Current financial reporting practices often produce fictional and sometimes aberrant statements that are misleading if not outright fraudulent.  For example, consolidated financial statements are traps for the unwary, hiding and masking transactions through Byzantine group structures and idiosyncratic consolidating techniques.

Consolidation procedures require that inter-group transactions be eliminated when the financial statements of the group are consolidated, on the theory that this procedure eliminates transactions between the group that are not at arm’s length and which may in fact be shams. But consolidation accounting has another, less obvious yet insidious result – it purposely conceals and buries subsidiary information within the group's consolidation, hiding both the enlightening and damaging aspects of subsidiary performance within the whole.

Consolidation accounting purports to represent the economic activity of a group of legally separate and unique entities under the fictional mantra of the group, relying on economic form over legal form and financial substance. They conceal data that might normally be available to users of financial statements, and may serve to hide data from shareholders and creditors that is damaging or otherwise disparaging.

Data not found in unconsolidated financial reports mysteriously appear in consolidated statements under the guise of economic substance, yet bear little relation to real-world substance and the individual, disaggregated accounts of the subsidiary. This theory of aggregation is contrary to the norms found in GAAP – that of full disclosure and careful consideration of an entity’s viability as a going concern.

Prevailing consolidation techniques ignore the legal and financial implications that the aggregated assets and liabilities are neither owned nor made available to the group. This group mentality encourages users and readers of financial statements to view the entities of the consolidated group as virtual branches of the parent, again creating a dangerous fiction rendering the financial statements less meaningful. The grandest of these fictions, though, is the assumption engendered by consolidation accounting that profits and losses of the subsidiary entities will pass through to the parent entity through dividend payments.

Our financial reporting system is under siege as never before. Corporations are under intense pressure from shareholders to meet or exceed earnings targets. Globalization continues to relentlessly compress profit margins. The response from many companies has been dramatic: radically reduce expenses by slashing services, wages and benefits, raise prices whenever possible, and employ accounting gimmicks and sleight-of-hand to manipulate earnings whenever these measures fall short.

These gimmicks, some quite elaborate, have resulted in a string of accounting failures and corporate scandals. Accounting failures have become rampant and more pervasive, undermining the credibility of the accounting profession and the inherent reliability of the financial reporting model as an evaluative tool in shaping investor confidence and awareness.

The financial statements, which include both quantitative and qualitative information, purport to transmit the financial data of an entity or group of entities into a prescribed format that stakeholders of that entity can use as a means of evaluating the financial health and viability of that entity. Financial statements must be able to accurately and faithfully convey the economic substance of a transaction, over a period of time, and as of a given date.

Financial information presented in these statements must be capable of accurate comparison to financial statements of other entities. These other entities may or may not be within the same industry as the target company, and the financial statements must convey the economic substance of the transaction rather than merely the economic form of it.

In a sign that the looming pension battles continue unabated, the New York Times reported, here, that the Securities and Exchange Commission accused the State of New Jersey of securities fraud and claimed that it had not been properly funding public worker’s pensions, while claiming it had. The SEC settled its suit with New Jersey by issuing a cease-and-desist order, and no penalties were imposed.

The SEC claimed that from 2001 to 2007, New Jersey claimed to have set aside funds to pay for pension benefits, when no such funds had been made available or earmarked. According to the SEC, New Jersey engaged in an accounting fiction to make it appear that the funds existed. The SEC also claims that this accounting illusion allowed New Jersey to sell $26 billion worth of state bonds to unsuspecting investors, who were never made aware of the magnitude of the state’s pension troubles.

New Jersey’s public pension fund is one of the largest in the country, and its chronic underfunding can potentially undermine future budgets by requiring significant redistributions from the operating budget to service its pension obligations. According to the SEC, the state treasurer repeatedly certified that the pensions were being funded according to the plan, which was never true. Interestingly, though, the SEC chose not to pursue charges against the treasurers who certified the misstatements or other professionals and auditors who reviewed them.

Balance sheet fiction continues unabated, as evidence mounts that banks are creating bogus loan modifications to avoid having to write down loans and destroy capital.  

A recent article in the Wall Street Journal, here, highlights how accounting manipulation has increasingly become the tool of choice for dealing with a souring economy. Regulators, the Federal Reserve, the Treasury, and those with clearly vested interests have largely failed in their efforts to stimulate the broader economy. The one remaining tool in the toolbox, though, remains their most potent: create more fiction and re-write those facts which are inconvenient.

