Despite calls for C.E.O. perp walks, building a criminal case will be very difficult.
by Karen Donovan Dec 28 2008
"Failure does not equate to a crime,” said Kenneth Lay, the chief executive of Enron, as he proclaimed his innocence in the 2001 collapse of the company. With investors and the economy reeling from the financial crisis, there is much public clamoring for an Enron-like crackdown, complete with executives in handcuffs being paraded before the cameras. (A federal jury convicted Lay of fraud and conspiracy charges, but he died before he was sentenced.)Most legal experts, however, predict that it will be tough to establish that crimes were committed.
Failure, in form of the financial tsunami that rocked nearly every bank and institution around the world, will be an effective defense this time around. Hundreds of billions of dollars have been lost, banks and Wall Street firms have disappeared, stocks of financial companies have tumbled. “Why would everybody have the same fraudulent thought?” notes Robert Giuffra, a securities litigator at Sullivan & Cromwell.Still, that won’t stop prosecutors, says Robert Plotkin, a lawyer with the Washington office of McGuire Woods and who worked for the defense in the Enron investigation. “A lot of this is going to be politically motivated,” he says. “Almost as a condition for any kind of loans or bailouts, there already has been a ratcheting up of investigations.” The prime target for the prosecutorial cross hairs is the collapse of Lehman Brothers, the Wall Street firm that filed for bankruptcy protection on September 15. Its demise is at the center of at least three criminal investigations – by federal prosecutors in Manhattan, Brooklyn, and in New Jersey.
In an unusual move, Manhattan federal prosecutors announced in October that they were cooperating with investigators from the office of the New York attorney general, Andrew Cuomo, to investigate the trading in credit-default swaps that contributed to Lehman’s meltdown. With $600 billion in assets, the Lehman bankruptcy was the largest in U.S. history.“There is a decent chance that Lehman will be the poster child” of these prosecutions, says Peter Henning, a professor of criminal law at Wayne State University and the founding editor of the White Collar Crime Professors blog. “When that much money gets lost, someone has to get the blame, and so it would not surprise me if there was a prosecution of Lehman management for misleading investors.”But Henning expects a case very different than those that focused on the complex accounting schemes that caused the collapse of Enron and WorldCom. “In the dying gasp at Lehman, they painted too pretty a picture: It will be a disclosure case as opposed to accounting fraud.”
A good comparison, says Henning, is the pending criminal prosecution of David Stockman, the former Reagan administration official and former chief executive of Collins & Aikman, the auto parts supplier, who is headed to a trial early next year on fraud charges. The indictment against him portrays a chief executive engaged in a web of lies and fraud about the financial forecasts of his company to gain access to credit, which filed for bankruptcy in May 2005. Such cases are built by sifting through the trail of emails and internal communications and contrasting them with what is said to the public. “Part of the Enron case was the same thing,” Henning says. “What did they know and what were they telling to the public. That is the great thing about white-collar cases. It is never a factual dispute, it is ‘what did you know and when did you know it and what did you say?’”The financial crisis has created another hurdle for prosecutors: A lack of resources.
When the Enron task force was put together, no expense was spared.“There aren’t going to be these grand enterprises to allow the prosecutors to put together more nuanced, complex malfeasance cases,” says John Hueston, one of the lead prosecutors of the Enron Task Force and now a partner at Irell & Manella of Newport Beach, California. “What they are left with is trying to make quick-hit cases --- narrowly burrowing into emails to see if there is chatter contrary to public disclosures.”The only prosecution to date, the June indictment of two former Bear Stearns hedge fund managers, zeros in on emails and internal conversations.
Critics of that case say that those communications, boiled down to a debate about the state of the subprime mortgage market between the two executives who oversaw the funds. The indictment against the two managers, Ralph Cioffi and Matthew Tannin, was unsealed the same day that the F.B.I. announced it was launching a crackdown against abuses in the mortgage business, called “Operation Malicious Mortgage.” The F.B.I.’s press release cites charges against 406 people, but mentions only the Bear Stearns executives by name. Prosecutors seemed very much in a rush in the Bear Stearns case, for they were demanding to interview witnesses at nine o’clock at night, according to a lawyer involved in the case.“That was prosecution that was brought in great haste, and I worry about that,” says John Carroll, who as an assistant U.S. attorney led the case against Michael Milken. He has recently joined Skadden, Arps, Slate, Meagher & Flom, where he and David Zornow, who also worked in the U.S. attorney's office in Manhattan, are now reunited on the defense side. The process of sifting through the evidence should take months if not years, but the public appetite for blame is much more impatient than that, Carroll says.The June 19 charges in the Bear Stearns case show Tannin complaining in an email that to Cioffi “we are in bad bad shape” and that the “subprime market looks pretty damn ugly,” while cautioning his boss against disclosing anything that could hint at the extent of the funds’ troubles. Days later, in an April 25, 2007 conference call with investors, Tannin sang a different tune, noting, “we’re very comfortable with where we are.” Also on the call, Cioffi ducked the question of whether there had been large redemptions from the funds, failing to mention that a redemption of about $57 million had been made just days before the call.Prosecutors had suggested that a grand jury would hand up a superseding indictment, but at a pretrial conference on December 5, they added no new charges.
