It's not surprising the jury today found Raj Rajaratnam guilty of 14 felony counts stemming from accusations of insider trading. After all, the government had him on tape. Prosecutors love tapes. What the tapes show is that: (a) the defendant and alleged tipper actually had a conversation--it wasn't just chit chat with a secretary; (b) the conversation took place at a time when the defendant could have taken advantage of any nonpublic information he received to trade profitably; and (c) the conversation wasn't just about the Mets, or the best recipe for mac and cheese, or the latest on the width of ties; and (d) the conversation involved the company whose stock the defendant allegedly traded on the basis of inside information. Defense lawyers can and will strenuously argue about what the parties to the taped conversations meant when they said whatever they said, and whether or not that information was already public, etc. But the tapes remove a lot of the doubt prosecutors need to overcome in order to get a guilty verdict.
Rajaratnam has promised to appeal. Apparently, he's going to argue something along the lines that the government can use its wiretap authority to nab old guys who walk around Brooklyn in bathrobes, but not Wall Street guys who live at fancy addresses in Manhattan. At least, that's how the argument on appeal might end up sounding. Would the judges in the appeals court be seen as traitors to their class if they uphold the verdict? Rajaratnam reportedly is rolling in dough, so he has little to lose by appealing ad infinitum. But convicted criminal defendants don't have a high rate of success on appeal. Maybe Bernie Madoff will some day have a neighbor with whom he can talk shop.
More importantly from a systemic standpoint, this verdict may contribute to a downturn for the hedge fund industry. It's not an accident that the current wave of insider trading cases, and the last big wave of insider trading cases, both took place during eras of market stagnation. The Dennis Levine-Ivan Boesky-Michael Milken string of cases had its origins in the insipid stock market of the 1970s and early 1980s. When a market is devoted mostly to flatlining, buying-and-holding and other such investing-for-Main Street mantras don't work. They need a rising market to provide returns. What can be highly profitable in such circumstances is insider trading. Dennis Levine, one of the first high-profile Wall Streeters to be nabbed, turned about $40,000 into $12 million in some eight years. Even if you don't adjust for inflation, that's impressive. (The inflation adjusted figures are an initial investment of about $137,000 becoming roughly $24,467,000.) Insider trading pays, as long as you're not caught.
Since the spring of 2000, the stock market has, adjusted for inflation, dropped. Okay, it's bounced down and up and down and up again. But adjusted for inflation, it hasn't returned to its 2000 peak. In such circumstances, with investors having high expectations for hedge fund results (appropriately so, given the steep management and performance fees they face), hedge fund managers are under the gun to deliver. But things haven't been like the 1990s, when a cow that bought and held would have made a lot of money. Thus, the temptation to seek out and trade on inside information.
The recent spate of insider trading cases, most of which seem to involve wiretaps, confirm that the allure of inside information remains strong. For quite a few defendants, it's proven to be a siren call. Hedge fund managers, whatever they may have been up to, will probably cool their jets. Some phone calls may not be answered; others not returned. Swapping tips to make some money today isn't worthwhile if the true price is you end up a guest at a federal facility, swapping tips with Bernie Madoff. Hedge fund returns could droop.
Hedge fund investors may start to yank their money. Most don't want to be associated with even a whiff of scandal. Moreover, if a fund they invest in is caught up in insider trading, they might have to return some of the distributions they receive so other investors, injured by the insider trading, can obtain recompense. This is what happened to some of Bernie Madoff's investors, who received distributions exceeding their investments and had to return some of the money.
Even if a hedge fund hasn't been charged or isn't rumored to be under investigation, its returns might diminish because managers stop having some of the edgier conversations they've had in the past. Not to say that they were or will do anything illegal, but not all risks are worth having to bunk with Bubba. The lower returns, though, may lead their investors to seek greener pastures elsewhere.
Money has surged into the hedge fund industry during the past year, with investors trying to recoup losses from the recent financial crisis. The hedgies have done well, since the Federal Reserve keeps shoveling shiploads of cash off its loading dock to boost stock and commodities prices. Hedge fund managers have reigned supreme while investment banks battled increased regulation. But the Fed is being circumspect about how long it will keep its money printing presses rolling. Inflation is rising. Asian and European economies are slowing. Commodities prices have suddenly ebbed. There are plenty of market-related reasons to think that asset prices may have peaked. Then consider that federal wiretapping is probably cutting off the flow of inside information to some of the more brazen hedge fund managers, and chances are growing that the sun may be setting on the hedge fund industry, at least for another market cycle.
Showing posts with label Bernard Madoff. Show all posts
Showing posts with label Bernard Madoff. Show all posts
Wednesday, May 11, 2011
Monday, February 28, 2011
Let's Count Our Blessings
The world is full of trouble, it would seem.
Libya is a free fire zone, with a gonzo maniac leading one side. This could end badly.
Oman is the latest Arab nation to succumb to unrest. The insurgency spreads.
Wisconsin is deadlocked over labor union rights in what has become the political confrontation of the year. Unfortunately, the management side of the dispute is run by a governor who didn't notice that a blogger from Buffalo isn't one of his biggest political contributors. So he probably won't be smart enough to see a good compromise that's right in front of him. He's now threatening numerous layoffs of state employees. The demonstrations in Madison echo the antiwar protests of the Vietnam era. Governor Walker echoes the American officer in Vietnam who reportedly said, "it became necessary to destroy the town to save it."
China is slowing its economy in an effort to control accelerating inflation and the potential for political unrest. This would take away one of the few sources of growth in the world economy.
But things really aren't that bad. Let's count our blessings.
Charlie Sheen tells us he has Adonis DNA. We should be grateful a living deity would share his divine talents on the small screen, at least until those unbelievers at CBS canceled his show.
Bernie Madoff tells New York Magazine that he's a good person. And to think we held such negative views of him. Although broke and in prison, Bernie still has a wealth of shamelessness DNA.
Speaking of shamelessness DNA, Mahmoud Ahmadinejad, President of Iran, recently criticized Arab leaders for their oppressive response to political protests. Even in a house of mirrors, this guy would manage not to see himself.
Libya is a free fire zone, with a gonzo maniac leading one side. This could end badly.
Oman is the latest Arab nation to succumb to unrest. The insurgency spreads.
Wisconsin is deadlocked over labor union rights in what has become the political confrontation of the year. Unfortunately, the management side of the dispute is run by a governor who didn't notice that a blogger from Buffalo isn't one of his biggest political contributors. So he probably won't be smart enough to see a good compromise that's right in front of him. He's now threatening numerous layoffs of state employees. The demonstrations in Madison echo the antiwar protests of the Vietnam era. Governor Walker echoes the American officer in Vietnam who reportedly said, "it became necessary to destroy the town to save it."
China is slowing its economy in an effort to control accelerating inflation and the potential for political unrest. This would take away one of the few sources of growth in the world economy.
But things really aren't that bad. Let's count our blessings.
Charlie Sheen tells us he has Adonis DNA. We should be grateful a living deity would share his divine talents on the small screen, at least until those unbelievers at CBS canceled his show.
Bernie Madoff tells New York Magazine that he's a good person. And to think we held such negative views of him. Although broke and in prison, Bernie still has a wealth of shamelessness DNA.
Speaking of shamelessness DNA, Mahmoud Ahmadinejad, President of Iran, recently criticized Arab leaders for their oppressive response to political protests. Even in a house of mirrors, this guy would manage not to see himself.
Friday, December 10, 2010
Even in Ponzi Schemes, the Rich End Up Richer
If you're going to invest in a Ponzi scheme, look for the biggest and most exclusive ones. Find scams in which really wealthy people and large, prominent financial institutions are involved. A swindle in the Hamptons or Palm Beach is a much better choice than a scam in Moline, Ill. or Tulsa, Okla. Why? Look at what's happening in the Bernie Madoff case.
Irving Picard, the trustee in bankruptcy for the case, has collected about $1.5 billion so far. The time for him to file claims to recover money for injured investors is expiring, and he has recently brought a flurry of additional cases. Big banks, like J.P. Morgan Chase, UBS and HSBC, have been sued. Other financial firms and people that may have fed investors into the scheme have been targeted. Overall, Picard has filed claims for over $50 billion recently. Since he reportedly estimates actual cash losses from the scheme in the range of $20 million, he's trying to collect more than the actual losses (evidently on the theory that some actors, like those soliciting or providing investors, may have liability for damages). His chances of recovering 100 cents on the dollar of actual losses is likely to be low, and the chances to obtain damages probably lower. Nevertheless, many of the recently named defendants are important players in the financial services industry with reputations to protect. If their cases go to trial, unflattering information about them might be revealed in court. They could have strong incentives to settle. Many of them, like the large financial institutions, can't claim inability to pay. That means they will have to pay something.
We're still a long way from the end of the Madoff case. But his victims, who two years ago may have thought they had lost everything, may receive non-pathetic recoveries. For many, recovering 20 or 25 cents on the dollar could bring a little champagne and a new leased Mercedes into their lives. The Bentley may not reappear. But dog food (other than for the pet) could be dropped from the grocery budget.
In the grand scheme of things, being duped in a big and brazen scam of the wealthy is better than being ripped off by a guy selling investments in the parking lot of a big box store. When the wealthy are victimized, other wealthy people and large institutions can possibly be made defendants. Such defendants will often be inclined to settle. Con artists who practice their chicanery in middle class settings are likely to spend the money as fast as it comes in, and there's nothing to collect when the house of cards collapses. Even when victimized by con artists, it would seem, the rich end up richer than everyone else.
Irving Picard, the trustee in bankruptcy for the case, has collected about $1.5 billion so far. The time for him to file claims to recover money for injured investors is expiring, and he has recently brought a flurry of additional cases. Big banks, like J.P. Morgan Chase, UBS and HSBC, have been sued. Other financial firms and people that may have fed investors into the scheme have been targeted. Overall, Picard has filed claims for over $50 billion recently. Since he reportedly estimates actual cash losses from the scheme in the range of $20 million, he's trying to collect more than the actual losses (evidently on the theory that some actors, like those soliciting or providing investors, may have liability for damages). His chances of recovering 100 cents on the dollar of actual losses is likely to be low, and the chances to obtain damages probably lower. Nevertheless, many of the recently named defendants are important players in the financial services industry with reputations to protect. If their cases go to trial, unflattering information about them might be revealed in court. They could have strong incentives to settle. Many of them, like the large financial institutions, can't claim inability to pay. That means they will have to pay something.
We're still a long way from the end of the Madoff case. But his victims, who two years ago may have thought they had lost everything, may receive non-pathetic recoveries. For many, recovering 20 or 25 cents on the dollar could bring a little champagne and a new leased Mercedes into their lives. The Bentley may not reappear. But dog food (other than for the pet) could be dropped from the grocery budget.
In the grand scheme of things, being duped in a big and brazen scam of the wealthy is better than being ripped off by a guy selling investments in the parking lot of a big box store. When the wealthy are victimized, other wealthy people and large institutions can possibly be made defendants. Such defendants will often be inclined to settle. Con artists who practice their chicanery in middle class settings are likely to spend the money as fast as it comes in, and there's nothing to collect when the house of cards collapses. Even when victimized by con artists, it would seem, the rich end up richer than everyone else.
Sunday, December 5, 2010
Looking for Bernie Madoff
If you could get the candid assessment of the financial markets from a lot of investors today, it would probably be something like returns are low and risks are high. That explains why so much money, especially that held by individual investors, remains in bank accounts, money market funds, ultra short bond funds and other relatively low risk places. The financial markets have given us so many unpleasant surprises in the last 3 years, people are afraid the future holds more.