“Extend and pretend” has become de rigueur at banks and other financial institutions, financial sleight-of-hand which masks bad loans by purportedly modifying loan terms or providing repayment assistance. These modifications prevent the need to immediately write-down the loans or fully reserve for them. By forestalling these write-downs, banks avoid further destruction of their capital positions, which have been decimated by the economic firestorm.

Many of these loan modifications are shams, and are not designed to protect the commercial project’s viability. Instead, these bogus loan modifications ensure that banks maintain the loan as performing assets and prevent further weakening of their capital.

As the FDIC grapples with an uncertain economy, spurious loan modifications and the fictitious balance sheets they create may purposely delay efforts to close many of the 1000 or so troubled banks that are projected to be shuttered by the FDIC in the next few years. Efforts to delay these closings will, in turn, postpone the FDIC’s own financial Armageddon and taxpayer bailout. 

The bankruptcy examiner’s report in the bankruptcy of Lehman Brothers is a portrait of accounting manipulation and fabrication that stands next to Enron as the epitome of structured financial statement fraud.

Anton Valukas, of Jenner & Block, discovered Repo 105 while investigating Lehman’s collapse and detailed its use in his report, here. Repo 105 was the artful term used to denote the accounting device through which Lehman manipulated and managed its financial statements, which involved temporarily removing billions of dollars of assets from Lehman’s balance sheet at the end of each quarter.  This gimmick reduced Lehman’s leverage ratios, which were crucial to maintaining its required favorable ratings from the principal ratings agencies, and ultimately, to maintaining investor and counterparty confidence.

Lehman ultimately failed for a variety of reasons, including its increasing inability throughout the crisis to securitize and distribute its subprime mortgage originations and its countercyclical growth strategies of using its own balance sheet to acquire assets for long-term investment. These proprietary investments were principally concentrated in three areas: commercial real estate, leveraged loans and private equity. Most of these asset areas would soon implode as the financial crisis expanded.

These countercyclical investment strategies “consumed more capital, entailed more risk, and were less liquid than Lehman’s traditional lines of business.” Ultimately, as the result of these investment strategies, Lehman desperately needed to raise cash, was unable to sell most of these highly illiquid investments at desirable prices and was forced to turn to massive accounting manipulation to temporarily reduce its balance sheet “solely for the purpose of the firm’s public financial reports.”

The US housing market remains on federal life-support as recognition of the government’s housing liability will wreck its balance sheet

If there was ever any doubt that the US housing market was being artificially supported by the federal government, new statistics dispel this. A recent Bloomberg article, here, highlights how dependent the US housing market has become on federal assistance.

Fannie Mae and Freddie Mac, already financial wards of the state, may ultimately require $1 trillion dollars in federal bailout funds. This sobering statistic belies the very notion that the US housing market operates as an efficient, free-market enterprise, and that housing values are based on arms-length transactions.

The fact is, the housing market is currently anything but arms-length or free-market. Gross price valuation distortions have occurred within many asset classes in the last 10 years, including commercial and residential real estate. These distortions occurred for many reasons, but were primarily due to the near freefall of credit standards that now threaten our banking system. Easy money distorted prices, and now threatens the survival of hundreds, if not thousands, of banks.

Fannie and Freddie own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, and have sold $1.4 trillion in mortgage-backed securities to the Federal Reserve and the Treasury Department since the crisis began. The liabilities assumed by the housing giants remain off the federal balance sheet, an accounting fiction that grossly underestimates the government’s long-term debt exposure.

Michael Burry, who accurately predicted the housing calamity long before anyone else, offers insight into the behavior of crowds, and those that move against them.

Michael Lewis' article in Vanity Fair, here, is a short tease for his new book, The Big Short, which exposes how Michael Burry, a hedge fund manager, accurately predicted the housing debacle far in advance of the actual crisis. The Vanity Fair article reveals how Burry single-handedly outmaneuvered Wall Street’s elite, and how this success has not ingratiated him to those he took to task.

Burry, a Stanford educated physician, is undoubtedly very smart, but this is not why Burry was able to see what others could not. It is Burry’s questioning, contrarian nature that led him to perform substantial due-diligence into an assumption that others had taken for granted: that housing was on an epic, sustained run that would never cease.

Burry’s story is a tale of two unique, if interrelated, phases. The first phase involved Burry’s tenacious slog through a thicket of documents, prospectuses and textbooks, looking for clues to the impending disaster and performing bank credit analysis on the home loans that he was analyzing, the same analysis that should have been performed by the issuing banks, but wasn’t. The second phase, convincing Wall Street to create financial products so that he could short the market, was pure genius.

