RAROC- Risk Adjusted Return On Capital and Toxic Waste Knee Deep

By Gayle Plato, M. Ed

This is an ongoing analysis of the fiscal power grab and bail-out of bad debt underway in our country.

How the heck can you have a RAROC reality?  Some think tanker or Nobel Prize winning economist comes up with the concept of insuring the risk of any default.  Some insurer guarantees the default and hedge funds make billions world-wide. The global economy buys in and believes that the risk is minimal; in comes Credit Default Swap contracts, and the insurance policy on the actual credit (like a mortgage backed security).  Here is the beginning of the end of our huge banking debacle and a supposed world rattling crash on the horizon.

The Risk Adjusted Return On Capital (RAROC) is a calculation of limited risk , designed for making huge profits, brought in on insurance premiums. AIG and others brought in tons of premium money and they assumed they would not have to pay off due to RAROC.  Any said insurer can create a great calculation of the potential risk by impressing each other, and the customer (some hedge fund like a Goldman Sachs).   But then, these smart guys are not always smart enough to calculate the potential risk. Ceteris Paribus Fallacy- one cannot hold everything constant.  Sometimes the risk is there even if not seen or predicted.

So the administration at the Treasury (Bush and now Obama presidencies) starts to see the mistakes.  It’s all been a big miscalculation. The country must panic with DC, and let a few in power, a few un-elected appointees, decide how to solve it all with our wallets.  The rest is history. Jump to today-

Enter the (PPIP)- Public-Private Investment Plan.  It’s Secretary Geither’s big plan and here’s what it means: the Treasury is trying to get the banks to unload all of the fiscal dung.  All of the toxic removal that is supposed to happen, is tricky book keeping including the FDIC supposedly guaranteeing all of it?  Now the Treasury is saying these are not liabilities but CONTINGENT liabilities. The FDIC’s main job is to help bad banks not back up bail-outs funneled through banks. This is not the job of the Federal Depository Insurance Corporation.  If they were sued, would they lose? Remember playing pass the hot potato?  Well Tim Geithner, our own Mr. Potatohead, might even be helping promote a fraudulent move. What is REALLY going on?

The FDIC has statutory limits to 30 billion in guarantees by their charter.  They are talking 1 trillion possibly?  This makes no sense.  It sounds like the PPIP is a fake plan to stimulate the market for short term. Heck,the market is up today and the average voter citizen can not balance her checkbook.

How do you then bail out something that does not technically exist? We are letting the government carry away General Motors, continue bailing out seemingly crooked AIG, but then beat on a few bonuses, and ask Joe Citizen to use less toilet paper and sit in the dark?

This whole bail-out mud slide is like a turned over honey hauler truck; full port-o-potties tipped over on Main Street.  We are knee deep in something that really stinks.  Now maybe Harry Reid has a stimulus for the smell factor, but in the meantime let’s wade through this toxic waste. Enter AIG and RAROC-abilly logic.

What if this whole risk analysis of ‘Oops we at AIG and other insurers were wrong in our calculation’ was not an Oops?  All these algorithms of how risk exists- the whole world of bond trading is this:  You hold huge positions of bonds based on formulas that would confuse Stephen Hawking, while you’re looking to make little percentages off of lots of holdings.  It’s all about little risk but lots of return.  Now we’ve found out that these companies may have had a lot of risk, like Citibank, AIG, or countless others.  Now we see that the math was just bad.  The key question is this; was it bad dumb or bad smart?  Did the risk happen as a mistake or as a huge ponzi scheme?  If a scam, Bernie Madoff will look like a carnie at the fair, holding a stuffed monkey.

Why do we as citizens care?  Because Geithner and his main man, President Obama, are doing the same thing all over again.  It is not logical, like Daniel Hannen, YouTube darling of the UK Parliament said to Gordon Brown: you cannot get out of debt, by going deeper in to debt. The current administration is saying – ‘If we put more money in and bail everybody out, in the long run, it will all work out.’  I project that this RAROC fallacy of math- trillions of dollars of risk, with foreign countries NOT LOYAL to us, as the potential saviors- is an absolute ponzi scam.

This is an obvious boondoggle of mass proportions and we are all paying for it.  Somebody is getting the commission now off of this. We are weakening the entire system to bail-out potential criminals? Is it a desperate need to save AIG, funnel money to Goldman Sachs, keep a failing company like General Motors going into obvious bankruptcy, while all of the details are kept secret!  We cannot even read the documents.  Is there anyone who believes this Bail-out Obamanomics makes any sense?

It is going to come out of somebody’s pocket.   PPIP- happens while trying to offer really attractive toxic paper, accounting tricks, financing tricks and get people to start believing again and start investing their money.  This is exactly what Japan started doing 1990, but the huge difference is that the Japanese have LOTS of savings. Their people survived by contracting.  Japan had the lost decade (now almost two decades), even though the government was funding companies.  Yakuza crime organization in Japan ran much business interest into danger zones; Japanese business had questionable financing principles and that is no mystery in the finance world.  The citizens though could keep going on by shrinking overall lifestyle, they live cheaply compared to us, with very simple means.  They do not have lots of 2500 square foot box homes with granite counters and stainless steel appliances.  They do not have ten credit cards each, all maxed out with high interest rates. 

Their housing market has NEVER come back in Japan- look at the records as it’s been tracked for years.  They’ve had zero percent interest rates for years upon years.  Foreigners have borrowed their money to invest in America too.  Japan is not the United States though, and the average American is in DEBT. 

All these bail-out expanding the money supply is all off the books you might say?  Who gives the Secretary of the Treasury and the Federal Reserve the right to bail everybody out?   The Congress is supposed to have the power to appropriate money.  The Treasury is not part of Congress.  The Executive Branch—the Treasury, who are appointed not elected, are supposed to get it all approved by you and me.


It appears to us that, seeing the heightened attention from regulators and federal law enforcement agencies such as the FBI on side letters, AIG began to move its shell game to the CDS (credit default swaps) markets, where it could continue to falsify the balance sheets and income statements of non-insurers all over the world, including banks and other financial institutions.”


The picture we have assembled is frightening and suggests that, far from just AIG, much of the insurance industry has been drawn into the world of financial engineering and has thus become part of the problem.”



“In the regulatory world, a ‘side letter’ is perhaps the most insidious and destructive weapon in the white-collar criminal’s arsenal. With the flick of a pen, underhanded executives can cook the books in enormous amounts and render a regulator helpless.”
Fraud Magazine
July/August 2006


  1. Have a fantastic day!


  1. […]      Do you remember in the movie A Few Good Men, the entire story was about a command given that was truly a set-aside command.  The implied command was to do the opposite.  It was seen as a criminal act, and it was very hard to prove.  I submit, there is a Watergate-level  debacle right in the desk drawers of AIG and the hedge funds. Also, the International Monetary Fund and the Central Banks are playing fast and loose. This is more than one administration deep too. It is being done with our money.  How did all of these banks last week show instant profits?  Why is gold moving around Europe like proverbial salami in hiding?  (Please see past post regarding this: http://sonoranalliance.com/?p=4031) […]

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