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.
Showing posts with label Madoff. Show all posts
Showing posts with label Madoff. Show all posts
Monday, February 28, 2011
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.
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.
Sunday, June 7, 2009
Death of a Millionaire
(The following is an imaginary conversation that, to our knowledge, has never taken place at the Metropolitan Correctional Center in Manhattan.)
Fred sat down on the bench and watched the other prisoners exercising. At the age of 60, he only felt the need to stretch his arms and legs a bit. Beyond that, exercise was just another thing he had lost interest in. Especially now, when after three days in prison, the stark reality of confinement was sinking in.
The older man on the other end of the bench turned and gave Fred a half-smile.
“How are you?” he asked.
“I’ve been better,” said Fred.
The older man nodded and said, “I know what you mean.”
Both men fell silent. Since things at the Metropolitan Correctional Center didn’t change much from day to day, there wasn’t much to talk about. But Fred figured that maybe this older guy, who seemed rather congenial, might be helpful.
“Say, do you know how to get something to read?” asked Fred.
“If you can find a guard who likes you, you might be able to spend extra time at the library,” said the older man.
“I’ll have to work on being pals with the guards, I guess,” said Fred. “I don’t find looking at walls very entertaining.”
“They’re not good conversationalists,” agreed the older man. “I tried looking out the window. It’s small and the bars get in the way. But I gave bird watching a try.”
“How did that go?” asked Fred, desperate for any diversion.
“After you learn to spot the pigeons, sparrows and the occasional hawk, there wasn’t much to see. I saw a seagull once or twice, and maybe a crow. That was the high point of bird watching for me.”
“I try to follow the little bit of the news I can learn,” said Fred. “But it all seems kind of irrelevant. In this place, it doesn’t matter what I think or feel about anything.”
“Oh, now, don’t think that way, uh, . . . what’s your name?”
“Fred.”
“Hi, Fred. I’m Bernie.”
Fred looked at the extended hand, and after a moment gave a brief squeeze. It was funny how in prison social customs like shaking hands were still followed. Never before in his life had it seemed like so little mattered. But decorum remained.
“Listen, Fred, you can’t be negative. You have to keep your chin up, even in a place like this.”
Fred gave Bernie a puzzled look. But the older man kept the half-smile on his face, and gestured upwards with his right hand, as if he were lifting something.
“You’re not kidding,” said Fred.
“No. I always try to look at the bright side of things,” said Bernie.
Fred turned away, and slowly said, “So did I, once.”
“What happened?”
“I’ve been spending a lot of time thinking about that,” said Fred. “I still don’t know exactly what happened. I thought I was doing everything right. I mean, not exactly everything. I started college, but then dropped out after a couple of years. That was in the late 60s, and I was kind of rebellious, a free thinker. I dabbled in the counterculture. Went to a commune, but that was too weird so I left within weeks. I got a bunch of dead end jobs, lived in cheap apartments, and had a bunch of girlfriends; didn’t keep any of them for long. I got by, until I got tired of just getting by. Then I went back to college and earned a bachelors degree.”
“Good for you,” said Bernie. “You see, finishing college is an investment for the future, and investing is an act of optimism. You were an optimist when you did that.”
“Except that the economy was going to hell. That was in the 70s, when we had stagflation and malaise and disco.”
“I’m glad to say I never got into disco,” said Bernie.
“I'm sorry to say I did. The 70s were the Me Decade, if you remember,” said Fred.
“I don’t remember that,” said Bernie. “I was busy trying to build a business and support a family.”
“I could see job opportunities for college grads weren’t good, so I went to law school,” said Fred.
“That’s great. You became a professional man,” said Bernie.
“Yeah. I became a lawyer. I did well in school, so a big law firm hired me. They paid a lot, but I had to work day and night and weekends. That and the office politics got old real fast. So I took a job in a small firm where the hours and people were sane. Then I got married and bought a house in the suburbs. Had two kids, two cars, one dog and one cat. My life became normal.”
“Sounds like everything was going well,” said Bernie.
“It was,” said Fred. “My marriage was happy, the kids were smart and well-behaved, I became a partner at the firm and we traded up to a larger house in a better school district. Everything was going well. But, as I look back, I realize I had stopped thinking.”
“How so?” asked Bernie.