Michael Burry’s analysis of the housing market and his conclusions are due primarily to his dogged due-diligence, pure and simple. This effort was nothing short of herculean in scope but otherwise unremarkable and tedious, and was the product of Burry’s tireless review of thousands of documents. Once completed, though, this due-diligence provided Burry the platform for the unshakeable faith in his ability to detect patterns and draw conclusions from within the housing bubble, and ignore the conventional and usually mistaken wisdom of crowds.

A recent study by three University of North Carolina researchers indicates that market short sellers profit from their enhanced ability to discern publicly available information, not from market manipulation or insider knowledge.

Common wisdom is that short sellers, those market participants attempting to capitalize on the misfortunes of individual stocks, manipulate or shape negative information to their benefit. The study, reviewed here in the New York Times, and published here, reveals that short sellers are merely very astute and perform a very high level of due diligence. These "informed traders" do not merely time the markets and information, and therefore, obtain unfair advantages over other market participants. Rather, short sellers perform effective due diligence and often prognosticate future failure or scams.

The researchers looked for evidence that short sellers' informational advantages were due to timing, and looked for evidence of abnormal short selling ahead of news events in the U.S. over the 2005-2007 period. They found no such patterns, and noted that the "ratio of short sales to total volume is nearly constant around news events." The researchers actually found that "there is a significant increase in short selling AFTER the news event" which indicates that the short sellers are trading on publicly available information.

A profound essay suggests that empires operate somewhere between order and chaos, and there comes a moment when great empires can be collapsed by seemingly minor disruptions.

Niall Ferguson, the Laurence Tisch Professor of History at Harvard University, has written a profound analysis of the destruction of empires for the journal Foreign Affairs, reprinted here. Ferguson posits that an empire's slide into chaos is abrupt and disruptive, rather than gradual and cyclical, as traditionally thought.  

Historically, scholars seemed unified around the notion of gradual decline and phased transitions:

1. A series of five paintings by Thomas Cole, which hang in the New York Historical Society, depict the fall of empires as a process moving through five stages: lush wilderness, a nascent agrarian idyll, an opulent merchant society, destruction from invading armies, to collapse and desolation in abandoned land.
2. Historians Giambattista Vico, Oswald Spengler, and Arnold Toynbee share a common vision of destruction as seasonal and rhythmic. Paul Kennedy’s The Rise and Fall of the Great Powers discusses the phenomenon of “imperial overstretch”, the notion that great powers overextend themselves, economically and militarily, and create the very seeds of their destruction.
3. Similarly, anthropologist Jared Diamond proposes a “green” theory of collapse: that empires destroy themselves by abusing their natural environments. Ferguson notes that Diamond falls prey to the same blunder that traditional historians have made, that whether the cause of collapse is economical, cultural or ecological, it occurs over a protracted period of time, often centuries.
4. The decline of the Roman empire has been attributed to long-term, collective failures that converged to cause its collapse.
5. Protracted decline prevents leaders from making changes, as the pain of making immediate and often costly changes is too high when contrasted to the alternative, leaving these issues to future generations to resolve.
6. The threats facing the United States are often characterized as long-term in nature, the “slow march of demographics”, the economics of an aging population that will eventually overwhelm economic sustainability.

Ferguson suggests that the cyclical nature of destruction as a theory of empire collapse is fundamentally flawed. Empires are complex societies, delicate social, cultural and economic systems that operate fluidly, organically, and in a state of delicate stasis. Sudden, often small events or circumstances, such as those described by Nassim Taleb in The Black Swan, can disrupt this equilibrium and create a crisis of such magnitude that the entire organism collapses.

It is these “proximate triggers” that we must be concerned about, that can cause wide-spread conflagration and destruction of complex systems. Small inputs to these systems can “produce huge, often unanticipated changes – what scientists call the amplifier effect.” “When things go wrong in complex systems, the scale of disruption is nearly impossible to anticipate.”

State pension funds are significantly magnifying risk and manipulating their expected rates of returns in order to reduce massive shortfalls between actual pension funds on-hand and expected pension liabilities to their retirees.

Following the Pew Center's Trillion Dollar Gap report on the pension crisis, The New York Times reports, here, that states continue to purposely distort their expected rates of return to prevent their already large pension funding shortfalls from growing steeply. Significantly, states are also concentrating greater portions of their assets in a riskier range of investments, such as commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing in an effort to seek higher returns.