A trial has been set tentatively for next September. And it is, to the mind of defense lawyers, the simplest case to make. “Valuation cases, to my mind, are the toughest cases to make,” Zornow of Skadden says, who noted that the Bear Stearns case eschewed that problem: “They are charging, they knew X, but they told the public Y.”Will that be enough to win a conviction? There is a fine line between trying to seem positive and being deceptive.
Surely, lawyers for Richard Fuld, Lehman’s former chief executive, last seen in public scowling before a congressional committee and debating whether his compensation has amounted to $430 million or $300 million in recent years, must be contemplating this question.Fuld’s compensation would figure into motive, as prosecutors try to explain that “the pressure was to present as rosy a picture as possible,” Professor Henning says. “As the C.E.O. of a company, do you have to come out and say, ‘We are dead?’ You are allowed to put a positive spin on the news, but when do you cross over from spin to fraud?”That question may be answered in the months and years to come if Fuld and others are put on the spot for the financial turmoil. But the law puts a heavy burden of proof on the prosecution.“For a criminal prosecution, it has to be willful,” says Jill Fisch, a professor of securities regulation and litigation at the University of Pennsylvania Law School. “What does willful mean? It means you knew you were materially mischaracterizing. You have to cross that line.”With so many cases of poor judgment by financial executives proving that the line was crossed will be difficult to prove. “It looks less like greed and more like horrible mistakes in judgment. And the problem is that is much harder to prosecute criminally,” Fisch says.There will certainly be prosecutions of fraudulent mortgage originators and brokers, but those nickel and dime prosecutions will do nothing to quench the public appetite for an Enron-like case. “There will be a lot of investigations, and there may not be many successful cases made,” Giuffra of Sullivan & Cromwell says. “Extreme and unprecedented market forces caused massive losses. These would be classic ‘fraud by hindsight’ cases if they were brought. If they knew it was toxic, why didn’t they just short the market?”Both Bernard Madoff, who has admitted to $50 billion Ponzi scheme, creating the basis for his arrest, and Marc Drier, a law firm chief with a gift for impersonation and a drawer full of cell phones at his fingertips, have recently given prosecutors fish in a barrel by comparison.Bigger Wall Street fish will be much harder to catch.There may not be any point to the pursuit. John Carroll says: “Most white-collar crime is good people who are like gamblers at Atlantic City. They lose a hand and they double and they double and the double. And so mistaken decisions turn into bad decisions and really bad decisions.”
Michael Garcia, who was at the center of many of the financial investigations, as United States attorney in Manhattan until November, says "If anything comes out of this, it is going to be a long haul, to unravel this is going to take a long time—a year or two years."
And this time around, the cases are spread around the country, and many of the offices conducting investigations "do not have the size or experience" to at many federal prosecutors offices that do not have the size or experience of the Southern District, says Garcia, now in private practice at Kirkland & Ellis.
And while prosecutors send out a rash of subpoenas and collect information, the public appetite for blame has not abated. "Some people are getting a bit hysterical," he says.
Tuesday, December 30, 2008
Monday, December 22, 2008
Who Wants to Kick a Millionaire?
December 21, 2008
www.nytimes.com
by FRANK RICH
DURING the Great Depression, American moviegoers seeking escape could ogle platoons of glamorous chorus girls in “Gold Diggers of 1933.” Our feel-good movie of the year is “Slumdog Millionaire,” a Dickensian tale in which we root for an impoverished orphan from Mumbai’s slums to hit the jackpot on the Indian edition of “Who Wants to Be a Millionaire.”
It’s a virtuoso feast of filmmaking by Danny Boyle, but it’s also the perfect fairy tale for our hard times. The hero labors as a serf in the toilet of globalization: one of those mammoth call centers Westerners reach when ringing an 800 number to, say, check on credit card debt. When he gets his unlikely crack at instant wealth, the whole system is stacked against him, including the corrupt back office of a slick game show too good to be true.