“I just began doing what everyone else was doing,” said Fred. “Going after a fancier lifestyle, trying to get all the symbols of success—big house, big cars, private schools for the kids, vacations in Europe, all that stuff. I even began to collect art—primitive folk art because I didn’t want to compete against the hedge fund guys. I borrowed against my house--for cars, tuition, clothes, you name it. Everyone was doing it and with housing values going up every year, it seemed like a winning bet. I didn’t forget about my retirement. I had a retirement plan, and invested in stocks, just like all the advisers told us. “
“Then, it all fell apart,” Fred continued. “My retirement plan took a beating when tech stocks collapsed in 2000. I thought my house would save me, and for a while it did. But then Wall Street blew up the housing market with these derivatives, which I still don’t understand. After that, the rest of the stock market collapsed, taking my retirement plan with it. The economy went to hell, and law business with it. My partners and I couldn’t agree how to salvage the firm, and it just fell apart. At my age, you can’t get anyone else to hire you. So I was unemployed and likely to stay that way. I couldn’t pay the mortgage and the home equity loans, so the house went into foreclosure. I had to move into a cheap apartment. It was like my life had gone full circle and I was 22 again, using an orange crate for a coffee table.”
“Life is funny,” agreed Bernie. “You can be king of the world one day and here at MCC the next.”
“The damndest thing is I was only doing what everyone else was doing,” said Fred. “I got an education and built a career. I bought the house in the suburbs and funded the retirement plan. Everyone said you had to be in stocks, so I put my money, and faith, in stocks. Between the house and the stocks, I was a millionaire just a few years ago.”
“Congratulations. You had the American Dream,” said Bernie.
“And then lost it. For reasons I still can’t wrap my head around. I mean, the Wall Street banks and hedge funds didn’t want the markets to collapse. How could they have done all the crazy stuff they did? The regulators didn’t want the chaos and panic they now have to deal with. How could they have let things run amok? I’d like to blame somebody besides myself. I only did what all these smart experts said I should do.”
“You shouldn’t blame yourself,” said Bernie. “A lot of things are out of your control.”
“I kind of went out of control. I went to Washington and began screaming outside the White House.”
“Is that what you’re in here for? Threatening the President?” asked Bernie.
“No. When the guards found out I was just mad about losing my house, my job and my retirement savings, they took me to a shelter for the homeless, where I got a hot meal and a place to stay for the night. I couldn’t stay angry after that, so I came back to New York. But I got mad again in New York and went to the Federal Reserve Bank in Manhattan. I began screaming at the regulators and blockaded some of their limousines as they were trying to leave.”
“So you’re in here for interfering with the operations of the federal government?” asked Bernie.
“No. When a Fed staffer found out I was pissed off because I was broke and out of work, he took me to a deli for lunch and listened to me complain for two hours. After he was so nice, I couldn’t stay mad at the regulators.”
“So how come you’re here?” asked Bernie.
“I regressed. I went back to being 22. With no job, no house and no money, I was in the same place I had been when I was 22. The millionaire me was gone forever. I did a juvenile thing. I took a picture of my bare ass, loaded it onto my computer and e-mailed it to every bank, mortgage lender, brokerage firm, investment adviser and anyone else who had any connection to my now ruined finances. I must have sent it to 50 places. The FBI arrested me and charged me with 50 counts of Internet porn.”
Bernie’s half-smile grew ever so slightly wider. “You must have gotten some satisfaction from doing that.”
“It was a childish thing to do, but, yes, I did feel better,” said Fred. “I’m still a bit rebellious, a bit of a free thinker.”
“I think you’ll get out pretty soon because you’ll have the sympathies of the judge and jury,” said Bernie.
“Maybe so. Then, I’ll have to figure out what to do. One thing I know is I have to start thinking for myself and stop doing things just because everyone else is doing them. With my working life almost over, and the financial and real estate markets a mess, I’ll never be a millionaire again. I have to find a new focus to life, maybe do something for the homeless or disadvantaged.”
“Attaboy, Fred. That’s the way to think. Optimism makes the world go around,” said Bernie.
“Why are you so cheery?” asked Fred. “You’ll never get out of prison.”
Bernie’s half-smile disappeared abruptly.
“I’m sorry,” said Fred. “I realized who you are when you told me your name is Bernie. You’re the guy that operated a $64 billion Ponzi scheme. They’ll never let you out.”