The outright inflation of expected rates of return on pension assets, often pegged at over 8 percent, allows governments to diminish their annual cash contributions to the plans, but ultimately succeeds only in deferring the pain to later years. The fiction of inflated returns on pension assets temporarily closes the funding shortfall and allows governments to ease their current budgetary constraints, but fails to address the fundamental urgency of the crisis: that pensions and retiree health care benefits are grossly underfunded.

A trillion dollar gap exists between states' pension and health care promises to their current and future retirees and the funds on hand to pay for these liabilities.

Taxpayers have, for decades, been induced into believing that unfunded pension plan increases were painless methods of increasing employee pay, especially pay for unionized workers.  Deferring the pain has left state and local governments with a massive, unfunded liability, though, and could bankrupt many state governments.

The report, published by the Pew Center on the States highlights the chasm between the promises made to government employees throughout the last three decades and the stark choices that will have to be made to pay for these benefits in the coming decades. These choices will exacerbate tensions between state government stakeholders, their citizens and employees.

The gap is roughly divided into two benefit components, pension costs and health care benefits. These benefits will increase steeply over the next few decades and will burden states and local governments with very difficult choices, namely, whether to dramatically raise new revenue by increasing the tax burden or slash services to their constituents, or a combination of both.

Local governments and real estate trade groups acknowledge that they are extremely worried about the inevitable withdrawal of federal assistance from the US housing markets.

The New York Times, reports here, that cities hit hardest by the collapse of the real estate bubble face significantly more distress in the coming years, as the federal government gradually removes the massive subsidies that have prevented a complete collapse of the residential real estate market, and with it, the economy. To the extent that the real estate market is functioning at all, it "is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit."

Notably, that aid has included the following:

1. The Federal Reserve has purchased over $ 1 trillion in mortgage securities to provide liquidity to the mortgage markets. These purchases have also forcibly and artificially pushed down mortgage rates. The scope of these purchases is unprecedented.
2. The Federal Housing Administration insures loans from buyers that have provided only minimal down payments. Studies note that buyers having little "skin" in the housing game are the first ones to walk away from their properties.
3. The first time buyer home tax credit, which is set to expire in the spring of 2010. This credit has merely cannibalized sales from one period to another, as buyers attempt to take advantage of the credit. The net effect of the expiration of this credit will be that future sales will dip by the same number of sales that were driven by the tax credit. Essentially, the tax credit has robbed sales from future periods to artificially inflate the current period. These are little more than timing differences.

Scott Rothstein's mess appears to deepen, as the largest Ponzi scheme ever attributed to a US lawyer increasingly appears to involve the law firm partners.

The wreckage of the law firm appears to have ensnared many of the partners, as the Miami Herald reports, here. The lawyers for the bankruptcy trustee, Charles Lichtman and Paul Singerman, allege that many transactions involving the partners were fraudulent and seek to recoup those amounts on behalf of the creditors and the bankruptcy estate.

Examples of alleged fraudulent activity by the partners include:

1. The movement of firm funds over the past four years through "the systematic trading of checks with the law firm and payment of third parties with law firm funds".
2. $475,000 in loans to partner Russell Adler, who purchased a New York apartment with his wife, just two months before the collapse of the Ponzi scheme.
3. Partner Stuart Rosenfeldt charged $1 million of jewelry to his firm-issued American Express card to pay for 72 pieces of jewelry for his wife, including home furnishings, clothes, vacations, restaurant meals, exotic reptiles, etc.
4. Rosenfeldt also transferred at least $690,000 in purported loans or salary payments to his wife on 30 separate occasions.
5. Many of the partners received hundreds of thousands of dollars in bonuses in 2008, and immediately contributed the funds to the GOP presidential nominees John McCain and Sarah Palin.
6. Rosenfeltd and partner Steven Lippman "typically deposited their [law firm] loan checks and then quickly turned around and disbursed the money back to the firm".
7. Rosenfeldt also used some of his "$9 million in loans to write a check for $61,500 to Kendall Sports Bar", in which Rothstein had in interest with club owner Stephen Caputi.
8. The law firm loaned Lippman almost $9 million, who wrote checks to third parties, including Kendall Sports Bar, directly to Rothstein, to Banyon, the largest Rothstein investor, and to Albert Peter, a business partner of Rothstein's.

Housing has been in a death spiral for a few years, and the latest evidence suggests that government support is the only thing keeping the housing market from complete collapse.