At the same time, with incomes stagnant and inflation increasing (regardless of government statistics and what high ranking government officials claim), many are under pressure to seek higher returns from their savings. There's nothing wrong with looking for a better return. Just remember that, even though we now live in the era of the endless bailout, there still isn't a free lunch. Unless you're a major bank, a sovereign nation, or a very large business corporation. Stocks and lower rated bonds might offer greater potential for profit, but they also offer greater potential for loss. Risk and reward walk hand-in-hand down Wall Street.
Some investment products include guarantees against loss. These often are touted by insurance companies and should be scrutinized closely. The promise against loss is going to cost you. It could be in the form of tight limits on upside returns (i.e., if the product generates a return, the insurance company is going to keep a good portion of it), stiff penalties for early termination or withdrawal, and in other forms. Remember that if the markets perform poorly and your return is zero, even though your losses are also zero, you would have been better off in passbook savings. (That's not a theoretical point; anyone who put money in passbook savings ten years ago instead of stocks is ahead of the market.) While no one knows what the future will bring, investing in a no-lose product doesn't mean you'll win.
Even though many insurance companies might want to sell you a lousy deal, in general they aren't fraudsters. The worst thing you could encounter in your quest for higher returns is the markets magician who claims to consistently produce good, albeit not spectacular yields, day in and day out, year after year. No one can do that, period. If you meet anyone who says he or she can, put your hand on your wallet and run away. Fast. No matter how tempted you are, and no matter how good the sales pitch sounds, don't invest.
The biggest frauds are perpetrated, not because the bad guy lies, but because investors lie to themselves. They convince themselves that lead can indeed be turned into gold. They brush aside contrary evidence and the rationality of naysayers. They want to hear, however improbably, that good returns can be secured with no risk. They seek out the con artists who promise the sun, the stars and the moon.
Bernie Madoff didn't have to find many of his victims. They found him, and they were ready to believe every word of his web of lies. He'll be in prison for the rest of his life. But there are plenty of latter day Bernie's around. Often, the gullible and greedy will find them. As a matter of law, the con artist is liable and should be punished sternly. As a matter of reality, if you go looking for a latter day Bernie Madoff, you'll probably find him. And you'll regret it.
At the same time, with incomes stagnant and inflation increasing (regardless of government statistics and what high ranking government officials claim), many are under pressure to seek higher returns from their savings. There's nothing wrong with looking for a better return. Just remember that, even though we now live in the era of the endless bailout, there still isn't a free lunch. Unless you're a major bank, a sovereign nation, or a very large business corporation. Stocks and lower rated bonds might offer greater potential for profit, but they also offer greater potential for loss. Risk and reward walk hand-in-hand down Wall Street.
Some investment products include guarantees against loss. These often are touted by insurance companies and should be scrutinized closely. The promise against loss is going to cost you. It could be in the form of tight limits on upside returns (i.e., if the product generates a return, the insurance company is going to keep a good portion of it), stiff penalties for early termination or withdrawal, and in other forms. Remember that if the markets perform poorly and your return is zero, even though your losses are also zero, you would have been better off in passbook savings. (That's not a theoretical point; anyone who put money in passbook savings ten years ago instead of stocks is ahead of the market.) While no one knows what the future will bring, investing in a no-lose product doesn't mean you'll win.
Even though many insurance companies might want to sell you a lousy deal, in general they aren't fraudsters. The worst thing you could encounter in your quest for higher returns is the markets magician who claims to consistently produce good, albeit not spectacular yields, day in and day out, year after year. No one can do that, period. If you meet anyone who says he or she can, put your hand on your wallet and run away. Fast. No matter how tempted you are, and no matter how good the sales pitch sounds, don't invest.
The biggest frauds are perpetrated, not because the bad guy lies, but because investors lie to themselves. They convince themselves that lead can indeed be turned into gold. They brush aside contrary evidence and the rationality of naysayers. They want to hear, however improbably, that good returns can be secured with no risk. They seek out the con artists who promise the sun, the stars and the moon.
Bernie Madoff didn't have to find many of his victims. They found him, and they were ready to believe every word of his web of lies. He'll be in prison for the rest of his life. But there are plenty of latter day Bernie's around. Often, the gullible and greedy will find them. As a matter of law, the con artist is liable and should be punished sternly. As a matter of reality, if you go looking for a latter day Bernie Madoff, you'll probably find him. And you'll regret it.
Tuesday, June 8, 2010
Bernie's Burdens
New York magazine reports that Bernie Madoff, when hassled about his Ponzi scheme by a fellow inmate at the federal medium security prison in Butner, NC, said, "F*ck my victims. I carried them for twenty years, and now I'm doing 150 years." http://nymag.com/news/crimelaw/66468/.
Poor Bernie. Life can be truly unfair. Perhaps he can take comfort from being the inspiration for millions of blogs, none of them complimentary. He's our inspiration today. The following is entirely fictional.
The young man was glad to escape the viscous humidity of summertime North Carolina as he entered the visitor's room at the prison. Perspiration dampened even the back of his hands. But when he spotted the man he had come to see, he forgot his discomfort. Business, as always, came first.
"Mr. Madoff?" he asked.
"Yes, I'm Bernie Madoff," said the older, gray-haired man.
"Alvin Doe," said the young man, as the two men shook hands. He tried to project the cheerfulness he had learned people beyond college age expected when first meeting someone.
Bernie wondered if that was the name on the young fellow's birth certificate. He was generic: about 5' 10", medium brown hair, brown eyes and a face you could readily forget. His clothes were also generic--a white polo shirt and khaki slacks. But his precociously jaunty manner seemed out of place for a guy who couldn't be more than a year or two out of college.
"Alvin, it's nice to meet you," said Bernie.
"Here are the things I promised," said Doe, handing three small glass jars over to Bernie.
"The real stuff?" Bernie asked.
"Russian caviar. Cost me more than the plane ticket down here. I asked my Mom to buy it because she would make sure it wasn't fake."
"Well, if your Mom says it's real, that's good enough for me," said Bernie, turning on his salesman's affability and unwinding his impenetrable half-smile. "So, what's on your mind, Alvin?"
"Mr. Madoff, I got an idea . . . an idea for a business. I wanted to talk to you about it."
"Glad to listen, Alvin. My time is yours."
"I was thinking that there's a tremendous opportunity for a business that provides people with excuses," said Doe.
"Excuses?" asked Bernie, genuinely puzzled.
"Look at today's world," continued Doe. "Everyone wants an excuse. No one wants to take responsibility for anything. A business that can supply excuses would be an instant hit."
"Hmm, you have a point there," said Bernie, warming to the idea.
"One of the biggest needs is excuses for financial screwups. There's an almost unlimited pool of customers. We have millions of defaulting homeowners. The ones who strategically default would make especially good prospects. Then there are banks that took bailouts and then made huge profits while the taxpayers who bailed them out struggle with unemployment and falling home values. The banks have armies of lawyers and lobbyists, but their image is terrible. They need the services of a business like mine. Also, there are entire countries over in Europe that borrowed a lot more than they should have and covered it up. But the truth has come out, and they're circling the drain. They don't want to actually take responsibility for all their debts. So they need help talking their way out of trouble. I think there's a lot of money to be made."
Bernie's brow wrinkled. "What you say is true, Alvin. But how do I fit into the picture?"
"Mr. Madoff, you're the champ when it comes to excuses. I mean, you went on for decades and got billions of dollars, all just with good sounding excuses. You didn't need anything else--no real business, no real trading strategy. You made a fortune for yourself out of talk. You have more talent for making excuses than anyone in history. I want you to join my business."
Bernie took a deep breath, while looking over Alvin Doe closely. He could be a junior federal agent, assigned to entrap Bernie in a criminal scheme. But he didn't look like he was wearing a wire under his polo shirt. And why would the feds bother? Bernie was 71 years old and sentenced to 150 years. He couldn't be punished more than he already had been. Doe had the eager enthusiasm of a young guy who saw goals more than he saw obstacles. That was the kind of fellow who would probably succeed.
"Well, Alvin, I might be interested," said Bernie. "How would things work? Since I'm here in prison, I can't put in days at the office. The prison people monitor my phone calls and we can't have computers or Internet access."
"We don't need any of that stuff," said Doe. "I or someone working for me will visit you and talk about the problems clients have. We don't need a lot of paper and we don't need to be connected online. I mean, all we're doing is coming up with excuses. You help us create excuses for the clients when we meet with you. That's all. No need for paper, no need for computers."
"That could work," conceded Bernie. "But what's the split on the money? Fifty-fifty?"
"I was thinking I should get three-quarters and you get one-quarter," said Doe. "I'll be out lining up clients and doing all the administrative work. And I have to handle communications with them and you."
"Don't I have the brainpower, the shamelessness that you can't find anywhere else?"
"Yes, you do, Mr. Madoff . . . "
"Bernie. Call me Bernie."
"Okay, Bernie. You do have the brainpower. But I can't exactly advertise that I'm partnering with a criminal, if you know what I mean. People won't think they're getting a legitimate excuse if it comes from a con artist."
Bernie paused, and then continued. "I think I understand that point, Alvin. Let's say I'll agree to 75 for you, 25 for me, at least to start with. Now, it seems to me that I should get a $1,000,000 advance on profits."
Doe sat back, momentarily stunned into silence. "Are you kidding?"
"Not at all. This is business. Money talks."
"I haven't got a million. I haven't even got air fare. I had to borrow it from my Mom."
"Tell you what, Alvin, I'll settle for $100,000 paid in advance."
"Bernie, I don't have $100,000. I barely have $100, and I have to cover the car rental and crappy airline food. Besides, you can't keep that kind of money, not here."
"There are places where it can go. We can get into that when you find the money," said Bernie.
"That's impossible, Bernie. I can't come up with a hundred grand. Can't you just help me out and take a split of the profits once we start making some money?"
"Well, Alvin, a man doesn't work for free. And a smart man doesn't work for just a promise. Take my word for it. I'll start out for $10,000."
"Well," said Doe, reluctantly rising to leave. "That won't be easy. I'll see what I can do."
"I think you have a great idea, Alvin, with a huge market. People, banks, governments, nobody wants to take responsibility any more. Everyone wants an excuse. Palming off an excuse is much easier than doing real work. Hell, if we took responsibility for things, we'd all have to stop acting like kids and become adults. No one wants to do that. So keep at it, Alvin."
"Okay, Bernie," said Doe, smiling broadly for the first time and extending his hand again.
"That's a nice smile you have, Alvin. Good for sales presentations," said Bernie. "Chin up. The world may be going to hell, but there's always opportunity in adversity. Making excuses will be a great business because you can count on people to pay for what they want to hear. That's what the real estate bubble market was all about. That's what Wall Street is all about. That's what politics are all about. You'll have a great business while it lasts."
The two men parted with a warm handshake. It wasn't until later, after Alvin had boarded his flight home, that he wondered if Bernie's last words meant he should rethink things.
Poor Bernie. Life can be truly unfair. Perhaps he can take comfort from being the inspiration for millions of blogs, none of them complimentary. He's our inspiration today. The following is entirely fictional.
The young man was glad to escape the viscous humidity of summertime North Carolina as he entered the visitor's room at the prison. Perspiration dampened even the back of his hands. But when he spotted the man he had come to see, he forgot his discomfort. Business, as always, came first.
"Mr. Madoff?" he asked.
"Yes, I'm Bernie Madoff," said the older, gray-haired man.
"Alvin Doe," said the young man, as the two men shook hands. He tried to project the cheerfulness he had learned people beyond college age expected when first meeting someone.
Bernie wondered if that was the name on the young fellow's birth certificate. He was generic: about 5' 10", medium brown hair, brown eyes and a face you could readily forget. His clothes were also generic--a white polo shirt and khaki slacks. But his precociously jaunty manner seemed out of place for a guy who couldn't be more than a year or two out of college.
"Alvin, it's nice to meet you," said Bernie.
"Here are the things I promised," said Doe, handing three small glass jars over to Bernie.
"The real stuff?" Bernie asked.