“I’ve always been an optimist,” said Bernie. “I had to be one, to start a firm in a cutthroat place like Wall Street. Then, when I began stepping over the line, I had to believe that somehow things would get better, I would be able to straighten things out, and make everyone whole. Later, when I realized that I would never be able to unravel things, I had to hope that I would be able to keep juggling all the balls and somehow not get caught. Most of the time, I was right to be optimistic. The markets kept going up, and my investors were like you—they didn’t really think about things. They just did what everyone else was doing. It was a helluva time while it lasted.”
Fred sat down on the bench and watched the other prisoners exercising. At the age of 60, he only felt the need to stretch his arms and legs a bit. Beyond that, exercise was just another thing he had lost interest in. Especially now, when after three days in prison, the stark reality of confinement was sinking in.
The older man on the other end of the bench turned and gave Fred a half-smile.
“How are you?” he asked.
“I’ve been better,” said Fred.
The older man nodded and said, “I know what you mean.”
Both men fell silent. Since things at the Metropolitan Correctional Center didn’t change much from day to day, there wasn’t much to talk about. But Fred figured that maybe this older guy, who seemed rather congenial, might be helpful.
“Say, do you know how to get something to read?” asked Fred.
“If you can find a guard who likes you, you might be able to spend extra time at the library,” said the older man.
“I’ll have to work on being pals with the guards, I guess,” said Fred. “I don’t find looking at walls very entertaining.”
“They’re not good conversationalists,” agreed the older man. “I tried looking out the window. It’s small and the bars get in the way. But I gave bird watching a try.”
“How did that go?” asked Fred, desperate for any diversion.
“After you learn to spot the pigeons, sparrows and the occasional hawk, there wasn’t much to see. I saw a seagull once or twice, and maybe a crow. That was the high point of bird watching for me.”
“I try to follow the little bit of the news I can learn,” said Fred. “But it all seems kind of irrelevant. In this place, it doesn’t matter what I think or feel about anything.”
“Oh, now, don’t think that way, uh, . . . what’s your name?”
“Fred.”
“Hi, Fred. I’m Bernie.”
Fred looked at the extended hand, and after a moment gave a brief squeeze. It was funny how in prison social customs like shaking hands were still followed. Never before in his life had it seemed like so little mattered. But decorum remained.
“Listen, Fred, you can’t be negative. You have to keep your chin up, even in a place like this.”
Fred gave Bernie a puzzled look. But the older man kept the half-smile on his face, and gestured upwards with his right hand, as if he were lifting something.
“You’re not kidding,” said Fred.
“No. I always try to look at the bright side of things,” said Bernie.
Fred turned away, and slowly said, “So did I, once.”
“What happened?”
“I’ve been spending a lot of time thinking about that,” said Fred. “I still don’t know exactly what happened. I thought I was doing everything right. I mean, not exactly everything. I started college, but then dropped out after a couple of years. That was in the late 60s, and I was kind of rebellious, a free thinker. I dabbled in the counterculture. Went to a commune, but that was too weird so I left within weeks. I got a bunch of dead end jobs, lived in cheap apartments, and had a bunch of girlfriends; didn’t keep any of them for long. I got by, until I got tired of just getting by. Then I went back to college and earned a bachelors degree.”
“Good for you,” said Bernie. “You see, finishing college is an investment for the future, and investing is an act of optimism. You were an optimist when you did that.”
“Except that the economy was going to hell. That was in the 70s, when we had stagflation and malaise and disco.”
“I’m glad to say I never got into disco,” said Bernie.
“I'm sorry to say I did. The 70s were the Me Decade, if you remember,” said Fred.
“I don’t remember that,” said Bernie. “I was busy trying to build a business and support a family.”
“I could see job opportunities for college grads weren’t good, so I went to law school,” said Fred.
“That’s great. You became a professional man,” said Bernie.
“Yeah. I became a lawyer. I did well in school, so a big law firm hired me. They paid a lot, but I had to work day and night and weekends. That and the office politics got old real fast. So I took a job in a small firm where the hours and people were sane. Then I got married and bought a house in the suburbs. Had two kids, two cars, one dog and one cat. My life became normal.”
“Sounds like everything was going well,” said Bernie.
“It was,” said Fred. “My marriage was happy, the kids were smart and well-behaved, I became a partner at the firm and we traded up to a larger house in a better school district. Everything was going well. But, as I look back, I realize I had stopped thinking.”