Facts are facts, and the fact that housing has been on government sponsored life-support for a few years has been under-reported and ignored. The housing marketplace has not improved, and is being kept alive only through massive government intervention and systemic support. As this support is gradually withdrawn, the housing market will continue to weaken. The pincer-like effects of continuing unemployment and increased foreclosure activity will multiply the effects of the gradual withdrawal of government aid.

The New York Times, reports here, that the nationalization of Fannie Mae and Freddie Mac fifteen months ago has resulted in massive government subsidies to these organizations. Fannie and Freddie, as they are commonly known, are stockholder-owned corporations chartered by Congress as government-sponsored enterprises (GSE's). In September 2007, these GSE's were placed into conservatorship of the Federal Housing Finance Agency. As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.

The controversy over Fannie and Freddie is fueled by the fact that the government has conveniently omitted their massive liabilities, estimated at nearly $5-8 trillion in debt and guarantees, from the Federal government's financial statements. Recording their liabilities on government financial statements would dramatically increase gross federal liabilities and further weaken the US dollar, as sovereign investment funds would lose faith in the U.S.'s ability to repay these massive debts.

Republicans have prevailed in their efforts to rein-in future spending, as deficit-saddled US governments will find it nearly impossible to increase spending for at least the next 10 years.

The New York Times reports, here, that the Obama administration has released startling budget predictions that anticipate massive budget deficits, through at least 2020, which will render the United States nearly impotent in its ability to create new domestic initiatives to alleviate our current crisis or develop new social programs. These deficits will strangle future governments' ability to initiate new programs or provide aid to stagnant states or industrial sectors.

Starving the Beast, which refers to Republican's fiscal policy of using budget deficits via tax cuts to force future reductions in the size of government, may ultimately prevail. Bush-era tax cuts, coupled with massive spending created by 2 wars, will result in budget deficits far into the future. These deficits have been largely funded by the Chinese, who have recently demonstrated their anxiety over the situation by admonishing the US government repeatedly.

While Starving the Beast was widely discounted and ridiculed as impractical or unsustainable throughout the Reagan and Bush era, it appears that the massive budget deficits created by the wars, coupled with the Bush era tax cuts, will have the same practical effect throughout the next decade.

The resulting deficits will largely succeed in choking future administrations, including Obama, from increasing or initiating domestic spending programs, especially while America fights a 2 front war. What are the practical implications of this? Future administrations, and Congress, will have to either make drastic cuts in expenditures or raise taxes, or a combination of both.

The Florida Bar has initiated investigations of 35 of Scott Rothstein's partners, investigating trust account misdeeds and misappropriations.

The Miami-Herald has reported, here, that Florida Bar investigators are focusing on the equity and non-equity partners of the failed firm, which served as the foundation for Scott Rothstein's $ 1 billion Ponzi scheme, one of the largest in Florida history, and whether any of the partners misappropriated client trust funds or otherwise lied about the status of those funds.

That the investigation has turned to Scott Rothstein's former partners is unsurprising, given the massive nature of the Ponzi scheme that unfolded at their feet. Without concrete evidence of complicit behavior, investigators are likely wielding the only tool at their disposal: the trust accounts and the annual certifications that occur when lawyers renew their Florida Bar memberships. The highly technical focus on these largely perfunctory certifications is evidence that investigators have been unable to directly tie partners or other attorneys to the massive, $1 billion Ponzi scheme, and are seeking creative, if technical, links that tie these attorneys to the fraud.

Frank Rich of the New York Times writes, here, that the narrative of our decade has been defined by how easily we've all been duped by the con-artists in our midst. Collectively, Americans have become inured to the deception that surrounds our social, commercial, cultural and economic relationships.

Our vacuous minds have purposely ignored the fraying of these relationships and the resulting impact on our country because acknowledging this reality would require a painful acceptance of the cancer that is slowly consuming our society.

Rich notes that we have witnessed a decade of scam, fraud and misfortune in the likes of Citigroup, Fanny Mae, Ted Haggard, Enron, Madoff, Drier, housing, Stanford, AIG, Barry Bonds and Iraq, to name a few, and that Tiger Wood's fraud is merely the culmination of this era. Tiger's demise is all the more pronounced, writes Rich, because of his "sham beatific image, questioned by almost no one until it collapsed".

Rich emphasizes, though, that it is not Tiger's hypocrisy and our collective disappointment at yet another fallen hero that is remarkable, but the canyon-like gulf between Tiger's public image as a "paragon of businesslike discipline" and his "maniacally reckless life". A worse breach, though, reveals the lie of Tiger's near-obsessive dedication to building trust as the cornerstone of his public image, and also of Tiger as the paragon of corporate resoluteness and self-discipline.