"Russian caviar. Cost me more than the plane ticket down here. I asked my Mom to buy it because she would make sure it wasn't fake."
"Well, if your Mom says it's real, that's good enough for me," said Bernie, turning on his salesman's affability and unwinding his impenetrable half-smile. "So, what's on your mind, Alvin?"
"Mr. Madoff, I got an idea . . . an idea for a business. I wanted to talk to you about it."
"Glad to listen, Alvin. My time is yours."
"I was thinking that there's a tremendous opportunity for a business that provides people with excuses," said Doe.
"Excuses?" asked Bernie, genuinely puzzled.
"Look at today's world," continued Doe. "Everyone wants an excuse. No one wants to take responsibility for anything. A business that can supply excuses would be an instant hit."
"Hmm, you have a point there," said Bernie, warming to the idea.
"One of the biggest needs is excuses for financial screwups. There's an almost unlimited pool of customers. We have millions of defaulting homeowners. The ones who strategically default would make especially good prospects. Then there are banks that took bailouts and then made huge profits while the taxpayers who bailed them out struggle with unemployment and falling home values. The banks have armies of lawyers and lobbyists, but their image is terrible. They need the services of a business like mine. Also, there are entire countries over in Europe that borrowed a lot more than they should have and covered it up. But the truth has come out, and they're circling the drain. They don't want to actually take responsibility for all their debts. So they need help talking their way out of trouble. I think there's a lot of money to be made."
Bernie's brow wrinkled. "What you say is true, Alvin. But how do I fit into the picture?"
"Mr. Madoff, you're the champ when it comes to excuses. I mean, you went on for decades and got billions of dollars, all just with good sounding excuses. You didn't need anything else--no real business, no real trading strategy. You made a fortune for yourself out of talk. You have more talent for making excuses than anyone in history. I want you to join my business."
Bernie took a deep breath, while looking over Alvin Doe closely. He could be a junior federal agent, assigned to entrap Bernie in a criminal scheme. But he didn't look like he was wearing a wire under his polo shirt. And why would the feds bother? Bernie was 71 years old and sentenced to 150 years. He couldn't be punished more than he already had been. Doe had the eager enthusiasm of a young guy who saw goals more than he saw obstacles. That was the kind of fellow who would probably succeed.
"Well, Alvin, I might be interested," said Bernie. "How would things work? Since I'm here in prison, I can't put in days at the office. The prison people monitor my phone calls and we can't have computers or Internet access."
"We don't need any of that stuff," said Doe. "I or someone working for me will visit you and talk about the problems clients have. We don't need a lot of paper and we don't need to be connected online. I mean, all we're doing is coming up with excuses. You help us create excuses for the clients when we meet with you. That's all. No need for paper, no need for computers."
"That could work," conceded Bernie. "But what's the split on the money? Fifty-fifty?"
"I was thinking I should get three-quarters and you get one-quarter," said Doe. "I'll be out lining up clients and doing all the administrative work. And I have to handle communications with them and you."
"Don't I have the brainpower, the shamelessness that you can't find anywhere else?"
"Yes, you do, Mr. Madoff . . . "
"Bernie. Call me Bernie."
"Okay, Bernie. You do have the brainpower. But I can't exactly advertise that I'm partnering with a criminal, if you know what I mean. People won't think they're getting a legitimate excuse if it comes from a con artist."
Bernie paused, and then continued. "I think I understand that point, Alvin. Let's say I'll agree to 75 for you, 25 for me, at least to start with. Now, it seems to me that I should get a $1,000,000 advance on profits."
Doe sat back, momentarily stunned into silence. "Are you kidding?"
"Not at all. This is business. Money talks."
"I haven't got a million. I haven't even got air fare. I had to borrow it from my Mom."
"Tell you what, Alvin, I'll settle for $100,000 paid in advance."
"Bernie, I don't have $100,000. I barely have $100, and I have to cover the car rental and crappy airline food. Besides, you can't keep that kind of money, not here."
"There are places where it can go. We can get into that when you find the money," said Bernie.
"That's impossible, Bernie. I can't come up with a hundred grand. Can't you just help me out and take a split of the profits once we start making some money?"
"Well, Alvin, a man doesn't work for free. And a smart man doesn't work for just a promise. Take my word for it. I'll start out for $10,000."
"Well," said Doe, reluctantly rising to leave. "That won't be easy. I'll see what I can do."
"I think you have a great idea, Alvin, with a huge market. People, banks, governments, nobody wants to take responsibility any more. Everyone wants an excuse. Palming off an excuse is much easier than doing real work. Hell, if we took responsibility for things, we'd all have to stop acting like kids and become adults. No one wants to do that. So keep at it, Alvin."
"Okay, Bernie," said Doe, smiling broadly for the first time and extending his hand again.
"That's a nice smile you have, Alvin. Good for sales presentations," said Bernie. "Chin up. The world may be going to hell, but there's always opportunity in adversity. Making excuses will be a great business because you can count on people to pay for what they want to hear. That's what the real estate bubble market was all about. That's what Wall Street is all about. That's what politics are all about. You'll have a great business while it lasts."
The two men parted with a warm handshake. It wasn't until later, after Alvin had boarded his flight home, that he wondered if Bernie's last words meant he should rethink things.
Tuesday, March 9, 2010
Bernie Does Europe
The following is entirely fictional.
The man stood out clearly among the other visitors at the Butner, NC medium security facility. He was trim, and scanned the room with dark eyes. His precisely cut blue suit, narrowed at the waist, the scaloppine soles of his pointed loafers, and his muted silk shirt offset by a mauve tie, would have photographed well east of the English Channel. His face was locked into a faint, bemused smile. It was a well-practiced expression, one perhaps used to mask his thoughts and emotions.
He had no trouble spotting the inmate he came to meet. The latter, an older man who was short and lumpy, would have been obvious even if he hadn't been so often photographed by the press. The visitor waved.
"Mr. Madoff."
"Yes. It's nice to meet you, Mr., uh . . ."
"John Talent," said the visitor, with the accent of someone who'd grown up with light breakfasts, not large ones.
"Yes, Mr. Talent." Bernie suspected that the visitor's registry, where Mr. Talent would have signed in, would not be terribly revealing to the press should they get their hands on it.
"I have the package you requested. Five pounds of shrimp cocktail and a quart of cocktail sauce."
"Wonderful, wonderful. You have no idea how hard it is to get a decent appetizer around here."
"I can imagine, sir," said the visitor, with well-exaggerated sympathy.
"Well, Mr. Talent. What was it you wanted to talk about?"
"I seek insight about your . . . former method of business. That is to say, your financial success."
"My . . . well, I suppose I was successful for a while."
"Yes, yes. How did you succeed in persuading people to give you money, and then keep it there?"
Bernie paused for a moment, seemingly in thought. "It comes down to telling them what they want to hear. Investing consists of putting your money down on a promise. The key is to make the best promise."
"That is interesting in abstract," said Talent quickly. "Let us consider, however, the possibility that the interests raising money are, shall we say, in some difficulty and their difficulties are not entirely unknown."
"Well, let me think. Uhmmm . . . can you tell me what interests you're talking about?"
"Perhaps we can say they are European. More I cannot reveal," replied Talent, his smile tighter than ever.
"Well," said Bernie, through a mouthful of shrimp. "They would have to improve the promises. That is, increase the promised earnings or profits on the investment, and make it appear that they have a very good chance of paying the returns. Look for ways to enhance your revenue, while cutting costs. At least, promise to do those things. By the way, this is excellent shrimp."
"I am pleased that you are enjoying it. Now, let us hypothesize that a . . . bailout, I think the English word is . . . will probably be necessary. That would require a third party--someone to provide the bailout for the interests I represent, so that we appear stronger. How should we deal with the third party?"
"What kind of bailout do you mean: funds, a guarantee of debt, or something else?"
"Any and all of them. Everything is under discussion. The important thing is to inspire confidence among the creditors."
"The creditors," muttered Bernie. "So you are trying to raise money to pay off old debts falling due?"
"Ahhh . . . perhaps I have said too much. But this is true. We must raise money to pay old debts. And there is not so much time."
"And you need a bailout to give the creditors confidence about your ability to repay new debt?"
"Precisely. We have been searching for a bailout, a new source of funds or at least a guarantee."
"How is that search going?" asked Bernie, plunking three pieces of shrimp at once into the cocktail sauce.
"Not very well. The European parties we approached speak in generalities. They don't want to say yes, but they don't want to say no."
"Why won't they say yes?"
"Because they believe we will use the money for consumption, not for investment. So it will not generate new revenues. It is, how you say, like the Ponzi arrangement."
Bernie chewed in silence for a moment. "I see. Then, why won't they say no?"
"Because they have invested in us already. If they say no and we fail, they will be harmed."
"So it is against their interests to say yes, and against their interests to say no."
"Precisely."
Bernie took a deep breath, and then another mouthful of shrimp. "Then you need to find another sugar daddy."
"Pardon?"
"Another benefactor. A new player to give you a bailout. Perhaps someone some distance away, who is not as involved in the situation. You have been talking to Europeans?"
"Yes. Interested parties in Europe."
"Maybe you should hop over the pond."
"Are you speaking of America?"
"That might be the next place to try."
"How could we persuade America to help European interests?"
"Think of something you could offer America."
The visitor stroked his chin, and then spoke. "We have been the victims of speculation in the derivatives market. It is very aggressive and damaging. Perhaps we could offer ourselves as an example of why your government should increase the regulation of derivatives. Your president might be interested, because he wants to add more regulation of derivatives but is having political problems with those people, the lobbyists. The international situation would give him . . . how you say it, political leverage . . . to change the laws. The lack of regulation is increasing international instability. This way, the profit making devices used by your big bankers . . . you call them Wall Street, I believe . . . will now be used against them."
Bernie smiled wryly. "I guess it's fair to say that sometimes, American financiers do go too far, and then the law catches up with them."
"So, if we give your government an international incident they can use to their advantage, perhaps they would have some sympathy for our situation."
"Maybe. Everything would have to be done very subtly. Nothing can be explicit, because the American government has many problems within the country to deal with, and the American people expect their government to take care of problems at home first."
"I understand perfectly. We will be very discreet."
"Good luck, then. And don't hesitate to come back for more advice."
"You have been very helpful, Mr. Madoff. Next time, I will bring ten pounds of shrimp."
The man stood out clearly among the other visitors at the Butner, NC medium security facility. He was trim, and scanned the room with dark eyes. His precisely cut blue suit, narrowed at the waist, the scaloppine soles of his pointed loafers, and his muted silk shirt offset by a mauve tie, would have photographed well east of the English Channel. His face was locked into a faint, bemused smile. It was a well-practiced expression, one perhaps used to mask his thoughts and emotions.
He had no trouble spotting the inmate he came to meet. The latter, an older man who was short and lumpy, would have been obvious even if he hadn't been so often photographed by the press. The visitor waved.
"Mr. Madoff."
"Yes. It's nice to meet you, Mr., uh . . ."
"John Talent," said the visitor, with the accent of someone who'd grown up with light breakfasts, not large ones.
"Yes, Mr. Talent." Bernie suspected that the visitor's registry, where Mr. Talent would have signed in, would not be terribly revealing to the press should they get their hands on it.
"I have the package you requested. Five pounds of shrimp cocktail and a quart of cocktail sauce."
"Wonderful, wonderful. You have no idea how hard it is to get a decent appetizer around here."
"I can imagine, sir," said the visitor, with well-exaggerated sympathy.
"Well, Mr. Talent. What was it you wanted to talk about?"
"I seek insight about your . . . former method of business. That is to say, your financial success."
"My . . . well, I suppose I was successful for a while."
"Yes, yes. How did you succeed in persuading people to give you money, and then keep it there?"
Bernie paused for a moment, seemingly in thought. "It comes down to telling them what they want to hear. Investing consists of putting your money down on a promise. The key is to make the best promise."
