THE INTERNAL MODEL

The double-entry bookkeeping and the hand plane

THE INTERNAL MODEL

The double-entry bookkeeping and the hand plane

By Andrea Cecchi 22/10/2020

Anyone who has a company or has a minimum of familiarity with balance sheet analysis knows very well how liquidity can be obtained with the simple trick of revaluation of inventory. Let's clarify this point immediately: in the honest management of accounting books, this is a legitimate and perfectly plausible step. It is the reason why all companies take inventory.

But when a comparative state balance shows a sudden surge in the value of merchandise, that's a sign to watch out for. Generally an external and independent auditing, assesses whether the estimates indicated are consistent with the market value of the goods or assets recorded in the assets of the company's balance sheet.

Double entry is indeed a magical tool. In this case, if you increase the value on one side of the balance sheet, on the other side you get spendable liquidity. All this done with a touch of a pen. The picture below shows the  inventor of this system, Luca Pacioli. A beautiful picture that’s almost scary.

Unfortunately, this practice, although widespread, is largely contained as the liquidity obtainable is discretionally disbursed by the bank which will decide whether to maintain or increase the credit lines granted based on its assessment. In fact, there is a well-defined limit within which certain accounting items can be favorably altered and therefore also a physiological limit of the cash availability obtainable with these accounting adjustments.

Well, these constraints and restrictions do not exist for the banks themselves when it comes to their balance sheets and their accounting, because banks have the INTERNAL MODEL.

What does internal model mean?

It means that the bank, in a totally legitimate way, can attribute the value of its balance sheet items in total autonomy. Generally it is an internal commission, appointed and dedicated to the specific role, which will determine at its own discretion how much an asset is worth in the balance sheet.

For example: the bank has granted loans that become bad debt because the debtors are  insolvent. Under normal circumstances, that would be a loss. But over the years, the banks have equipped themselves to transmute losses into assets. THE TRANSUBSTANTATION OF SHIT! I apologize if I used a sacrilegious term, but it is necessary to understand to what level of absolute megalomania the bankers have gone. An accounting trick that has made many managers rich and has kept the economic bubble alive and inflated beyond belief, that we must face and  suffer the deadly consequences.

The climax was reached with the well-known statement of the banker Lloyd Blankfein, when he declared “banks do the works of God”.

https://www.reuters.com/article/us-goldmansachs-blankfein-idUSTRE5A719520091108

What is God's work? to create from nothing! The banker becomes God, giver of life or death. The incarnation of the unscrupulous narcissism of one who has lost all faith.

The history of risk management, describes the progression of events that led us up to here. We understand how, from a small initial problem that was never solved but postponed - badly disbursed credit - we have now reached a dimension that is no longer manageable because it is amplified to the utmost extent - a colossal bubble of derivatives. Without going back to the derivatives topic that I have written about in my previous newsletter, we can simply say that the strategy adopted by the banks up to now has been one that is described as: extend and pretend .

Read a paragraph from this article from ilsole24:

"The Deutsche Bank crisis in the beginning of February reminded everyone where the real systemic risks lurk. The announcement of the losses and devaluations launched by the bank terrified the markets, bringing to light a very different reality from that told by Schauble . Deutsche, considered a super-hedge fund, has issued derivatives worth 75 trillion euros, 20 times the German GDP, and its current balance sheet shows 32 billion euros in high-risk derivatives and very high financial leverage: even a 4% decline in the value of assets could wipe out the capital of the German giant. For years, it has been keeping large quantities of toxic titles classified as level 3 in its balance sheet. That is financial instruments that cannot be given a price because they are not traded on the markets and cannot be compared to other similar products that are. At that point, the bank itself decides, through internal models and with a wide margin of discretion, what value to attribute to these titles.

The full article is available at this link:

https://st.ilsole24ore.com/art/finanza-e-mercati/2016-04-14/la-guerra-lampo-deutsche-derivati-074637.shtml?uuid=ACI1OS7C

Now that we understand what the internal model is, let's see what its consequences have been.

The article is from 2016, but I chose it for the descriptive effectiveness of that paragraph for which the author deserves a round of applause: it couldn't have been better described.

Unfortunately, despite the repeated signs of risk, the situation only worsened exponentially up to the progression of events that from September 2019, with the alarm of the Bank of International Settlements, led us to the current situation, that is: economic and political solutions agreed globally, to freeze the economy through lockdowns, aimed at the practical recording of counterparty adjustment accounting operations called THE GREAT RESET. It would be unthinkable to implement such a far-reaching maneuver without altering the normal conduct of economic life of the planet, because the plan envisages accustoming people to a new standard of living, worse than the previous one, but more corresponding to the modern needs of the Huxleyan “Brave New World”.  

These are maneuvers so complex and articulated that all the world efforts must be concentrated on being able to defuse or at least contain the explosion of the incalculable galaxy of sewage that nestles right into the connective tissues of all the subjects and economic operators of the planet

We can only imagine how gigantic such an operation must be.

When Enron went bankrupt, at the time the largest corporate bankruptcy in history, it is said that all the accounting books and all the folders containing the fraudulent history of the well-known energy giant, were kept inside building number 7 of the WTC, the skyscraper that accidentally disintegrated on September 11, 2001 without being hit by anything. Then came the QE and money was found for everyone. Unable to replicate the collapse of the buildings of 9-11 or the fire, to destroy all the documents of banks around the world, it seems that the most viable solution has been this synthetic pandemic.