“How so?” asked Bernie.
“I just began doing what everyone else was doing,” said Fred. “Going after a fancier lifestyle, trying to get all the symbols of success—big house, big cars, private schools for the kids, vacations in Europe, all that stuff. I even began to collect art—primitive folk art because I didn’t want to compete against the hedge fund guys. I borrowed against my house--for cars, tuition, clothes, you name it. Everyone was doing it and with housing values going up every year, it seemed like a winning bet. I didn’t forget about my retirement. I had a retirement plan, and invested in stocks, just like all the advisers told us. “
“Then, it all fell apart,” Fred continued. “My retirement plan took a beating when tech stocks collapsed in 2000. I thought my house would save me, and for a while it did. But then Wall Street blew up the housing market with these derivatives, which I still don’t understand. After that, the rest of the stock market collapsed, taking my retirement plan with it. The economy went to hell, and law business with it. My partners and I couldn’t agree how to salvage the firm, and it just fell apart. At my age, you can’t get anyone else to hire you. So I was unemployed and likely to stay that way. I couldn’t pay the mortgage and the home equity loans, so the house went into foreclosure. I had to move into a cheap apartment. It was like my life had gone full circle and I was 22 again, using an orange crate for a coffee table.”
“Life is funny,” agreed Bernie. “You can be king of the world one day and here at MCC the next.”
“The damndest thing is I was only doing what everyone else was doing,” said Fred. “I got an education and built a career. I bought the house in the suburbs and funded the retirement plan. Everyone said you had to be in stocks, so I put my money, and faith, in stocks. Between the house and the stocks, I was a millionaire just a few years ago.”
“Congratulations. You had the American Dream,” said Bernie.
“And then lost it. For reasons I still can’t wrap my head around. I mean, the Wall Street banks and hedge funds didn’t want the markets to collapse. How could they have done all the crazy stuff they did? The regulators didn’t want the chaos and panic they now have to deal with. How could they have let things run amok? I’d like to blame somebody besides myself. I only did what all these smart experts said I should do.”
“You shouldn’t blame yourself,” said Bernie. “A lot of things are out of your control.”
“I kind of went out of control. I went to Washington and began screaming outside the White House.”
“Is that what you’re in here for? Threatening the President?” asked Bernie.
“No. When the guards found out I was just mad about losing my house, my job and my retirement savings, they took me to a shelter for the homeless, where I got a hot meal and a place to stay for the night. I couldn’t stay angry after that, so I came back to New York. But I got mad again in New York and went to the Federal Reserve Bank in Manhattan. I began screaming at the regulators and blockaded some of their limousines as they were trying to leave.”
“So you’re in here for interfering with the operations of the federal government?” asked Bernie.
“No. When a Fed staffer found out I was pissed off because I was broke and out of work, he took me to a deli for lunch and listened to me complain for two hours. After he was so nice, I couldn’t stay mad at the regulators.”
“So how come you’re here?” asked Bernie.
“I regressed. I went back to being 22. With no job, no house and no money, I was in the same place I had been when I was 22. The millionaire me was gone forever. I did a juvenile thing. I took a picture of my bare ass, loaded it onto my computer and e-mailed it to every bank, mortgage lender, brokerage firm, investment adviser and anyone else who had any connection to my now ruined finances. I must have sent it to 50 places. The FBI arrested me and charged me with 50 counts of Internet porn.”
Bernie’s half-smile grew ever so slightly wider. “You must have gotten some satisfaction from doing that.”
“It was a childish thing to do, but, yes, I did feel better,” said Fred. “I’m still a bit rebellious, a bit of a free thinker.”
“I think you’ll get out pretty soon because you’ll have the sympathies of the judge and jury,” said Bernie.
“Maybe so. Then, I’ll have to figure out what to do. One thing I know is I have to start thinking for myself and stop doing things just because everyone else is doing them. With my working life almost over, and the financial and real estate markets a mess, I’ll never be a millionaire again. I have to find a new focus to life, maybe do something for the homeless or disadvantaged.”
“Attaboy, Fred. That’s the way to think. Optimism makes the world go around,” said Bernie.
“Why are you so cheery?” asked Fred. “You’ll never get out of prison.”
Bernie’s half-smile disappeared abruptly.