"That is interesting in abstract," said Talent quickly. "Let us consider, however, the possibility that the interests raising money are, shall we say, in some difficulty and their difficulties are not entirely unknown."
"Well, let me think. Uhmmm . . . can you tell me what interests you're talking about?"
"Perhaps we can say they are European. More I cannot reveal," replied Talent, his smile tighter than ever.
"Well," said Bernie, through a mouthful of shrimp. "They would have to improve the promises. That is, increase the promised earnings or profits on the investment, and make it appear that they have a very good chance of paying the returns. Look for ways to enhance your revenue, while cutting costs. At least, promise to do those things. By the way, this is excellent shrimp."
"I am pleased that you are enjoying it. Now, let us hypothesize that a . . . bailout, I think the English word is . . . will probably be necessary. That would require a third party--someone to provide the bailout for the interests I represent, so that we appear stronger. How should we deal with the third party?"
"What kind of bailout do you mean: funds, a guarantee of debt, or something else?"
"Any and all of them. Everything is under discussion. The important thing is to inspire confidence among the creditors."
"The creditors," muttered Bernie. "So you are trying to raise money to pay off old debts falling due?"
"Ahhh . . . perhaps I have said too much. But this is true. We must raise money to pay old debts. And there is not so much time."
"And you need a bailout to give the creditors confidence about your ability to repay new debt?"
"Precisely. We have been searching for a bailout, a new source of funds or at least a guarantee."
"How is that search going?" asked Bernie, plunking three pieces of shrimp at once into the cocktail sauce.
"Not very well. The European parties we approached speak in generalities. They don't want to say yes, but they don't want to say no."
"Why won't they say yes?"
"Because they believe we will use the money for consumption, not for investment. So it will not generate new revenues. It is, how you say, like the Ponzi arrangement."
Bernie chewed in silence for a moment. "I see. Then, why won't they say no?"
"Because they have invested in us already. If they say no and we fail, they will be harmed."
"So it is against their interests to say yes, and against their interests to say no."
"Precisely."
Bernie took a deep breath, and then another mouthful of shrimp. "Then you need to find another sugar daddy."
"Pardon?"
"Another benefactor. A new player to give you a bailout. Perhaps someone some distance away, who is not as involved in the situation. You have been talking to Europeans?"
"Yes. Interested parties in Europe."
"Maybe you should hop over the pond."
"Are you speaking of America?"
"That might be the next place to try."
"How could we persuade America to help European interests?"
"Think of something you could offer America."
The visitor stroked his chin, and then spoke. "We have been the victims of speculation in the derivatives market. It is very aggressive and damaging. Perhaps we could offer ourselves as an example of why your government should increase the regulation of derivatives. Your president might be interested, because he wants to add more regulation of derivatives but is having political problems with those people, the lobbyists. The international situation would give him . . . how you say it, political leverage . . . to change the laws. The lack of regulation is increasing international instability. This way, the profit making devices used by your big bankers . . . you call them Wall Street, I believe . . . will now be used against them."
Bernie smiled wryly. "I guess it's fair to say that sometimes, American financiers do go too far, and then the law catches up with them."
"So, if we give your government an international incident they can use to their advantage, perhaps they would have some sympathy for our situation."
"Maybe. Everything would have to be done very subtly. Nothing can be explicit, because the American government has many problems within the country to deal with, and the American people expect their government to take care of problems at home first."
"I understand perfectly. We will be very discreet."
"Good luck, then. And don't hesitate to come back for more advice."
"You have been very helpful, Mr. Madoff. Next time, I will bring ten pounds of shrimp."
Sunday, December 20, 2009
Lumps of Coal
Christmas lumps of coal came early for some this year:
Bernie Madoff, who will spend the rest of his life in prison.
GM’s former management. Rick Wagoner, Fritz Henderson, and other old timers in the executive ranks lost their jobs after many years at GM. It’s hard to say they didn’t deserve it, especially Wagoner for betting GM and its employees’ prosperity on the price of oil. It’s one thing if you take all of your personal savings and put it on a single roll of the dice. But if you’re responsible to millions of shareholders and employees, a touch of prudence and at least the first draft of Plan B are good management strategies. Let's hope the telephone guy now in charge at GM has some good ideas.
Sovereign debt holders. It began with Dubai and its grandiose ambitions, which ultimately rested on wishful hoping. Now the illness has spread to Greece, Lithuania, Iceland, Latvia and other small European nations. Some of these troubled countries are members of the Euro Zone, and the wealthier members of the European Union are imitating Alphonse and Gaston as they try to figure out how to pass the hot tamale. They talk about IMF assistance to the beleaguered. Look for quiet increases in support for the IMF from the bigger Euro bloc nations. They know some sort of bailout is likely, but would want a circumspect way of funding it.
The Republican Party, which finds itself riven by tea parties and inquisitional undercurrents. Its struggle to redefine itself is understandable in light of the drubbing it took in the 2008 presidential election. The internecine nature of the feuding could cripple the party for years to come.
Tiger Woods. By all indications, he’s an intelligent guy whose story seems more like Eliot Spitzer’s than the typical celebrity-cheating-on-his-wife tabloid fodder. As with Spitzer, you have to wonder how Tiger could have figured he wouldn’t be caught. Tiger’s evidently taken a page from Spitzer’s playbook, disappearing until things cool off. Then, like Spitzer, Tiger will try to rehabilitate himself. Given his tremendous athletic ability and pro golf’s need for television revenues, chances are he’ll succeed. But Tiger’s done us all a favor by re-affirming, however unintentionally and indirectly, that integrity matters. With American culture having morphed from its pioneer, yeoman farmer roots to a social networking frenzy of marketing, image and popularity, it’s reassuring that integrity, along with thrift and prudence, still mean something. In spite of all the economic wreckage, there’s hope for America.
Tarek and Michaele Salahi, the White House party-crashing self-promoters whose notoriety seems to have hurt them more than it helped. If so, that would be a rare instance of 15 minutes of fame turning out badly in a celebrity-obsessed nation.
Let’s hope Santa has some extra lumps, because just deserts remain to be given to:
Bernie Madoff, because what he did deserves much worse than life in prison. At a minimum, his only prison jobs should be cleaning bathrooms with a toothbrush and collecting trash with a 1-quart plastic bag.
Senator Chris Dodd, for his lousy financial regulatory reform proposal. It would put way too much power in one place—a new super regulator for banks—while seriously weakening the FDIC, the one federal regulator that spotted the iceberg before the economy smacked into it. We are again reminded that Washington’s guiding principle is no good deed will go unpunished. Senator Dodd may be rethinking his proposal, and we hope he does.
Big taxpayer-subsidized mega-bonus-paying banks that don’t make new loans. The highest living welfare queens in American history, the big banks pay stupendous bonuses while pulling credit lines from consumers and small businesses. They prosper at public expense as unemployment reaches the highest levels in over 25 years. Yet they need serious parenting to learn the concept of gratitude. Most 2-year olds can be taught to say “thank you," but not, it seems, the best paid bankers.
Obstructionist Republicans in Congress. The Republicans’ only “strategy,” if you will, is to obstruct whatever the Democrats are trying to do. This may be in keeping with their special talent for going negative in political campaigns. But the American people won’t ultimately be won over by the Calvin Coolidge take-a-nap-every-afternoon style of governance, not in a time of privation and crisis. There’s a reason why FDR was elected to the White House four times in a row: he was a doer, not a naysayer.
Tuesday, November 17, 2009
Bernie Madoff's Ponzi Scheme is Cleaned Up While the Federal Scheme Keeps on Rolling
How much would you pay for Jesse James' revolver? He was highly felonious, robbing numerous banks and taking a role in many murders. But his revolver, if it ever were auctioned, would probably sell in the millions. Crime, as long as it's notorious, confers value. We saw this last weekend.
The federal marshalls' auction of Bernie and Ruth's paraphernalia produced some surprisingly large bids. A pair of diamond earrings thought to be worth $21,400 went for $70,000. Bernie's Mets jacket went for $14,500. A wooden duck decoy thought to be worth $60 went for $4,750. A pair of boogie boards estimated at $90 went for $1,000. Someone even paid $500 for a table made from a tree trunk, saying he hoped Bernie had stashed some money inside it. (This is a long shot; Bernie didn't have to salt away money since he could always rip off another investor if he needed more cash.) All told, the auction yielded over $900,000, well over the $500,000 or so that was expected.
Some of the aggressive bidding could come from the eBay effect--put "Madoff" into the Search function on eBay and you'll see a few of the auctioned items already for sale. Since you can't flip houses today, try Bernie's and Ruth's belongings. Other buyers may be biding their time, as the continuing Madoff saga leads to more prosecutions, further revelations and enhanced value for his erstwhile possessions. Still other buyers may hold onto their acquisitions, feeling good about owning something that once belonged to someone who was seriously bad.
Meanwhile, back at the ranch, the U.S. government continues to operate the biggest Ponzi scheme of all. The official federal debt will probably end the year over $12 trillion, around 90% of the U.S. Gross Domestic Product. Ten years ago, it was under 60% of GDP. By 2011, it will probably exceed 100% of GDP. And we're not counting unbooked liabilities from Social Security, Medicare, Medicaid, Fannie Mae, Freddie Mac, FHA and continued bank bailouts. Let's not even go there because the RAM in most personal computers can't handle numbers that large.
America's government debt will never be repaid. It's gotten too big. The government pays debt coming due by finding new lenders or convincing holders of old debt to roll their investments over. The government is lucky that the dollar is the world's reserve currency, or it would be up a poorly lit creek. (For more on this point, see http://blogger.uncleleosden.com/2009/11/is-federal-government-tempted-by-moral.html.)
Using new loans to pay off old loans isn't by itself illegal. Many corporations do that with their bonds and commercial paper. All banks fund daily operations that way. A Ponzi scheme differs from legitimate enterprise because the bad guys don't use the money they take in to operate bona fide businesses. They pocket it and use it to buy cars, jewelry, houses, clothing, vacations, expensive meals and so on. In short, it's used for consumption.
What does the U.S. government do with all its borrowed money? Stuff that looks suspiciously like consumption. Most government operations aren't meant to generate profits. Law enforcement and regulation protect lives and property. The courts are there to resolve disputes. The President is supposed to manage the Executive branch departments and provide leadership. The legislative process is supposed to do something useful, although what that might be seems to have been lost in the mists of time. These operations are not intended to yield dividends or create wealth. They are forms of consumption. So, too, is most of the federal stimulus spending. And the federal bailouts and accommodations that are never repaid (which could total to a large amount) will end up as consumption.
Granted, not personal consumption. But that simply means that the federal government isn't operating an illegal Ponzi scheme. Since the government survives mainly by wheedling money out of Peter to pay Paul, its finances sure look like some kind of Ponzi scheme. To make things worse, nowadays when Peter doesn't have enough cash to cover all the government's spending, the Federal Reserve simply prints money. Indeed, trillions of dollars worth. Paul gets . . . paper spun out of thin air.
Recent comments by Chairman Bernanke and other governors indicate that the Fed isn't about to pull back those printed dollars. The Fed's balance sheet will apparently stay its Brobdingnagian size as far into the future as one can foresee. The latest thinking at the Fed about "withdrawing" liquidity seems to be that it would pay higher interest rates on member bank deposits at Federal Reserve banks. That would put a floor under fed fund rates, and arguably reduce interbank lending (and thereby constrain overall lending). But the target for fed fund rates these days is zero to 0.25%, so even if the Fed pays 0.2% and effectively prevents fed fund rates from going below 0.2%, how much will lending be constrained? The hot, new thing in the financial markets is the carry trade, where speculators borrow dollars, convert them into foreign currencies, and invest overseas for returns expected to be a shipload larger than 0.25%. A 0.2% interest rate on member bank deposits won't constrain an unemployed novice day trader let alone a multi-billion dollar hedge fund. We hesitate to delve into anathema, but the Fed needs to raise its fed funds target rate before it will constrain much of anything.