Throughout the history of banking, crises have always happened. When the bankers understood that it was time to come to an agreement and give rise to new economic balances, they declared a "Bank Holiday", closed all the banks for a few days, and reopened  when the mutual accounts were settled. Now, instead of closing themselves, the banks have decided to close the entire world with lockdowns. The principle is the same, but the practice has changed. This is nothing personal. So we must not hold a grudge. Accounting and loss sharing only. For the banks we are just tax codes on which to attach a mortgage that otherwise could not exist, precisely because it is subject to the rules of double entry. We are just Xs on Excel sheets.

This is the progression that has brought us to where we are: the END OF CREDIT!

Since 2009, the so-called global recovery has been financed by an exponential growth in debt, but the output generated by the new debt has continued to decline. It means that every dollar or euro or other additional currency of debt fails to generate much in the way of positive value addition. As with the therapeutic use of any type of stimulating chemical, after the initial euphoria, the more you administer, the less the effect will be. Then there is also the fact of debt saturation and debt exhaustion. A central bank, even if it acts as a government entity, is in fact a private commercial body and operates like any other company. Like all companies, central banks and commercial banks are also looking for buyers for their product, and their product is debt, but they call it credit because it sounds better and sells better. Saturation occurs when those deserving of credit no longer want it, while those who want it are insolvent and cannot be further indebted unless the lender is ready to absorb the loss. Practically:

• Those who can access loans do not want to get into debt because they do not see investment opportunities worthy of being considered.

• Those who would like to borrow money and need it cannot do so because they are insolvent or cannot be financed due to low or no income and little or no capitalization.

Central banks cannot turn insolvent debtors into triple A creditors.

Nor does it magically transform those who are mired in anomalous debt into subjects capable of further borrowing at increasing rates. Credit cannot be pushed beyond the point where it begins to decline. "You can take the horse to the water, but you can't force it to drink".

In the new risk management, trying to start again with a more solid and credible basis, calls for  a clean start. Let’s look at it from the bank's point of view.

 The bank provides credit to individuals and companies. That credit is the money that flows that we handle. It is an imperfect instrument because interest accrues on it and this generates imbalances because new loans are needed to pay those interests to the bank. The disbursement of a loan, technically, follows a deliberation process, where an employee proposes the loan, and the decision-making bodies forward the proposal to the deliberative body, which gives or denies his approval. So Blankfein's statement is not wrong when he said that the bank does God's work, because when the banker hits enter on the keyboard, the generated digits turn into something that didn't exist before and can actually create. Just think of a loan to build a house, a road, a bridge or a factory, etc.

Here we are, at the terminal phase of the END OF CREDIT, the banks have decided to implement a new system to save themselves, not the people. The banks are all linked together; they are a cartel headed by the Bank for International Settlements which is based in Basel. That's where the famous Basel 1-2-3 rules got its name. And most likely, it was the banks, all together that requested the blockade of the economy with the aim of "cleaning up". In bank jargon it is said "balance and excerpt": you pass a stroke of the hand plane and level all the irregularities. In our case, or the dramatic situation we are experiencing now, the banks have decided to abandon those who they do not consider to be any more deserving of operating with their economic activities. In fact, the categories most affected are those categories hit hardest by government regulations throughout the world in a relentless manner: bars and restaurants, hotels, non-virtual commerce, sports, travel, live shows and entertainment. The latter are precisely those businesses that allow people to be free, active and moving, which is no longer welcome, since the future  is aiming towards a scenario where humans are preferred when immobile on their couches and connected with the outside world only through special online devices.

The bank reasons in this way: "you customer who can no longer support your company, you have not been able to take advantage of our credit granting and have shown that you are inept in managing your business, since you have not generated enough assets to withstand this emergency, We bankers will not give you any more money, the golden days are over!

But we will still be good to you. Once you have closed your company you can still live on your sofa, in permanent forced confinement and consume, since it is the only thing you are suitable to do without causing damage, and you can only buy what we deem suitable for your needs. Giving you a digital wallet loaded with coupons that can only be spent at the companies that WE have decided to be worthy of our trust. We trusted you with loans now look at  what you've done! You have ruined the world, you have destroyed the environment, you have guzzled without thinking about tomorrow. Now that’s enough, our patience has ran out ”!

So here's what the new world will be like. A number of increasingly powerful oligopolists will remain in the field and the others will be out of the game, forever. The sheeple will always follow the shepherd where he wants them to go. Just a whistle or a lash on the side and the sheep docilely gets back in line. The Immune App could very well have been called the Cowbell App. People are now afraid of each other and will accept virtual life as a saving and a blessing.

At this point you might ask: "but why does Mr. Cecchi tell us these catastrophic things, instead of proposing solutions and giving us something to hope for"?

Because the problem is inherent in human nature, therefore we will always be faced with these issues.

All possible revolutions could be made, but humanity would reorganize itself again according to the same hierarchical order, and whoever controls the currency will always find themselves at the top in a short time. It has always happened in history. Many imagine a utopian world in which wealth is equally redistributed, but that world does not exist, because all it takes is only one greedy and envious person within the community to make every solidarity project fail.

 If you want to continue playing in this cruel global Monopoly game, the only solution is to follow the consortium of winners which is represented by the rich class, and here we need great ability and excellence. But if we don't like playing this game, we can only get out of the game, finding a place of peace and self-subsistence.

I conclude with this beautiful aphorism:

"The way in which elites remain in power in almost all societies is not only by controlling the means of production (wealth), but also by influencing the cognitive map with which society itself describes itself and the world around it. And this cognitive map is not defined only by what is publicly discussed, but also and above all by what is not discussed in public: for example, why are certain topics considered boring, irrelevant, taboo or simply unthinkable "(Pierre Bourdieu).

That's right:

The INTERNAL MODEL is boring, irrelevant and taboo! Just like my newsletters.