Enron was the canary in the coal mine

Hey, the more commentaries I read, the more Ralph Nader comes across as one we ought to have listened to; maybe I simply should vote for Nader, eh! Here is Bethany McLean, who is a contributing editor at Vanity Fair, and co-author of The Smartest Guys in the Room:

After Enron's implosion, everyone talked about how important it was to be able to understand how a company makes money. Now raise your hand if you understand how a modern financial services firm makes money. No hands? The truth is, there is no way to understand. These companies are as opaque as Enron. Just as Enron had off balance-sheet vehicles - SIVs - that allowed it to book earnings and hide debt, Citigroup and other financial institutions had structured investment vehicles that did the same. Indeed, Citigroup had to take almost $50bn of SIVs back on to its balance sheet after they ran into trouble. It would be nice if the accounting rule-makers would grasp this basic tenet: if they want to hide it, we want to know about it.
Of course, SIVs are only a small manifestation of the deeper problem, which is the evolution of financial engineering into a dark art. Enron now seems like the canary in the coal mine. After its bankruptcy, Steve Cooper, who was in charge of restructuring it, told the Wall Street Journal his task might leave him "in a wheelchair and drooling" due to the complexity of its financial structures and the "unbelievable amount of debt accumulated around the company". Doesn't that sound like our entire financial system?
Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn't afford the payments into sleek new instruments called RMBS and CDOs.

"The Martingale" on Wall Street

Here's how to make money flipping a coin. Bet 100 bucks on heads. If you win, you walk away $100 richer. If you lose, no problem; on the next flip, bet $200 on heads, and if you win this time, take your $100 profit and quit. If you lose, you're down $300 on the day; so you double down again and bet $400. The coin can't come up tails forever! Eventually, you've got to win your $100 back.
This doubling game, sometimes called "the martingale," offers something for nothing—certain profits, with no risk. You can see why it's so appealing to gamblers. ....
The carefully synthesized financial instruments now seeping toxically from the hulls of Lehman Bros. and Washington Mutual are vastly more complicated than the martingale. But they suffer the same fundamental flaw: They claim to create returns out of nothing, with no attendant risk.

That was a pretty good piece by Jordan Ellenberg. And, again, I was reminded of Ralph Nader's warnings about derivatives and the various games that these "financial experts" were playing with borrowed money.

Ralph Nader warned about derivatives

It was way back in the mid-1990s, I think, that I went to listen to Ralph Nader. This was in California--in LA. I had expected him to talk in the language of us mortals about corporations, environment, labor, .... Instead, he went all technical and it felt like I was in a graduate-level economics course. His focus was on derivatives and how they were being abused by Wall Street financial experts. The audience, not too large to begin with, almost fell asleep. But, it turns out that, as always, Nader was on target.
Unfortunately for him and for us, nobody paid any attention to Nader.
Then Enron happened. And even then nobody paid attention to the complexities in derivatives that these MBAs were concocting. The traders, on the other hand, started coming up with even more crazy schemes to essentially gamble with other people's money.
When Bear Sterns tanked last March--six months ago--that apparently still didn't wake up those who were supposed to safeguard the "public interest."
Oh well .... I guess I should feel better that if Congress passes a 700-billion dollar bailout, I will literally own a share of America's real estate--more than my own home that we pay for with blood, sweat, and tears!

9/26 update: Nader has a terrific commentary at Cockburn's Counterpunch. His postscript there is something that the "investor nation" should pay attention to:

Shareholders also have some work to do. They should have listened when Warren Buffett called securities derivatives a "time bomb" and "financial weapons of mass destruction.” The Wall Street crooks and unscrupulous speculators use and draining of “other people’s money” out of pension funds and mutual funds should motivate painfully passive shareholders to organize to gain greater authority to control the companies they own. Where is the shareholder uprising?