So we have a government ponzi scheme, which gives itself a boost by printing money whenever it can't find new lenders. What a racket. No wonder the Chinese and other foreign creditors of America are nervous.
There is a way out of the federal Ponzi scheme--a marked increase in federal tax revenues, which is devoted to debt repayment. That could come from a brisk resumption of economic growth or by increasing taxes. The former seems as likely as Godot's arrival. The latter may happen, although the additional tax dollars don't seem destined for debt reduction.
Nevertheless, let's accentuate the positive. With all these freshly minted dollars floating around, it's understandable why the bids at the Madoff auction were higher than expected. Bernie's victims, at least, can be grateful for federal profligacy.
The federal marshalls' auction of Bernie and Ruth's paraphernalia produced some surprisingly large bids. A pair of diamond earrings thought to be worth $21,400 went for $70,000. Bernie's Mets jacket went for $14,500. A wooden duck decoy thought to be worth $60 went for $4,750. A pair of boogie boards estimated at $90 went for $1,000. Someone even paid $500 for a table made from a tree trunk, saying he hoped Bernie had stashed some money inside it. (This is a long shot; Bernie didn't have to salt away money since he could always rip off another investor if he needed more cash.) All told, the auction yielded over $900,000, well over the $500,000 or so that was expected.
Some of the aggressive bidding could come from the eBay effect--put "Madoff" into the Search function on eBay and you'll see a few of the auctioned items already for sale. Since you can't flip houses today, try Bernie's and Ruth's belongings. Other buyers may be biding their time, as the continuing Madoff saga leads to more prosecutions, further revelations and enhanced value for his erstwhile possessions. Still other buyers may hold onto their acquisitions, feeling good about owning something that once belonged to someone who was seriously bad.
Meanwhile, back at the ranch, the U.S. government continues to operate the biggest Ponzi scheme of all. The official federal debt will probably end the year over $12 trillion, around 90% of the U.S. Gross Domestic Product. Ten years ago, it was under 60% of GDP. By 2011, it will probably exceed 100% of GDP. And we're not counting unbooked liabilities from Social Security, Medicare, Medicaid, Fannie Mae, Freddie Mac, FHA and continued bank bailouts. Let's not even go there because the RAM in most personal computers can't handle numbers that large.
America's government debt will never be repaid. It's gotten too big. The government pays debt coming due by finding new lenders or convincing holders of old debt to roll their investments over. The government is lucky that the dollar is the world's reserve currency, or it would be up a poorly lit creek. (For more on this point, see http://blogger.uncleleosden.com/2009/11/is-federal-government-tempted-by-moral.html.)
Using new loans to pay off old loans isn't by itself illegal. Many corporations do that with their bonds and commercial paper. All banks fund daily operations that way. A Ponzi scheme differs from legitimate enterprise because the bad guys don't use the money they take in to operate bona fide businesses. They pocket it and use it to buy cars, jewelry, houses, clothing, vacations, expensive meals and so on. In short, it's used for consumption.
What does the U.S. government do with all its borrowed money? Stuff that looks suspiciously like consumption. Most government operations aren't meant to generate profits. Law enforcement and regulation protect lives and property. The courts are there to resolve disputes. The President is supposed to manage the Executive branch departments and provide leadership. The legislative process is supposed to do something useful, although what that might be seems to have been lost in the mists of time. These operations are not intended to yield dividends or create wealth. They are forms of consumption. So, too, is most of the federal stimulus spending. And the federal bailouts and accommodations that are never repaid (which could total to a large amount) will end up as consumption.
Granted, not personal consumption. But that simply means that the federal government isn't operating an illegal Ponzi scheme. Since the government survives mainly by wheedling money out of Peter to pay Paul, its finances sure look like some kind of Ponzi scheme. To make things worse, nowadays when Peter doesn't have enough cash to cover all the government's spending, the Federal Reserve simply prints money. Indeed, trillions of dollars worth. Paul gets . . . paper spun out of thin air.
Recent comments by Chairman Bernanke and other governors indicate that the Fed isn't about to pull back those printed dollars. The Fed's balance sheet will apparently stay its Brobdingnagian size as far into the future as one can foresee. The latest thinking at the Fed about "withdrawing" liquidity seems to be that it would pay higher interest rates on member bank deposits at Federal Reserve banks. That would put a floor under fed fund rates, and arguably reduce interbank lending (and thereby constrain overall lending). But the target for fed fund rates these days is zero to 0.25%, so even if the Fed pays 0.2% and effectively prevents fed fund rates from going below 0.2%, how much will lending be constrained? The hot, new thing in the financial markets is the carry trade, where speculators borrow dollars, convert them into foreign currencies, and invest overseas for returns expected to be a shipload larger than 0.25%. A 0.2% interest rate on member bank deposits won't constrain an unemployed novice day trader let alone a multi-billion dollar hedge fund. We hesitate to delve into anathema, but the Fed needs to raise its fed funds target rate before it will constrain much of anything.
So we have a government ponzi scheme, which gives itself a boost by printing money whenever it can't find new lenders. What a racket. No wonder the Chinese and other foreign creditors of America are nervous.
There is a way out of the federal Ponzi scheme--a marked increase in federal tax revenues, which is devoted to debt repayment. That could come from a brisk resumption of economic growth or by increasing taxes. The former seems as likely as Godot's arrival. The latter may happen, although the additional tax dollars don't seem destined for debt reduction.
Nevertheless, let's accentuate the positive. With all these freshly minted dollars floating around, it's understandable why the bids at the Madoff auction were higher than expected. Bernie's victims, at least, can be grateful for federal profligacy.
Thursday, October 15, 2009
Bernie Does It Again, But Why Worry?
Recently, Bernie Madoff reportedly got into a strenuous argument with another prison inmate--about the stock market, no less. It's hard to imagine why two guys in prison would argue about the stock market. You'd think the pay phone or exercise equipment would be more important. But the discussion got so heated that a shoving match ensued, with Bernie pushing the other man to the ground. Scuffling is against prison rules, but the guards evidently didn't see the incident. So Bernie broke the rules--and again wasn't caught by the authorities. He also won the fight. At some point, you have to think some people are just plain lucky, even if they're serving the equivalent of a life sentence.
And what was there to argue about? The current stock market never met a news story it didn't like. Unemployment rising? Stocks rise. Oil prices rising, which means gasoline and heating oil will rise? Stocks rise. Consumer spending down. Stocks up. J.P. Morgan Chase, a very big bank on Wall Street that is subsidized with virtually free money from the Fed and guaranteed not to fail reports better than expected profits. Stocks rise. But how could the profits have been better than expected? This bank--and its mega-sized compadres on Wall Street--can do anything and the Fed will make sure they survive. There shouldn't be any level of profitability from them that isn't expected.
Frankly, the stock market will continue to rise briskly from here on forward, and will never, ever decline again. There's nothing to worry about for the rest of your life. You read it here first.
And if you believe that, there's a really nice bridge in Brooklyn I can get you for a song. Payment in cash--unmarked bills and nonsequential serial numbers--is required.
And what was there to argue about? The current stock market never met a news story it didn't like. Unemployment rising? Stocks rise. Oil prices rising, which means gasoline and heating oil will rise? Stocks rise. Consumer spending down. Stocks up. J.P. Morgan Chase, a very big bank on Wall Street that is subsidized with virtually free money from the Fed and guaranteed not to fail reports better than expected profits. Stocks rise. But how could the profits have been better than expected? This bank--and its mega-sized compadres on Wall Street--can do anything and the Fed will make sure they survive. There shouldn't be any level of profitability from them that isn't expected.
Frankly, the stock market will continue to rise briskly from here on forward, and will never, ever decline again. There's nothing to worry about for the rest of your life. You read it here first.
And if you believe that, there's a really nice bridge in Brooklyn I can get you for a song. Payment in cash--unmarked bills and nonsequential serial numbers--is required.
Monday, August 24, 2009
Bernie Madoff's Prison Blues
News services reported today that Bernie Madoff is claiming he has cancer, although federal officials deny that there has been any cancer diagnosis. News services also report that Bernie’s participating in Native American purification ceremonies, taking about 20 pills a day, and getting other prisoners to cook sandwich wraps for him. Supposedly, various gangs in the prison—the federal medium security facility in Butner, NC—are trying to recruit Bernie. He reportedly was assigned to the engraving section at the prison when he first arrived, but is now painting fences. The following is a work of fiction.
“Here’s your chicken fajita, Bernie.”
“Oh, hi, Doug. Did you use less vinegar like I told you?”
“Yeah. Less vinegar and a dash of paprika, like you said.”
“Good.”
“You how hard it is to get paprika in this place, Bernie?”
“Come on, Doug. All you had to do was talk to that reporter, and tell him that I was taking 20 pills a day and not feeling so good.”
“I think he thought it was funny, giving me some spice for information.”
“It was probably the cheapest tip the guy ever got.”
“Okay, well, Bernie, you got my ten bucks?”
“Oh, yeah. Ten bucks. Here it is.”
“This a good bill?”
“It’s as good as anything out there.”
“Bernie, I know you were assigned to the engraving section first. Then, they moved you to fence painting real fast. What were you doing in engraving?”
“Nothing that the Federal Reserve isn’t doing.”
“What the hell does that mean, Bernie?”
“It means take the ten and have a good time spending it. Now, look it, here comes Ray Ray. I gotta talk to him. “
“Okay, Bernie. Let me know when you want another sandwich.”
"All right, Doug. See you around."
“Bernie, my man.”
“Hello, Ray Ray.”
“I got the thing you wanted.”
“You mean the bagel with cream cheese and lox?”
“That’s right, Bernie. Here it is.”
“Ray Ray, you’re a genius.”
“It was easy. It was like you said. That reporter, he gave it to me ‘cuz I told him we was trying to recruit you.”
“Good. Even in this place, life is sometimes a bowl of cherries.”
“Say what?”
“I was just making an observation.”
“So, Bernie, you gonna join up with us?”
“I don’t know, Ray Ray. Why do you want an old guy like me in your gang?”
“Bernie, my man. You the biggest hustler of all time. I seen a lot of hustle and jive. But I ain’t never seen no one take $65 billion. All the blow that goes through LA, it ain’t worth nothing like $65 billion. You the man. You the main man. We can learn from you. You gotta tell us how you did it. You gotta teach us.”
“It’s nice of you to say that, Ray Ray. I’ll think about it.”
“There’s a lot more bagel, lox and cream cheese if you join up with us.”
“I'll keep that in mind. Look, the Chief is coming. If you’ll excuse me, I need to speak with him.”
“Okay, Bernie. Keep on talking to me.”
“Okay, Ray Ray.”
“Hello, Bernie.”
“Hello, Chief Running Bear. Everything ready?”
“The lodge is ready and the stones are hot.”
“Good. I’ll just take my shirt off and we can get started.”
“This is your third purification ceremony this month, Bernie. I think we’re getting you in pretty good shape.”
“I do enjoy the ceremonies, Chief. I feel better afterwards.”
“That’s good, Bernie. Maybe, before we get started this time, you could tell what you’ve been seeing.”
“You sure you want to know, Chief?”
“Bernie, I’m full-blooded Native American. I can’t stay cooped up here. It’s bad enough being on the reservation. This place will kill me.”
“Okay, Chief. I’ll tell you what I saw while I was painting. The fence in the northeast corner of the perimeter looks kind of loose at the bottom. Maybe, if you scraped away enough of the dirt, you might be able to slip underneath. And you know the manhole cover near the fence along the south side of the perimeter, for the storm water drainage?”
“I know what you mean.”
