Testing the Limits of Imagination: If Greece is Fudging its Debt, MOST CERTAINLY U.S.A. is Too!

So it turns out corporations are not the only ones fudging their balance sheet. Entire nations have joined that list. A recent Der Spiegel report outlines that the Greece's government not only knowingly excluded certain debts from the national debt tally, but also used derivatives structured by Goldman Sachs to mask the true extent of its budget deficits. According to the Der Spiegel report:

Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn't exceed 60 percent.

The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat [the European Union's statistical office] consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

"Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products. Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

Of course Greece is "small fry" in this global game of chicken with rating agencies, debt and currency investors. Imagine the extent of fudging that goes on in the maestro balance sheet fudgers (a.k.a. U.S. banks) home base the U.S.A. Consider this little fact: the United States government routinely accounts for Fannie and Freddie activities as off-balance sheet. According to Reuters:

The ultimate off balance sheet vehicles are the GSEs themselves: Fannie, Freddie and Ginnie Mae (which securitizes FHA loans). Though backed by taxpayers, the nearly $5.0 trillion worth of mortgages they guarantee aren’t included on Uncle Sam’s balance sheet.

And this is stuff we know off. Like Greece, Bernanke the currency imagineer's "ring-leader" has many such derivative and currency swap skeletons in his closet, that he is trying his best to not divulge. Not to mention his secret deals with other central banks (primarily the U.K's) to prop up U.S. Treasury purchases at the now weekly auctions.

Now one reason why the U.S. Government has not been tough on the very banks that brought down the global economy, is because they are hand in glove with each other. It is a case of "you scratch my back and I will scratch yours". Bernanke needs Goldman Sachs, JP Morgan and the rest of Wall Street to syndicate/bid for his colossal $1+ Trillion of annual U.S. Treasury auctions. He needs their support to "hide" who actually bids at these auctions.

We know that last year out of the $1.5 trillion U.S. Treasury auction, foreign central banks purchased only $300bn. The Fed purchased the rest through their quantitative easing (QE) operations. As the Fed's QE operations end in March 2010, it will be interesting to see who bids on the next batch of $1 trillion of U.S. Treasuries. Bernanke for sure does not want you to find out. The banks are obviously complicit in the U.S. government's efforts to hiding trillions in liabilities. Were it not for all these gimmicks the U.S. Dollar would have collapsed by now. No wonder Goldman's CEO thinks he is doing God's work.

And regulators and the Fed do their part by turning a blind eye to the banks shenanigans. Consider the most recent.

According to Reuters Wells Fargo alone has over $2 trillion in off balance sheet loans. That is Trillion with a "T". And this is just Wells Fargo...add in Citigroup, JPMorgan and other Wall Street banks and the numbers will soon crash even a supercomputer. (Note that for a bank, the loans that it makes are classified as "assets", since the bank earns interest income on them). Of course when a bank makes a loan it is required to hold regulatory capital (Tier 1 and Tier 2 capital) against those loans.

Now new accounting rules that went into effect on January 1, 2010, require banks to consolidate all off-balance sheet loans and bring them back on their balance sheet. Of course that would require banks to raise billions in new regulatory capital. For example if Wells Fargo were to consolidate the entire $2 trillion of off balance sheet loans, it alone will need to raise $200bn in equity to meet a 10% capital ratio requirement. Now why would Wells Fargo, a masterful fudger, go for a $200bn capital raising headache? It is much too clever a bank for that.

According to Reuters, with a little bit of "hope" mixed in with plenty of accounting "imagination" Wells Fargo has consolidated only $10 billion out of the $2 trillion. Hey Presto! Problem Solved! Or at the very least brushed under the taxpayer carpet. When s**t hits the fan on the off balance sheet loans Wells Fargo will get bailed out.

In conclusion, the one thing this crisis is doing is testing the limits of imagination. The bankers have put even Disney's "imagineers" to shame. At this point we are in the midst of a global financial crisis of unimaginable magnitude. Were it not for all the accounting and derivative tricks, we would have seen a global currency collapse by now. However accounting tricks can take you only so far. The world continues to be a hair's breadth away from systemic collapse.

Which is why we reiterate our older recommendations: The goal for everybody is to become "self-sufficient" - own alternative currency (gold and silver) that cannot be printed away. (Yes Bernanke will try his level best to push gold down this year, but that is all the better, he just lowered your purchase price). Buy a farm or plan a kitchen garden. Keep excess food supply for emergency. Although we are staunchly against guns, in this crisis we are breaking that rule. Buy a gun. You may need it for self-defense.