Zombie love, true sales and why “Too Big To Fail” is really dead via Housingwire

Simply stated, the largest commercial banks became “too big to fail” in large part because they used non-bank vehicles to increase leverage without disclosure or capital backing. Their intent was to reduce the apparent capital needs of banks. Banks’ abuse of non-bank vehicles to issue subprime securities and hide capital deficits was facilitated by legal counsel, auditors, rating agencies and regulators, who all pretended that four centuries of legal precedent regarding financial fraud had somehow never occurred. Until 2011, FDIC rules did not preclude that abuse and even sheltered banks from need to disclose it to auditors and investors.

The failure of Lehman Brothers, Bear Stearns and most notably Citigroup all were attributable to deliberate acts of securities fraud whereby assets were “sold” to investors via non-bank financial vehicles. These transactions were styled as “sales” in an effort to meet applicable accounting rules, but were in fact frauds that must, by GAAP and law applicable to non-banks since 1997, be reported as secured borrowings.

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