Risk. Now They See It. Now You Don't.

You'd think after Enron, folks would have gotten wise to the old shell game of moving assets and liabilities to off-balance-sheet investment vehicles, where no one can tell what the risks really are. Think again.

Over the past few years, major banks figured out how to use "conduits" and "structured investment vehicles" to earn big fees while playing cute little games of tax and regulatory arbitrage and keeping it all pretty much hidden from investors.

It worked like a dream until it turned out that a good portion of the hundreds of millions of dollars in assets held by these vehicles were mortgage-backed securities that weren't as risk-free as everyone assumed. Now wary investors are refusing to roll over the "commercial paper" used to finance these vehicles, forcing the banks to assume the loans themselves.

In the old days, when bankers behaved like bankers rather than hedge fund managers, banks would raise money on the bond market and use it to make loans to companies that had assets to put up as securities. The bonds were recorded as a liability, the loans as assets, and a certain amount of the bank's own capital would have to be put aside in case something went wrong. Any profits would be subject to taxation.

The conduits and SIVs changed all that. Because it wasn't the bank issuing IOUs, but the conduit, the borrowing didn't have to show up on the bank's balance sheet as a liability, where it might affect the bank's credit rating. And because the financial risks associated with the conduit were sold off for a nominal sum, there was no need to list it as an asset. Because the conduit was registered in an offshore tax haven, no taxes had to be paid until profits were repatriated. And for reporting purposes, all that was required was a cryptic little footnote in the annual report about the promise of backup credit facilities in the unlikely event of a liquidity crisis.

Now that the unlikely has happened, it's fair to ask why regulators and auditors tolerated this ruse -- a ruse that not only makes a mockery of their promise of greater transparency in financial reporting but also now threatens to take down the entire global financial system.