Why 'too big to fail' fails

Dear Mr. Berko: I have an IRA, all in Fairholme Fund, worth $18,212.22 that has done pretty good. I'm thinking of cashing it in to put it all in silver, which is going great guns. I don't have enough to buy gold, but silver is much cheaper. Please tell me your thoughts on silver as an investment. Also, I'm hearing that Ernst & Young is responsible for Lehman going bankrupt. I used to work for Lehman and lost everything I had. How is it possible for an accounting firm to cause Lehman to go bankrupt? I always believed it was the Wall Street competition that took Lehman to its knees. Can you explain?

R.R., Durham, N.C.

Dear R.R.: Many folks think that Soviet commerce is crooked because it's controlled by psychopathic oligarchs who use bribery and strong-arm tactics approved by the government and judiciary. And they're right as the sunshine and rain.

However, the Soviet system is no different than ours. Our commerce is just as crooked, controlled by similar forces, and the failure of Lehman Brothers is a perfect example. Huge accounting firms like Ernst & Young are crooked as corkscrews, and because Lehman was willing to pay EY's special fees, EY was willing to find a way to ''account'' for everything. That's why they call them ''accounting firms.''

Standard & Poor's, Moody's and Fitch, are also crooked as shillelaghs, so why should EY, Price Waterhouse, Deloitte or KPMG be any different?

The SEC is just as complicit because it refused to enforce the truth. So it's not a stretch to ask if some high-ups at the SEC are on the take.

EY, an accounting firm with a long record of fraud, used a maneuver called REPO 105. This is a deceptive accounting trick that classifies specified loans as a sale, enabling Lehman to use cash it never got to reduce its debt and make its balance sheet look stronger. EY's accounting tricks let Lehman remove $50 billion of debt from its balance sheet. And compounding this fraud, EY lied to investors about the accounting methods it used. The SEC didn't say ''boo'' while EY collected huge fees from Lehman. Lehman milked the deception, borrowing so much money that the firm was flattened by a massive debt load it could never pay back. Remember Enron? EY was right there cooking the books, too.

Yes, I think silver, often called the ''poor man's gold,'' can continue to rise in price. Silver, now trading about $30 per ounce, is up almost 100 percent from $16 a bit over a year ago.

And silver prices are rising in spite of over-supply and a lackluster industrial demand. In fact, silver prices have risen faster than gold, platinum or palladium, and analysts did not expect such an overwhelming flow of speculative money into this metal from investors frantic to ride the boom in commodity prices.

But darn, I should not have used the word ''investors'' because few people ''invest'' in silver. Silver is not an investment like common stocks, mutual funds or bonds; rather, silver is a speculative endeavor.

Even though I think silver can run as high as $48 per ounce, it was $48.70 in January l980 or $129 adjusted for inflation. You gotta be industrial-strength stupid to cash in your IRA and board the ''ship of fools'' who speculate in silver. It's not a wise decision, it's extremely risky and owning silver in an IRA is like using a silk pouch to hold a clump of coal.

Silver's reliance on investors, not industrial demand, to prop up its value will eventually cause the price to crash. So when investors' support for silver begins to wane, the downside will be implosive, and your $18,000 may only be worth a few silver shillings.

Stay with the Fairholme Fund (FAIRX-$36), which is up about l4 percent in the last dozen months and has a 10-year average annual total return of 11.4 percent. It certainly is more dependable and makes a lot more sense than silver. FAIRX is your gold. Let fools buy silver, and a year from now, you may thank me.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at mjberko@yahoo.com

Published: Thu, Mar 10, 2011