“When I was painting there, I overheard a couple of maintenance guys talking while they were inspecting the drainage pipe. They said the bars in the pipe are getting rusty, and that it might not be that hard to push through them. You’re a big, strong guy, Chief. Maybe you could lift up the manhole cover, get into the drainage pipe--it's big--and push through the bars.”
“Thanks, Bernie. That’s good to know. Let’s get the ceremony going. We’ll have you in great shape soon.”
“I’m glad to hear that.”
“By the way, Bernie. Do you mind if I ask a personal question?”
“No, not at all. Fire away, Chief.”
“You look pretty healthy to me. Do you really have cancer?”
“Chief, what you don’t know won’t hurt you.”
“Bernie, no disrespect intended, but a lot of your investors would argue with that.”
“Chief, like you, I don’t want to stay here forever. The cancer story worked out well for that Libyan guy in Scotland. I might as well give it a try.”
Tuesday, August 11, 2009
What Will Frank DiPascali Say About the Bernie Madoff Scandal?
Frank DiPascali, depicted by the government as Bernie Madoff's right hand man, pled guilty today in the federal court in Manhattan. The charges against him include ten felony counts, enough for a maximum 125-year sentence. If imposed, that would be close to Bernie's 150 year sentence. But DiPascali will probably get something much less than 125 years.
Unlike Bernie, DiPascali entered into a cooperation agreement with the government. Although the plea agreement isn't public, it likely requires DiPascali to reveal everything he knows about the Madoff scandal. At age 52, DiPascali has a chance, by singing loudly and at length about every crime he's aware of, to avoid a lifetime sentence. It's clear that's his goal.
Bernie, on the other hand, has refused to cooperate. As we discussed previously (see http://blogger.uncleleosden.com/2009/06/will-bernie-madoff-now-talk.html), there are pressures on Bernie to talk. Things have only gotten worse for him today, with DiPascali getting friendly with the government.
In the "information" (the government's document setting forth the criminal charges) and in the "complaint" (a document containing civil charges) filed simultaneously by the SEC against DiPascali, one gets the picture that contrary to Bernie's claims, he had a number of people helping him out. DiPascali and other "co-conspirators" allegedly fabricated documents and misled investors, the government, and auditors. They evidently enjoyed lying to the SEC, because they supposedly did it early (beginning in 1992) and often (again in 2004, 2005 and 2006).
Rather intriguing are the allegations that the fraud went back to at least the 1980s, and that in 1992, things almost fell apart when Bernie had to prove that he actually held some $300 million in assets for clients he got through a firm called Avelleno & Bienes. The SEC sued Avelleno & Bienes, and a receiver appointed by the court in that case asked for redemption of all accounts of A&B customers and records of those accounts. Bernie had to scramble to come up with $300 million actual dollars while DiPascali helped to fabricate phony documentation. They were successful in deceiving the receiver and the SEC, and many A&B clients returned to Madoff to be defrauded further. (This shows you the allure of Ponzi schemes--when the culprits successfully meet withdrawal requests, many victims think everything is legit and come back to be fleeced again.)
This may have been a critical moment in Bernie's Ponzi scheme. If it had been exposed in 1992, the total loss might have been in the hundreds of millions or low billions--a very large fraud, but nothing on the scale of the ultimate scam. But Bernie thwarted any possibility of that by coming up with the $300 million needed for the redemptions.
Bernie's ability to come up with this much cash in 1992 raises interesting questions. Since the scam was probably much smaller in those days, with fewer feeder funds and what not, how did Bernie come up with such a big pile of dinero so quickly? There are allegations in the court papers that in recent years the Madoff firm kept well-funded bank accounts at J.P. Morgan Chase as a reserve against customer redemption requests (in other words, the crooks were prudent about taking steps to keep the fraud going). But did they have a reserve fund in 1992? If so, was it funded with $300 million (probably not, since the SEC complaint says that Bernie "scrambled" to raise the money).
Since Bernie didn't hold real assets, but ran a fraud, he couldn't have simply gone to his neighborhood bank, pledged some collateral, and got a $300 million loan. He was running a criminal enterprise, not a legitimate business. In the world of crime, there are ways to get loans. But they tend to be expensive, and repayment is very important unless you want to be fitted with really heavy shoes. Is this why Bernie has been mum? Are there investors in, lenders to, or owners of his scheme whose identities he can't afford to reveal no matter where he is?
Today's court papers also reveal that DiPascali made off with more than $5 million of investor funds by siphoning them into accounts he personally controlled. That, it appears, was boat money and other such pocket change. It's unclear whether Bernie knew about DiPascali's sticky fingers--when you're stealing tens of billions, the disappearance of a few million might go unnoticed. But perhaps DiPascali wasn't alone in pinching off a few pennies here and there. Perhaps Bernie quietly stashed a few nickels in places he doesn't want to reveal.
You can expect that DiPascali will name everyone in the Madoff organization or elsewhere who was involved in the nastiness. It would improve his prospects at the sentencing hearing (conveniently set for ten months from now to give him plenty of time to sing) if he can truthfully finger high profile people (like members of Bernie's family). His "co-conspirators" are now under the gun to come in out of the cold and cut deals with the government to sing themselves. Otherwise, they might be sitting ducks once the prosecutors have DiPascali's evidence. The tabloid quality of this story could improve.
As for Bernie, the enigma of his silence only increases. He could have fingered DiPascali and other "co-conspirators" to get a chance at a lesser sentence. That he didn't suggests he wants to be in prison (a possibility we discussed in http://blogger.uncleleosden.com/2009/03/what-bernie-madoff-told-us-today.html). Now, with DiPascali doing his best Pavarotti imitation, Bernie's lost some leverage. We may never learn why Bernie's taken a vow of silence. But, then again, with the number of indicted songbirds likely to increase, perhaps we will. Stay tuned.
Unlike Bernie, DiPascali entered into a cooperation agreement with the government. Although the plea agreement isn't public, it likely requires DiPascali to reveal everything he knows about the Madoff scandal. At age 52, DiPascali has a chance, by singing loudly and at length about every crime he's aware of, to avoid a lifetime sentence. It's clear that's his goal.
Bernie, on the other hand, has refused to cooperate. As we discussed previously (see http://blogger.uncleleosden.com/2009/06/will-bernie-madoff-now-talk.html), there are pressures on Bernie to talk. Things have only gotten worse for him today, with DiPascali getting friendly with the government.
In the "information" (the government's document setting forth the criminal charges) and in the "complaint" (a document containing civil charges) filed simultaneously by the SEC against DiPascali, one gets the picture that contrary to Bernie's claims, he had a number of people helping him out. DiPascali and other "co-conspirators" allegedly fabricated documents and misled investors, the government, and auditors. They evidently enjoyed lying to the SEC, because they supposedly did it early (beginning in 1992) and often (again in 2004, 2005 and 2006).
Rather intriguing are the allegations that the fraud went back to at least the 1980s, and that in 1992, things almost fell apart when Bernie had to prove that he actually held some $300 million in assets for clients he got through a firm called Avelleno & Bienes. The SEC sued Avelleno & Bienes, and a receiver appointed by the court in that case asked for redemption of all accounts of A&B customers and records of those accounts. Bernie had to scramble to come up with $300 million actual dollars while DiPascali helped to fabricate phony documentation. They were successful in deceiving the receiver and the SEC, and many A&B clients returned to Madoff to be defrauded further. (This shows you the allure of Ponzi schemes--when the culprits successfully meet withdrawal requests, many victims think everything is legit and come back to be fleeced again.)
This may have been a critical moment in Bernie's Ponzi scheme. If it had been exposed in 1992, the total loss might have been in the hundreds of millions or low billions--a very large fraud, but nothing on the scale of the ultimate scam. But Bernie thwarted any possibility of that by coming up with the $300 million needed for the redemptions.
Bernie's ability to come up with this much cash in 1992 raises interesting questions. Since the scam was probably much smaller in those days, with fewer feeder funds and what not, how did Bernie come up with such a big pile of dinero so quickly? There are allegations in the court papers that in recent years the Madoff firm kept well-funded bank accounts at J.P. Morgan Chase as a reserve against customer redemption requests (in other words, the crooks were prudent about taking steps to keep the fraud going). But did they have a reserve fund in 1992? If so, was it funded with $300 million (probably not, since the SEC complaint says that Bernie "scrambled" to raise the money).
Since Bernie didn't hold real assets, but ran a fraud, he couldn't have simply gone to his neighborhood bank, pledged some collateral, and got a $300 million loan. He was running a criminal enterprise, not a legitimate business. In the world of crime, there are ways to get loans. But they tend to be expensive, and repayment is very important unless you want to be fitted with really heavy shoes. Is this why Bernie has been mum? Are there investors in, lenders to, or owners of his scheme whose identities he can't afford to reveal no matter where he is?
Today's court papers also reveal that DiPascali made off with more than $5 million of investor funds by siphoning them into accounts he personally controlled. That, it appears, was boat money and other such pocket change. It's unclear whether Bernie knew about DiPascali's sticky fingers--when you're stealing tens of billions, the disappearance of a few million might go unnoticed. But perhaps DiPascali wasn't alone in pinching off a few pennies here and there. Perhaps Bernie quietly stashed a few nickels in places he doesn't want to reveal.
You can expect that DiPascali will name everyone in the Madoff organization or elsewhere who was involved in the nastiness. It would improve his prospects at the sentencing hearing (conveniently set for ten months from now to give him plenty of time to sing) if he can truthfully finger high profile people (like members of Bernie's family). His "co-conspirators" are now under the gun to come in out of the cold and cut deals with the government to sing themselves. Otherwise, they might be sitting ducks once the prosecutors have DiPascali's evidence. The tabloid quality of this story could improve.
As for Bernie, the enigma of his silence only increases. He could have fingered DiPascali and other "co-conspirators" to get a chance at a lesser sentence. That he didn't suggests he wants to be in prison (a possibility we discussed in http://blogger.uncleleosden.com/2009/03/what-bernie-madoff-told-us-today.html). Now, with DiPascali doing his best Pavarotti imitation, Bernie's lost some leverage. We may never learn why Bernie's taken a vow of silence. But, then again, with the number of indicted songbirds likely to increase, perhaps we will. Stay tuned.
Tuesday, June 30, 2009
Will Bernie Madoff Now Talk?
In sentencing Bernard Madoff to 150 years, Judge Denny Chin expressed the outrage and condemnation that so many feel. He also set in motion a subtle dynamic.
The 150 year sentence must be a record for white collar crime. With Madoff being 71, he's destined to die in prison. That is, unless the sentence is reduced.
An inmate whose record is so egregious as Madoff's won't have much chance for a reduction of sentence. But he might pull it off if he provides substantial and fruitful cooperation to the government's continuing investigation. In this case, cooperation would include, at a minimum, information, testimony, documents, and any assets he hasn't turned over. While Madoff may have provided the government with some information through his lawyer, cooperation of the sentencing-reducing sort would mean full, unreserved and comprehensive disclosure, with nothing held back (except possibly limited amounts of information subject to legal privileges like the attorney-client privilege).
Clearly, Madoff doesn't want to spend the rest of his life in jail. His lawyer proposed a 12 year sentence, which isn't any slap on the wrist because it would mean incarceration in a medium security prison. You'd be better off in a 50-year old motel near the freeway in downtown Detroit than in a medium security prison (although that would be a close call). But a 12 year sentence, with time off for good behavior, might have gotten him out before he went six feet under. He hasn't got a prayer of living to see an early release for good behavior now.
As we discussed before, it is very curious that Madoff pled guilty without agreeing to cooperate with the government (see http://blogger.uncleleosden.com/2009/03/what-bernie-madoff-told-us-today.html). For a guy who apparently doesn't want to spend the rest of his life in prison, cooperation would be the most obvious way to get a lighter sentence. Since Madoff didn't agree to cooperate, he may well have something to hide. Billions stashed away overseas? He was laundering money for narco traffickers? He was hiding assets for foreign dictators and Russian oligarchs? His unreserved cooperation would mean jail time for his wife and sons?
