Are we living in a world of Lies?

It started in 2005, where housing market is booming, sub prime loans in demand, poor families issue a mortgage and gain 5 or more houses based on large borrowings. Securitisation is applied, converting mortgages to Mortgage Backed Securities and bundled them together accordance to credit ratings packaged to a Collateralized Debt Obligation. Sounds complex isn’t it? But, there’s only one thing that come out of my mind, what really happen? That make this sparks an economic crisis, and how investors provide wrong valuations to these securities and companies thinking that it will generate profits, solvency, growth and future business benchmarks, but at the end it’s a toxic investment, incur losses to everyone and companies went bankrupt.

There was a scene that shocked me, where Brownfield Fund bet against the market with the help of Ben to short Mortgage Backed Securities with AA ratings, and that scene where the Brownfield Fund successfully short the MBS, Ben claims that if they are right about the housing bubble and CDO toxic investment, this means that people will get unemployed, loosing pensions, businesses will go bankrupt and if unemployment goes up 40,000 people died. I just knew this, and when I research its somehow truthful, but it seems based on a metaphor because it only focuses on the raise of poverty and low medical expenditure to insure health for citizens, which may cause slow growth in life expectancy and may raise mortality.

Without a doubt that Investors was fooled and abuse in a fraudulent manner, such as in 2007 Lehman Brothers assets was $600 billion and Liabilities was $400 billion, with an excess of $200 billion as Net Asset Valuation which is large and can be use for further productive investment, and its Net Cash Flow was positive $6 billion with a WACC of  7% which is low, leading to high NPV and profits, but funny enough they went bankrupt because of low transparency and financial statement manipulation as those are not their actual liabilities and losses, hence they were supposed to experience a loss in cash flows and insufficient NVA result. Thus, many investors are fooled by Lehman Brothers thinking that the bank is solvent, financially productive, and financially sustainable, but its not.

I am surprise that how cunning those banks are to manipulate financial reports and CDO’s credit rating to fooled investors and it is not ethical. When I graduate from Northumbria in Business and Finance and I would like to work in a bank to be the savings, wealth and investment manager, and 10 years later to be the vice president of financial controller, and on that job I will try to make a difference, instead of caring about the bank and shareholder, I must also care on the customers and external investors on providing reliable and truthful financial information and advices, including ensuring viability, integrity, accountability and transparency applied to banks financial report, information distribution, services and financial valuations. This must be done with the objective to increase valuable reputation for myself and the banks, because from the event of 2008 financial crisis customers do not trust banks anymore, they see us as criminal, and it shouldn’t be that way.

This also leads to S&P and Moody’s credit valuation and corporate valuation, because if the corporation is valued as financially sustainable such as Lehman Brothers up there, the Credit Rating should be AAA or AA. This is fraud and ridiculous, signifying that these credit rating agencies do not care at all on the actual value of a company and just follow the market, such as if the market goes up means it’s a safe investment because people are in demand and financially supported, without actually investigate the company to see the actual earnings and losses, assets and liabilities and ethics. Hence, when I’m professional in the field of Accounting, Finance and Economics and have the position of Vice President in barclays, I will intervene to spread awareness and set new recommended rules to properly manage financial ethics and credit ratings to be truthful, meaningful and factual. This is important because I believe it will reduce fraud and able to achieve stakeholders’ satisfactions.

Looking at the present, I suppose that nowadays by experiencing this event we learn something right? We should not provide fraudulent activity and playing with someone else’s money for own benefit. Well, it turns out, we are still living in a fraudulent system! They are still repeating previous mistakes, such as currently there’s a bubble in the OTC derivative market focusing in CDS reaches to $10 trillion and CDO’s with $100 billion, looks good as the CDS can cover the CDO and default rates is currently decreasing to 1.2%:

(Are you kidding me? Who believe this? If you believe this, you’re doing something wrong…. I mean Global Det to GDP goes up 225% and default rates goes down? This does not make any sense)

When I found out about this, I immediately sold my risky investment assets, because I predict there will be a future financial crisis and its going to burden many investors and companies, because even though there high amount of CDS investment, in my opinion it does not mean that the bank have the money to cover CDO and loan defaults, as currently international active banks experiencing leakages and reducing in cash holdings from net profit losses, capital are flooded with debt, and a current stock market crash where big companies share prices are reducing on Black Tuesday thus signifying as illiquidity, insolvency and leading to divestment. Truthfully, I’m surprise that many of my colleagues and friends sees this as an economic growth, however in my perspective it’s not, it will be an economic crisis and I got the idea 1 year ago, and now many news media giving the information about future financial crisis more devastating than 1930s and 2008, not to mention the current black Tuesday where 600 points of S&P goes down and major companies share price drops drastically. I was happy that I was right, however I’m also worried about other people because if they lose their job and businesses this will be devastating.

From watching The Big Short, analyzing current facts about the banking system and corporate valuation is that we could not trust anyone, we need to put a minimum confident level, and we should be careful on what we invest and how we think independently on fiduciaries. Corporate Valuation technique and tools is a facade calculation because even though if the numbers are correct, it just shows a result what a company might be worth or will be worth, which does not mean at the future that the company will worth that much because such as Lehman Brothers a $600 billion worth of company and positive net cash flow reaches $6 billion just went bankrupt in a snap of a finger.

Personally, The Big Short was a suspenseful movie, you might not agree with this, but that’s what I felt when I learn the truth about the business and banking sector. I learn that not to always believe and relies on companies’ financial numbers and graphs represents by the company and credit rating agency because it might not be right and truthful. It also teaches me to always be independent on investing securities and to never invest on something I do not fully understand and something that seems ambiguous.

Furthermore, with all of this is explained, there’s one thing on my mind that we all should worry. In the future financial crisis, with many people become jobless, homeless and businesses went bankrupt. How should we prevent this from ever occurring again? And obviously banks will go bankrupt in a n economic crisis and should the government always issue a bailout? Or should they not? Some new information rises, such as the Basel 4 Regulatory requirement, but is it enough to prevent a future financial crisis? And if the government bailout banks how should we ensure they are performing ethical and care about their stakeholders including customers and investors? If they do not bailout the banks and the banks went bankrupt, obviously that means the end of our financial era because banks can transfer our money and keep our money secured.