Kynikos Associates head James Chanos says banks knowingly booked inflated earnings when they sold the financial products that led to their downfall — and then those earnings wound up in bonus pools and lining bankers’ pockets.
"It's the heart of one of the greatest heists of all time," Chanos told Forbes.
Chanos says that by booking assets at a higher than market price, banks effectively reported earnings that never existed. Those earnings first went into a bonus pool that was paid out to bank executives.
“There’s no doubt in my mind that this is fraud,” Chanos says. “This was the bezzle.”
Collateralized asset-backed investments are segregated into tranches, the highest of which are considered safer than the lowest.
Chanos says that banks typically retained three percent to five percent as payment for constructing the product, and that sometimes those fees came from the lowest and most risky tranches.
"In many cases, the fee was a toxic tranche," Chanos notes. "They were immediately worth 30 cents on the dollar, but not priced that way."
Chanos believes guilty bank execs will never be prosecuted for their crimes because the Machiavellian web of how they created and sold collateralized debt and related financial products would cause any jury’s eyes to glaze over.
Charges for impaired loans rose in all customer groups and regions during the first quarter, HSBC Holdings reports.
“The statement was pretty terrible; the U.S. was much worse than we expected,” analyst Simon Willis told Bloomberg.
“HSBC remains pretty cautious and said there is limited appetite for borrowing around the world.”
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