on everyone else. Many jobs will be lost; many people will see reduced, delayed, or even total loss of social security benefits; many people will see reduced pension payouts; and many people will see reduced healthcare and other benefits.
USAPonzi is more than 3 orders of magnitude (1000 times) larger than the Enron fraud since we are talking about $60-70 Trillion in present value of unfunded liabilities that have been accumulated over the last 45 years as compared to a bankruptcy of a $60 Billion market cap company.
That is why I say that USAPonzi is Enron Ponzi on steroids!
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