We may be closer on this. I suspect S&P is motivated by greed like most players – which is a conflict in itself – but the catalyst may be incompetence as much as fraud.

I liken this to LTCM, where partners had their own money on the line for pure risk – Nobel prizes are no hedge for the poor judgement that is later explained away as a 20 sigma event – and no, I don’t believe in the 20 sigma event either.

I don’t know about fraud at Citi. I know that banks will stretch the regulatory capital rules just about as far as they can. I doubt that’s fraud. Maybe bad judgement in terms of the ultimate consequences – which amounts to stupidity in the long run.

I think the purpose of financial engineering is to slice and dice capital and risk into deceptively enticing morsels of expected return – maybe that’s moral fraud but probably not financial fraud.

Disgust is appropriate.

You’re one angry accountant. I have nothing against accountants but you just trashed your entire profession.

S&P AAA risk has nothing to do with accounting. Or lawyers! It’s about risk. That’s my point. S&P had a bad risk model and/or were conflicted in their relationships.

This is about financial engineering exuberance gone mad – not about fraud.

The baby of such exuberance was securitization itself, followed by derivatives, etc. etc. All designed to transfer risk.

The problem in this case is risk modelling that couldn’t measure up to the complexity of the instruments created – which by the way was EXACTLY the problem created in LTCM – and the only fundamental problem – NOT accounting or legal!

Enron on the other hand was accounting fraud!

The first time I heard about the SIVs my initial thought was: How, exactly, is this different from the “raptor” scams? But I assumed it had to be, because, hey, nobody would be so reckless as to try the same scam AGAIN so soon after the people behind the first one got caught.

Knowing Citi (at least, the post-2002 Citi)I seriously doubt the powers that be would have signed off on it unless they had a favorable opinion from someone — outside counsel, accounting firm, or both.

The real task for some enterprising reporter is to find out who those people where.

A couple of broader points on the context for all of this (but not to defend it):

What’s happened is a limiting case of the institutional risk in the whole idea of ’securitization’. I would extend securitization here to include more abstractly the entire sphere of derivatives. Securization and derivatives are all about transferring risk, mostly away from bank balance sheets.

These risk transfers are subject to the scrutiny of regulatory capital requirements. If risk is transferred the way it should be according to the rules, then banks are relieved of the capital requirements that would have underpinned those risks transferred out.

So this is is not so much about auditors and accountants per se as it is about the rules for minimum capital requirements, which are prescribed by the various Basle accords. Auditors and accountants serve as a check on the implementation of those rules, but they do not make the rules.

So this is all about risk and capital.

I don’t know how much of the put of the risk back to the banks is based on reputational obligation versus legal obligation. If its the latter, then it must be covered under capital reqirements. If its the former, then there really is a fundamental question about the treatement of that as a risk.

I’m not familiar enough with Sarbox to know whether it covers the issue of the accurate depiction of risk as well as the accurate depiction of financial results.