“I’m sorry,” said Fred. “I realized who you are when you told me your name is Bernie. You’re the guy that operated a $64 billion Ponzi scheme. They’ll never let you out.”
“I’ve always been an optimist,” said Bernie. “I had to be one, to start a firm in a cutthroat place like Wall Street. Then, when I began stepping over the line, I had to believe that somehow things would get better, I would be able to straighten things out, and make everyone whole. Later, when I realized that I would never be able to unravel things, I had to hope that I would be able to keep juggling all the balls and somehow not get caught. Most of the time, I was right to be optimistic. The markets kept going up, and my investors were like you—they didn’t really think about things. They just did what everyone else was doing. It was a helluva time while it lasted.”
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.
Tuesday, December 16, 2008
The Bernard Madoff Scandal: How Many More Ponzi Schemes Are There?
An important question arising from the Bernard Madoff scandal is what wider impact will it have? The proportions of the reported fraud--$50 billion over the course of years--probably set some sort of record. The victims included a number of people who could be featured in Lifestyles of the Rich and Famous. The fact that some charities--and, consequently, the beneficiaries of their charitable activities--were also victims darkens the tragedy of the events.
This is the sort of event that shakes investor confidence--in this case, the investors who have enough to turn it over to money managers. These aren't the people with $50,000 or $100,000 in a mutual fund; or $200,000 in a stock trading account. These are people with millions, who hand their hard-earned assets over to investment professionals that supposedly can provide them with selective access to especially good investments. Many of these investors have tony addresses in West Palm Beach, the Hamptons, La Jolla and Marin County. But others live relatively modestly in suburbs better known for the quality of their schools than the opulence of their neighborhoods. These folks tend to be highly skilled in their chosen fields or professions, but not terribly sophisticated about money. That's why they rely on money managers.
When it's reported that a man of Bernard Madoff's prominence (well known financial executive and former Chairman of the Nasdaq Stock Market) is a crook, investors naturally begin wondering if their own money manager is a crook. They'll make inquiries, and perhaps check with other sources. Many of them will submit withdrawal requests, preferring to live with the low returns that accompany federal deposit insurance than the possibility that they could lose everything. Those withdrawal requests will be like a hound flushing a rabbit, forcing whatever other frauds there might be out into the open when the fraudster can't honor the withdrawal requests.
Are there other Madoff-like scams? We don't know, but probably yes. Money managers, as Madoff purported to be, need to do better, somehow, than the market. There's no need to hire a money manager if all the performance you'll get is the market average. An inexpensive index fund is a much easier and more profitable way to go.
According to news reports, Bernie Madoff claimed to have an investment strategy that would produce unusually stable earnings. If you can take the volatility out of the stock market, but produce stock market-like 8% to 12% per year returns on average, your product will be an easy sell with the monied classes. Think back, say, to the stock market volatility of the last few months and you'll see the appeal of stable, stock market-like returns. Of course, as reported, Madoff didn't really have a magic investment formula that did away with volatility, and the recent volatility of the stock market did him in when he couldn't honor investor withdrawal requests.
Other money managers make their own claims as to how they'll improve on the market. But what if the law of averages catches up with them and they can't meet their claims? The honest ones will admit their failings and take their lumps. The sleazy ones will perpetrate a fraud.
Rising financial markets cover up a multitude of frauds. Good times draw investment dollars into the market and make investors inclined to believe that anything is possible. But the law of averages hasn't been repealed and markets also fall. Falling financial markets reveal frauds, when investors try to pull out and discover they can't get their money back. Unless you've been hanging with Rip van Winkle for the last year, you've probably noticed that our financial markets have been bungee jumping without a rope. As the financial tide ebbs low, all kinds of scum will be exposed.
Investor withdrawal requests were a major reason for the sharp drop in the stock market in September, October and November of this year. The market has, momentarily, appeared to level off. The Madoff case, and any others of its ilk that emerge, will probably trigger more investor withdrawal requests. If the money managers are legit, they'll have to sell securities in order to meet those requests. If the money managers are crooks, the ensuing scandal will further erode investor confidence. Either way, the existence of, or even potential for, more large Ponzi schemes a la Bernie Madoff will dampen already battered investor spirits and add to the sell pressure in the market.