Judge Chin, a former federal prosecutor, would surely understand the pressure a 150 year sentence would place on Madoff to cooperate. And perhaps that was his intention. Madoff and his lawyer will probably be chatting about this question. Perhaps equally important, people that Madoff might implicate will likely be chatting with their lawyers about this question. If Madoff fingers them now, their sentences could be harsher than if they stepped forward first, admitted guilt and themselves cooperated with the government. If they step forward quickly before Bernie talks, they may get significantly better outcomes than Bernie.
Madoff and others may have been stonewalling the government so far. But the 150 year sentence places Bernie under greater pressure to cooperate. Others who may be involved in the scam know, as do we all, that Madoff has betrayed plenty of people before. Can they be sure he'll protect them now? Or should they step forward first and get the sweetest deal available under the circumstances from the government?
The Bernie Madoff story may not be over. Time will tell.
The 150 year sentence must be a record for white collar crime. With Madoff being 71, he's destined to die in prison. That is, unless the sentence is reduced.
An inmate whose record is so egregious as Madoff's won't have much chance for a reduction of sentence. But he might pull it off if he provides substantial and fruitful cooperation to the government's continuing investigation. In this case, cooperation would include, at a minimum, information, testimony, documents, and any assets he hasn't turned over. While Madoff may have provided the government with some information through his lawyer, cooperation of the sentencing-reducing sort would mean full, unreserved and comprehensive disclosure, with nothing held back (except possibly limited amounts of information subject to legal privileges like the attorney-client privilege).
Clearly, Madoff doesn't want to spend the rest of his life in jail. His lawyer proposed a 12 year sentence, which isn't any slap on the wrist because it would mean incarceration in a medium security prison. You'd be better off in a 50-year old motel near the freeway in downtown Detroit than in a medium security prison (although that would be a close call). But a 12 year sentence, with time off for good behavior, might have gotten him out before he went six feet under. He hasn't got a prayer of living to see an early release for good behavior now.
As we discussed before, it is very curious that Madoff pled guilty without agreeing to cooperate with the government (see http://blogger.uncleleosden.com/2009/03/what-bernie-madoff-told-us-today.html). For a guy who apparently doesn't want to spend the rest of his life in prison, cooperation would be the most obvious way to get a lighter sentence. Since Madoff didn't agree to cooperate, he may well have something to hide. Billions stashed away overseas? He was laundering money for narco traffickers? He was hiding assets for foreign dictators and Russian oligarchs? His unreserved cooperation would mean jail time for his wife and sons?
Judge Chin, a former federal prosecutor, would surely understand the pressure a 150 year sentence would place on Madoff to cooperate. And perhaps that was his intention. Madoff and his lawyer will probably be chatting about this question. Perhaps equally important, people that Madoff might implicate will likely be chatting with their lawyers about this question. If Madoff fingers them now, their sentences could be harsher than if they stepped forward first, admitted guilt and themselves cooperated with the government. If they step forward quickly before Bernie talks, they may get significantly better outcomes than Bernie.
Madoff and others may have been stonewalling the government so far. But the 150 year sentence places Bernie under greater pressure to cooperate. Others who may be involved in the scam know, as do we all, that Madoff has betrayed plenty of people before. Can they be sure he'll protect them now? Or should they step forward first and get the sweetest deal available under the circumstances from the government?
The Bernie Madoff story may not be over. Time will tell.
Thursday, April 23, 2009
Bernie and Abdu
{This is a fantasy.}
Abdu picked up his lunch tray and looked for a place to sit in the inmates cafeteria at the Metropolitan Correctional Center in Manhattan. Almost all the prisoners were clustered together, it seemed, by skin color. The whites were in one corner, the blacks in another corner and the brown prisoners, who mostly spoke a language other than English, were in a third corner. He didn’t see anyone who looked Somali. More than ever, Abdu felt alone.
Then, he noticed an elderly white man sitting by himself. The man gave Abdu a half smile and nodded at the chair across the table from where he was sitting. Since no other American had given Abdu even a quarter smile, he took the invitation and sat down across from the elderly man.
“Hi. How are you?” asked the elderly man.
“Not so well. It’s hard adjusting to America when you’ve lived in Somalia all your life,” sighed Abdu, not saying even the half of it.
“First time here, then?” asked the elderly man.
“Yes,” said Abdu morosely, as he took a bite of his sandwich. Then, he frowned and asked, “What’s in this sandwich?”
“It’s called bologna,” said the elderly man.
“Is there any pork in it? I’m Muslim. I can’t eat pork,” said Abdu.
“They told me it was all-beef bologna,” said the elderly man. “I can’t eat pork either, so I made sure to ask.”
“Why can’t you eat pork?” asked Abdu.
“I’m Jewish,” said the elderly man.
Abdu squirmed in his chair and looked around. But, still, none of the other inmates, or prison staff, were giving him even a quarter smile. So he stayed where he was.
“Say, what’s your name?” asked the elderly man.
“Abdu.”
“Abdu? I’m Bernie.”
Abdu looked at the extended hand. He had never touched a Jew before; in fact he had never seen one before. He had heard about them, of course, and expected something much more monstrous than this seemingly congenial old man. However, considering that no one else was giving him even a quarter smile, he took Bernie’s hand and gave it a perfunctory squeeze.
“So, Abdu, what are you in here for?”
Abdu fidgeted and said, “Stealing . . . I suppose you could call it robbery. I mean . . . well, they say I was a pirate.”
“I see,” said Bernie. “They’ve charged me with stealing as well. And, to tell you the truth, people have called me worse things than a pirate.”
Abdu, not having had anyone to talk to since he had been arrested, couldn’t contain himself. “It’s so unfair. We weren’t pirates. We were . . . uh, fishermen. We approached the ship to see if we could get a glass of water. It was very hot that day.”
“Didn’t you have guns?” asked Bernie, his brow furrowed in puzzlement.
“Well, yes. But it’s very dangerous in that part of the world. There are a lot of pirates.”
“I see,” said Bernie, easing back into his half-smile.
“Do you? Do you understand? We’re very poor people. I never experienced central heating before I was imprisoned here. We struggle just to stay alive.”
“Life is a struggle,” said Bernie sympathetically. “You always have to stay on your toes.”
“I found that out this morning,” said Abdu. “A very large man here, with a name something like ‘Buppa’ . . .”
“You mean Bubba?” asked Bernie.
“Yes. That’s his name. He told me I had to give him the wages I would earn working at the prison laundry room. He raised his fists to make sure I understood what he meant. I can’t believe he would threaten me with violence to extort a little money.”
“Life can be very unfair,” observed Bernie. “Sometimes, you just have to bear up.”
Abdu felt panic welling up inside of him. “Bernie, they told me I could spend the rest of my life in prison. I can’t do that. I’ll go crazy. There has to be a way out.”
Bernie looked around, remaining silent while he scanned the room. Then he spoke in a low whisper.
“It doesn’t look like anyone is listening. Look, Abdu, I can help you get out.”
“You can? How is that?” asked Abdu, for the first time since his arrest feeling a ray of hope.
Bernie now widened his mouth into a full smile. “First, let’s chat about how you can help me.”
Abdu was puzzled. “How could I possibly help you?”
“You or your family probably have some . . . um, savings you might want to invest.”
“Us? Savings? Are you kidding?”
“Oh, come on, Abdu. Surely, you fishermen catch big fish sometimes. Everyone gets lucky now and then. This is important, if you want to get out of here.”
Abdu turned his head slightly, narrowed his eyes, and scrutinized Bernie closely. “Well, maybe we have a few extra shillings,” he said in a low voice.
“Good. I have a friend who controls a bank account in a foreign country, and all you have to do is tell your family to wire, let’s say, a million U.S. dollars to this account,” said Bernie. “Then I’ll tell you how to get out of here.”
“A million dollars?” cried Abdu. “That’s piracy.”
“Not at all. You see, you aren’t giving it to me. You’re investing it with me. I’ll use it to trade stock and options. I have a special, secret strategy that will generate returns of 10 to 12 percent a year, every year. Guaranteed. I’ll bet that’s a better return than you can get in Mogadishu.”
Abdu frowned. “No one can possibly earn a steady return like that. Even in Somalia, we know that markets fluctuate. Why, with the rising interest in piracy, the price of an RPG rocket launcher has doubled in the last two years.”
“Abdu, I tell you, I can get those returns,” said Bernie, the picture of buttery sincerity. “You understand that I’m offering you an exclusive opportunity. I haven’t told the other inmates about it. They’re all staying while you’ll be on your way out.”
Abdu pursed his lips while his mind raced. Then, he sat up in surprise. “Wait a minute. I know who you are. You’re the guy who stole $64 billion dollars. Even in Somalia, we’ve heard of you. You’ve stolen much more money than all the Somali pirates put together.”
“Don’t believe what you read in the newspapers,” said Bernie. “They never get the full story.”
“Forget it,” said Abdu. “I’m not falling for this nonsense. Whatever money my family has, we’re keeping at home, under the mattress, right next to the AK-47.”
Bernie was silent for a moment, but kept smiling. Then, he said, “Well, think about it, Abdu. We have lots of time to talk it over. I’m not going anywhere and neither are you.”
“Bernie,”said Abdu. “You know what you’re saying is a pack of lies. You’ve pled guilty. You’ve admitted you’re a crook. How can you keep saying these things?”
“Because this is what I do,” said Bernie. “I started years ago, and couldn’t stop even though I knew it was wrong. Why stop now? They can’t keep me in jail any longer than they already plan to.”
Abdu slumped back in his chair. He could see the future now. If he was convicted of the charges against him, there would be more lunches—maybe years of lunches--with Bernie, who would pitch him again and again about an exclusive way to escape. He’d listen because no one else would offer him any hope. And Bernie’s promises would be the worst punishment of all, because they’d just be illusions.
Abdu picked up his lunch tray and looked for a place to sit in the inmates cafeteria at the Metropolitan Correctional Center in Manhattan. Almost all the prisoners were clustered together, it seemed, by skin color. The whites were in one corner, the blacks in another corner and the brown prisoners, who mostly spoke a language other than English, were in a third corner. He didn’t see anyone who looked Somali. More than ever, Abdu felt alone.
Then, he noticed an elderly white man sitting by himself. The man gave Abdu a half smile and nodded at the chair across the table from where he was sitting. Since no other American had given Abdu even a quarter smile, he took the invitation and sat down across from the elderly man.
“Hi. How are you?” asked the elderly man.
“Not so well. It’s hard adjusting to America when you’ve lived in Somalia all your life,” sighed Abdu, not saying even the half of it.
“First time here, then?” asked the elderly man.
“Yes,” said Abdu morosely, as he took a bite of his sandwich. Then, he frowned and asked, “What’s in this sandwich?”
“It’s called bologna,” said the elderly man.
“Is there any pork in it? I’m Muslim. I can’t eat pork,” said Abdu.
“They told me it was all-beef bologna,” said the elderly man. “I can’t eat pork either, so I made sure to ask.”
“Why can’t you eat pork?” asked Abdu.
“I’m Jewish,” said the elderly man.
Abdu squirmed in his chair and looked around. But, still, none of the other inmates, or prison staff, were giving him even a quarter smile. So he stayed where he was.
“Say, what’s your name?” asked the elderly man.
“Abdu.”
“Abdu? I’m Bernie.”
Abdu looked at the extended hand. He had never touched a Jew before; in fact he had never seen one before. He had heard about them, of course, and expected something much more monstrous than this seemingly congenial old man. However, considering that no one else was giving him even a quarter smile, he took Bernie’s hand and gave it a perfunctory squeeze.
“So, Abdu, what are you in here for?”
