As the information age intensifies, secrecy becomes important. Steve Jobs of Apple recognizes this truth. Apple Computer Inc. obsessively enforces a strict secrecy policy.
In early 2004, for example, Hewlett-Packard cut a deal to repackage Apple’s iPod digital music player and sell it with H-P label. Even though they were partners, Apple did not tell H-P about the new iPod models until the day before they were introduced. Apple rigidly compartmentalizes itself so that even its own employees don’t find out about coming products. It has fired and later sued workers who leaked information.
Bernard L. Madoff, as a crook, needed the utmost secrecy. For many years, his clients were unaware of the “Ponzi scheme” he had created. His two sons worked on the 19th floor . Many traders worked on the 18th floor. And, Madoff, with his computer, worked on the 17th floor, keeping the secret from his own employees.
New Financial System
The world’s finances are now driven by a vast secret web of investments. The immense shadow economy is created by hedge funds and investment banks – a web of securities that has made the world’s financial system so opaque that even many experts confess they no longer understand how it works. The money caught up in this secret web is now many times larger than the world’s gross domestic product and most of it exists outside the purview of regulators.
So much of the world’s capital is now tied up in the secret economy. The traditional tools for fixing an economic downturn may not work as expected. As new regulations arrive, more secrecy is created in order to get around such regulations.
Currently dark pools are used by financial institutions to shift trading from public exchanges to private networks. These dark pools enable institutional investors to buy or sell large blocks of stocks while keeping the price and volume concealed. This secret trading now accounts for 10 percent of overall daily trading volume in the U.S.
Off-Balance Sheet Financing
Off-balance sheet financing is a form of financing in which large capital expenditures are kept off a company’s balance sheet. A formal accounting distinction between on and off-balance sheet items depends to a large degree on management judgments, but in general terms, an item should appear on the company’s balance sheet if it is an asset or liability formerly owned or legally responsible by the company.
The term, off-balance sheet financing, came into popular use during the Enron bankruptcy. Many of the energy traders’ problems stemmed from setting up inappropriate off-balance sheet entities. The Financial Accounting Standards Board has been trying to amend the rules governing off-balance sheet securitization.
The U.S. government uses the off-balance sheet technique to keep many of its debts secret. The official national debt is about $9 trillion. There is also an off-balance sheet number. According to the Institute for Truth in Accounting, the total national debt is at $55 trillion. The calculation of national debt includes all the “off-balance sheet” liabilities of the U.S. government.
No one talks about those off-balance sheet obligations. It is as if one only looks at his check book balance to figure out his family finances and ignores the amount due on his mortgage and his credit cards. That would totally misrepresent the state of his finances.
Businesses and governments love to hide debt. This desire for secrecy will last despite more regulations.