Trust and its destruction have defined these frauds. Tiger purposely cultivated an image of trust and self-discipline, and ultimately became Accenture's standard bearer. Similarly, Enron, AIG, Fanny Mae and Madoff collectively hyped trust and reliability as the cornerstones of their businesses. Rich notes that "We keep being fooled by our leaders in all sectors of American life, over and over" and that after Enron, our financial leaders and government regulators should have been more careful in monitoring our financial landscape and critically analyzing the developing housing bubble.

South Florida is awash in illegal money, and even federal investigators can no longer ignore this area as the center of corruption.

Miami continues to uphold its well-earned reputation as being the capital of vice and corruption, as the Herald writes, here. Miami is the epicenter of Medicare corruption, yet again, and has become the focus of federal efforts to reduce fraud. According to the Herald, Medicare "paid $520 million to Miami-Dade healthcare agencies for treating diabetic patients, more than what the agency spent in the rest of the country combined". Think about that, Medicare spent more in Miami-Dade than the rest of the country!

The Herald noted that the county is home to just 2% of the nation's diabetic patients eligible for Medicare. The assessment that Miami-Dade represents a disproportionate amount of medicare and health-care fraud throughout the United States has, incredibly, taken federal investigators decades to reach. But, there's more: 1) "Miami-Dade providers accounted for over half of the $1 billion paid out nationally in 2008 for the treatment of homebound patients with diabetes and related illnesses"; 2) "The county's percentage of diabetics is lower than the rate of in other Florida areas with heavy elderly populations; 3) "No other part of the country…comes close to Miami-Dade, which is dubbed the nation's healthcare fraud capital; 4) "Medicare spends more than $15 billion on all home-care services nationwide, with one of every $15 spend in Miami-Dade"; 5) "Medicare's average cost for each home healthcare patient with diabetes runs $11,928 every two months…that's 32 times the national average cost of $378".

Allen Stanford's Ponzi scheme is a stark reminder of our collective inability to discern wisdom from crowd behavior, especially when making financial decisions.

The Miami Herald published an expose, here, of Allen Stanford's final, desperate days to prop-up Stanford International Bank, in Antigua. Stanford Bank had sold $7 billion worth of fake certificate of deposits to unsuspecting investors, including the Libyan government, which was defrauded of nearly $140 million. The well-researched story, covering nearly 2 full-spread newspaper pages, details Stanford's increasing desperation and failed attempts to attract additional investors to his Ponzi scheme in its final days.

In searching for a theme, a unifying theory of Stanford's fraud, it became apparent that there was none. Stanford's fraud was brilliant for its massive scale, its sheer audacity and the garish opulence of Stanford's monthly personal expenditures, but sophisticated it was not. In fact, Stanford's scam was frighteningly simple: as long as sufficient investors were lured into depositing their savings at Stanford International and the stock market continued to escalate, Stanford and his group could continue to live extravagant lives of leisure and deception. The fraud would continue as long as inflows of funds, or investors providing new sources of cash, exceeded outflows of funds, or investors redeeming their certificate of deposits. As in Bernie Madoff's fraud, which likely occurred for 3 decades, Stanford's fraud, which occurred over a decade, would collapse as soon as this dynamic was inverted, or outflows representing redemptions exceeded investor inflows.

Societe Generale recently published a white paper that purports to be a "worst-case-scenario" of economic predictions, but which ultimately makes a persuasive case for an economic meltdown akin to that experienced by Japan throughout its "lost decade" of the 1990's.

The report is primarily aimed at presenting its clients with practical financial guidance should this scenario prevail, but provides extensive historical and analytical comparisons to the current economy and Japan's lost decade. Among the striking comparisons and economic features of both the US and Japanese crises, these are the most compelling:

1. Ballooning public debt: "Debt is the main constraint on US GDP growth, but reducing the excessive debt burden is likely to stall economic activity." Lower government spending will limit consumption and GDP;
2. End of bear market rally: The rally was "fueled by restocking and fiscal stimulus". Normal consumer spending will be unable to pick up the slack;
3. Deflation is the real immediate risk, not inflation: "The printing of money by western economies has been used only to replace the credit destroyed";
4. Banking crisis;
5. Property bubble: the largest asset bubble in the nation's history spawned massive, artificial consumption which will likely not be replaced;
6. Corporate debt crisis;
7. High valuations going in;
8. Stock market crash;
9. Low interest rates.