Abdu fidgeted and said, “Stealing . . . I suppose you could call it robbery. I mean . . . well, they say I was a pirate.”
“I see,” said Bernie. “They’ve charged me with stealing as well. And, to tell you the truth, people have called me worse things than a pirate.”
Abdu, not having had anyone to talk to since he had been arrested, couldn’t contain himself. “It’s so unfair. We weren’t pirates. We were . . . uh, fishermen. We approached the ship to see if we could get a glass of water. It was very hot that day.”
“Didn’t you have guns?” asked Bernie, his brow furrowed in puzzlement.
“Well, yes. But it’s very dangerous in that part of the world. There are a lot of pirates.”
“I see,” said Bernie, easing back into his half-smile.
“Do you? Do you understand? We’re very poor people. I never experienced central heating before I was imprisoned here. We struggle just to stay alive.”
“Life is a struggle,” said Bernie sympathetically. “You always have to stay on your toes.”
“I found that out this morning,” said Abdu. “A very large man here, with a name something like ‘Buppa’ . . .”
“You mean Bubba?” asked Bernie.
“Yes. That’s his name. He told me I had to give him the wages I would earn working at the prison laundry room. He raised his fists to make sure I understood what he meant. I can’t believe he would threaten me with violence to extort a little money.”
“Life can be very unfair,” observed Bernie. “Sometimes, you just have to bear up.”
Abdu felt panic welling up inside of him. “Bernie, they told me I could spend the rest of my life in prison. I can’t do that. I’ll go crazy. There has to be a way out.”
Bernie looked around, remaining silent while he scanned the room. Then he spoke in a low whisper.
“It doesn’t look like anyone is listening. Look, Abdu, I can help you get out.”
“You can? How is that?” asked Abdu, for the first time since his arrest feeling a ray of hope.
Bernie now widened his mouth into a full smile. “First, let’s chat about how you can help me.”
Abdu was puzzled. “How could I possibly help you?”
“You or your family probably have some . . . um, savings you might want to invest.”
“Us? Savings? Are you kidding?”
“Oh, come on, Abdu. Surely, you fishermen catch big fish sometimes. Everyone gets lucky now and then. This is important, if you want to get out of here.”
Abdu turned his head slightly, narrowed his eyes, and scrutinized Bernie closely. “Well, maybe we have a few extra shillings,” he said in a low voice.
“Good. I have a friend who controls a bank account in a foreign country, and all you have to do is tell your family to wire, let’s say, a million U.S. dollars to this account,” said Bernie. “Then I’ll tell you how to get out of here.”
“A million dollars?” cried Abdu. “That’s piracy.”
“Not at all. You see, you aren’t giving it to me. You’re investing it with me. I’ll use it to trade stock and options. I have a special, secret strategy that will generate returns of 10 to 12 percent a year, every year. Guaranteed. I’ll bet that’s a better return than you can get in Mogadishu.”
Abdu frowned. “No one can possibly earn a steady return like that. Even in Somalia, we know that markets fluctuate. Why, with the rising interest in piracy, the price of an RPG rocket launcher has doubled in the last two years.”
“Abdu, I tell you, I can get those returns,” said Bernie, the picture of buttery sincerity. “You understand that I’m offering you an exclusive opportunity. I haven’t told the other inmates about it. They’re all staying while you’ll be on your way out.”
Abdu pursed his lips while his mind raced. Then, he sat up in surprise. “Wait a minute. I know who you are. You’re the guy who stole $64 billion dollars. Even in Somalia, we’ve heard of you. You’ve stolen much more money than all the Somali pirates put together.”
“Don’t believe what you read in the newspapers,” said Bernie. “They never get the full story.”
“Forget it,” said Abdu. “I’m not falling for this nonsense. Whatever money my family has, we’re keeping at home, under the mattress, right next to the AK-47.”
Bernie was silent for a moment, but kept smiling. Then, he said, “Well, think about it, Abdu. We have lots of time to talk it over. I’m not going anywhere and neither are you.”
“Bernie,”said Abdu. “You know what you’re saying is a pack of lies. You’ve pled guilty. You’ve admitted you’re a crook. How can you keep saying these things?”
“Because this is what I do,” said Bernie. “I started years ago, and couldn’t stop even though I knew it was wrong. Why stop now? They can’t keep me in jail any longer than they already plan to.”
Abdu slumped back in his chair. He could see the future now. If he was convicted of the charges against him, there would be more lunches—maybe years of lunches--with Bernie, who would pitch him again and again about an exclusive way to escape. He’d listen because no one else would offer him any hope. And Bernie’s promises would be the worst punishment of all, because they’d just be illusions.
Thursday, March 12, 2009
What Bernie Madoff Told Us Today
Bernie Madoff pled guilty to 11 felony charges today in the federal court in Manhattan. In his plea statement, he said, "[A]s the years went by I realized that my arrest and this day would inevitably come."
He knew he'd face the music because his Ponzi scheme was ultimately untenable. He couldn't continue to pay steady, above average returns forever. Wall Street is in New York, not on the shores of Lake Wobegon. Bernie was a little man in a booth, and he knew that when someone drew back the curtain, he would be revealed as a humbug.
Unfortunately for his victims, they can't just click their heels three times, repeating "there's no place like home" and miraculously get their money back. The principle of caveat emptor hasn't legally applied in the stock markets since the federal securities laws were adopted in 1933 and 1934. But it remains a sound practical guidepost. When the money has evaporated, as is the case with Bernie's little scam, all the legal liability in the world can't make the investors whole. Be cautious about investment opportunities. If it sounds too good to be true, it probably isn't true.
One wonders whether Bernie has leveled with the court and with his victims. He didn't agree to cooperate with the government. That suggests that he has secrets he'd prefer to take to the grave. His plea statement (which lawyers call an "allocution") was carefully crafted to point the finger at himself, and only himself. It would make Bernie appear to be a super-con, who perpetrated a $64 billion fraud all by himself. Yet, one would have to suspend credulity to accept that he could have pulled this off alone. Too much work was required, too many documents were necessary, too many communications were made, and too much money was involved. There are plenty of American banks that don't have $64 billion in deposits. Are we to believe that ole Bernie, all by his little lonesome self on the 17th floor of the Lipstick Building, was able to skim off more money than the GDP of some nations?
Bernie's scam takes us from the world of stocks and bonds to the world of crime. In the criminal world, a guy doesn't plead guilty to almost a dozen felony counts, putting himself in federal prison probably for the rest of his life, unless he's got a powerful reason or two. What's his game? Who's he shielding? Is he protecting his former colleagues? If so, why? What do they have on him? Is he protecting his wife? Or other family members? Why not try to cut a deal with the prosecutors to shield his family and perhaps others from criminal prosection in return for his guilty plea and cooperation? Such deals are not unknown.
Let's recall that a $64 billion Ponzi scheme implies a cash flow of $64 billion. That's really quite a lot of cash. Neither Bill Gates nor Warren Buffett have anywhere near that much cash. Their wealth is embodied in stocks and other assets. Much of the $64 billion probably was paid to withdrawing investors to maintain the appearance that all was well. But you have to consider the possibility that Bernie was up to something more than stealing from his family, friends, colleagues, charities and others. Was he laundering money? That would probably have been easy, given the cash flow he controlled. If so, whose money was he laundering? U.S. citizens evading taxes? Mobsters and other drug dealers trying legitimize their ill-gotten gains? U.S. intelligence activities that couldn't be funded through conventional government appropriations processes? Russian oligarchs trying to stash a nest egg in a safe Western country? Leaders of foreign governments stealing from their citizens? Other dark forces? If such persons were among Bernie's victims, they might not consider civil remedies available in American courts to be adequate recompense.
Bernie could be better off than some of his victims. He'll always get three squares a day, and a warm place to sleep. He'll have access to indoor plumbing; no peeing in an alley. He'll get free medical care and free clothing--not exactly stylish stuff but he won't look out of place for his environs. He won't have to skulk into a supermarket and buy dog food for a fictitious dog. And there's the fact that security in federal prisons isn't bad. Not all that many inmates are murdered. Bernie, in effect, might have today talked his way to free security service for the rest of his life.
An intelligent guy like Bernie Madoff doesn't ensure that he'll quietly stay in the pen for life without having a really strong reason or two. The government is continuing its investigation, as it should, because it's doubtful we have the full story. And we don't want the government to be scammed by Bernie, not this time.
He knew he'd face the music because his Ponzi scheme was ultimately untenable. He couldn't continue to pay steady, above average returns forever. Wall Street is in New York, not on the shores of Lake Wobegon. Bernie was a little man in a booth, and he knew that when someone drew back the curtain, he would be revealed as a humbug.
Unfortunately for his victims, they can't just click their heels three times, repeating "there's no place like home" and miraculously get their money back. The principle of caveat emptor hasn't legally applied in the stock markets since the federal securities laws were adopted in 1933 and 1934. But it remains a sound practical guidepost. When the money has evaporated, as is the case with Bernie's little scam, all the legal liability in the world can't make the investors whole. Be cautious about investment opportunities. If it sounds too good to be true, it probably isn't true.
One wonders whether Bernie has leveled with the court and with his victims. He didn't agree to cooperate with the government. That suggests that he has secrets he'd prefer to take to the grave. His plea statement (which lawyers call an "allocution") was carefully crafted to point the finger at himself, and only himself. It would make Bernie appear to be a super-con, who perpetrated a $64 billion fraud all by himself. Yet, one would have to suspend credulity to accept that he could have pulled this off alone. Too much work was required, too many documents were necessary, too many communications were made, and too much money was involved. There are plenty of American banks that don't have $64 billion in deposits. Are we to believe that ole Bernie, all by his little lonesome self on the 17th floor of the Lipstick Building, was able to skim off more money than the GDP of some nations?
Bernie's scam takes us from the world of stocks and bonds to the world of crime. In the criminal world, a guy doesn't plead guilty to almost a dozen felony counts, putting himself in federal prison probably for the rest of his life, unless he's got a powerful reason or two. What's his game? Who's he shielding? Is he protecting his former colleagues? If so, why? What do they have on him? Is he protecting his wife? Or other family members? Why not try to cut a deal with the prosecutors to shield his family and perhaps others from criminal prosection in return for his guilty plea and cooperation? Such deals are not unknown.
Let's recall that a $64 billion Ponzi scheme implies a cash flow of $64 billion. That's really quite a lot of cash. Neither Bill Gates nor Warren Buffett have anywhere near that much cash. Their wealth is embodied in stocks and other assets. Much of the $64 billion probably was paid to withdrawing investors to maintain the appearance that all was well. But you have to consider the possibility that Bernie was up to something more than stealing from his family, friends, colleagues, charities and others. Was he laundering money? That would probably have been easy, given the cash flow he controlled. If so, whose money was he laundering? U.S. citizens evading taxes? Mobsters and other drug dealers trying legitimize their ill-gotten gains? U.S. intelligence activities that couldn't be funded through conventional government appropriations processes? Russian oligarchs trying to stash a nest egg in a safe Western country? Leaders of foreign governments stealing from their citizens? Other dark forces? If such persons were among Bernie's victims, they might not consider civil remedies available in American courts to be adequate recompense.
Bernie could be better off than some of his victims. He'll always get three squares a day, and a warm place to sleep. He'll have access to indoor plumbing; no peeing in an alley. He'll get free medical care and free clothing--not exactly stylish stuff but he won't look out of place for his environs. He won't have to skulk into a supermarket and buy dog food for a fictitious dog. And there's the fact that security in federal prisons isn't bad. Not all that many inmates are murdered. Bernie, in effect, might have today talked his way to free security service for the rest of his life.
An intelligent guy like Bernie Madoff doesn't ensure that he'll quietly stay in the pen for life without having a really strong reason or two. The government is continuing its investigation, as it should, because it's doubtful we have the full story. And we don't want the government to be scammed by Bernie, not this time.
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