Will the impact of the Madoff scandal and any others like it drive the stock market down? That's hard to say. The Federal Reserve has printed a trillion dollars plus in the last three months in order to prop up the financial system, and there's no limit on how much more it can print. It's also evident that the Fed and other federal authorities are intent on supporting stock market values, regardless of what they might have said to the contrary. But no amount of government bookkeeping--in actuality, the Fed creates money by making computer entries on its records of the accounts of member banks--can serve as a long term substitute for investor confidence. We now have a continuing mortgage crisis, a widening credit crunch, worldwide recession and a mega scam, and it's not at all clear that the federal cavalry riding over the crest of the hill can slay all these dragons.
This is the sort of event that shakes investor confidence--in this case, the investors who have enough to turn it over to money managers. These aren't the people with $50,000 or $100,000 in a mutual fund; or $200,000 in a stock trading account. These are people with millions, who hand their hard-earned assets over to investment professionals that supposedly can provide them with selective access to especially good investments. Many of these investors have tony addresses in West Palm Beach, the Hamptons, La Jolla and Marin County. But others live relatively modestly in suburbs better known for the quality of their schools than the opulence of their neighborhoods. These folks tend to be highly skilled in their chosen fields or professions, but not terribly sophisticated about money. That's why they rely on money managers.
When it's reported that a man of Bernard Madoff's prominence (well known financial executive and former Chairman of the Nasdaq Stock Market) is a crook, investors naturally begin wondering if their own money manager is a crook. They'll make inquiries, and perhaps check with other sources. Many of them will submit withdrawal requests, preferring to live with the low returns that accompany federal deposit insurance than the possibility that they could lose everything. Those withdrawal requests will be like a hound flushing a rabbit, forcing whatever other frauds there might be out into the open when the fraudster can't honor the withdrawal requests.
Are there other Madoff-like scams? We don't know, but probably yes. Money managers, as Madoff purported to be, need to do better, somehow, than the market. There's no need to hire a money manager if all the performance you'll get is the market average. An inexpensive index fund is a much easier and more profitable way to go.
According to news reports, Bernie Madoff claimed to have an investment strategy that would produce unusually stable earnings. If you can take the volatility out of the stock market, but produce stock market-like 8% to 12% per year returns on average, your product will be an easy sell with the monied classes. Think back, say, to the stock market volatility of the last few months and you'll see the appeal of stable, stock market-like returns. Of course, as reported, Madoff didn't really have a magic investment formula that did away with volatility, and the recent volatility of the stock market did him in when he couldn't honor investor withdrawal requests.
Other money managers make their own claims as to how they'll improve on the market. But what if the law of averages catches up with them and they can't meet their claims? The honest ones will admit their failings and take their lumps. The sleazy ones will perpetrate a fraud.
Rising financial markets cover up a multitude of frauds. Good times draw investment dollars into the market and make investors inclined to believe that anything is possible. But the law of averages hasn't been repealed and markets also fall. Falling financial markets reveal frauds, when investors try to pull out and discover they can't get their money back. Unless you've been hanging with Rip van Winkle for the last year, you've probably noticed that our financial markets have been bungee jumping without a rope. As the financial tide ebbs low, all kinds of scum will be exposed.
Investor withdrawal requests were a major reason for the sharp drop in the stock market in September, October and November of this year. The market has, momentarily, appeared to level off. The Madoff case, and any others of its ilk that emerge, will probably trigger more investor withdrawal requests. If the money managers are legit, they'll have to sell securities in order to meet those requests. If the money managers are crooks, the ensuing scandal will further erode investor confidence. Either way, the existence of, or even potential for, more large Ponzi schemes a la Bernie Madoff will dampen already battered investor spirits and add to the sell pressure in the market.
Will the impact of the Madoff scandal and any others like it drive the stock market down? That's hard to say. The Federal Reserve has printed a trillion dollars plus in the last three months in order to prop up the financial system, and there's no limit on how much more it can print. It's also evident that the Fed and other federal authorities are intent on supporting stock market values, regardless of what they might have said to the contrary. But no amount of government bookkeeping--in actuality, the Fed creates money by making computer entries on its records of the accounts of member banks--can serve as a long term substitute for investor confidence. We now have a continuing mortgage crisis, a widening credit crunch, worldwide recession and a mega scam, and it's not at all clear that the federal cavalry riding over the crest of the hill can slay all these dragons.
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