We cheer the young man on screen even if we’ve lost the hope to root for ourselves. The vicarious victory of a third world protagonist must be this year’s stocking stuffer. The trouble with “Slumdog Millionaire” is that it, like all classic movie fables, comes to an end — as it happens, with an elaborately choreographed Bollywood musical number redolent of “Gold Diggers of 1933.” Then we are delivered back to the inescapable and chilling reality outside the theater’s doors.
Just when we thought that reality couldn’t hit a new bottom it did with Bernie Madoff, a smiling shark as sleazy as the TV host in “Slumdog.” A pillar of both the Wall Street and Jewish communities — a former Nasdaq chairman, a trustee at Yeshiva University — he even victimized Elie Wiesel’s Foundation for Humanity with his Ponzi scheme. A Jewish financier rips off millions of dollars devoted to memorializing the Holocaust — who could make this stuff up? Dickens, Balzac, Trollope and, for that matter, even Mel Brooks might be appalled.
Madoff, of course, made up everything. When he turned himself in, he reportedly declared that his business was “all just one big lie.” (The man didn’t call his 55-foot yacht “Bull” for nothing.) As Brian Williams of NBC News pointed out, the $50 billion thought to have vanished is roughly three times as much as the proposed Detroit bailout. And no one knows how it happened, least of all the federal regulators charged with policing him and protecting the public. If Madoff hadn’t confessed — for reasons that remain unclear — he might still be rounding up new victims.
There is a moral to be drawn here, and it’s not simply that human nature is unchanging and that there always will be crooks, including those in high places. Nor is it merely that Wall Street regulation has been a joke. Of what we’ve learned about Madoff so far, the most useful lesson can be gleaned from how his smart, well-heeled clients routinely characterized the strategy that generated their remarkably steady profits. As The Wall Street Journal noted, they “often referred to it as a ‘black box.’ ”
In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.
The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.
Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance.
There has been no punishment for many of those who failed to heed this repeated lesson. Quite the contrary. The business magazine Portfolio, writing in mid-September about one of the world’s biggest insurance companies, observed that “now that A.I.G is battling to survive, it is its black box that may save it yet.” That box — stuffed with “accounting or investments so complex and arcane that they remain unknown to most investors” — was so huge that Washington might deem it “too big to fail.”
Sure enough — and unlike its immediate predecessor in collapse, Lehman Brothers — A.I.G. was soon bailed out to the tune of $123 billion. Most of that also disappeared by the end of October. But not before A.I.G. executives were caught spending $442,000 on a weeklong retreat to a California beach resort.
There are more black boxes still to be pried open, whether at private outfits like Madoff’s or at publicly traded companies like General Electric, parent of the opaque GE Capital Corporation, the financial services unit that has been the single biggest contributor to the G.E. bottom line in recent years. But have we yet learned anything? Incredibly enough, as we careen into 2009, the very government operation tasked with repairing the damage caused by Wall Street’s black boxes is itself a black box of secrecy and impenetrability.
Last week ABC News asked 16 of the banks that have received handouts from the Treasury Department’s $700 billion Troubled Asset Relief Program the same two direct questions: How have you used that money, and how much have you spent on bonuses this year? Most refused to answer.
Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions “without seeking to monitor the use of funds provided to specific financial institutions.” The Treasury prefers instead to look at “general metrics” indicating the program’s overall effect on the economy. Well, we know what the “general metrics” tell us already: the effect so far is nil. Perhaps if we were let in on the specifics, we’d start to understand why.
In its own independent attempt to penetrate the bailout, the Government Accountability Office learned that “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” Executives at all but two of the bailed-out banks told the G.A.O. that the “money is fungible,” so they “did not intend to track or report” specifically what happens to the taxpayers’ cash.
Nor is there any serious accounting for executive pay at these seminationalized companies. As Amit Paley of The Washington Post reported, a last-minute, one-sentence loophole added by the Bush administration to the original bailout bill gutted the already minimal restrictions on executive compensation. And so when Goldman Sachs, Henry Paulson’s Wall Street alma mater, says that it is not using public money to pay executives, we must take it on faith.
In the wake of the Madoff debacle, there are loud calls to reform the Securities and Exchange Commission, including from the president-elect. Under both Clinton and Bush, that supposed watchdog agency ignored repeated and graphic warnings of Madoff’s Ponzi scheme as studiously as Bush ignored Al Qaeda’s threats during the summer of 2001.
But fixing that one agency is no panacea. All the talk about restoring “confidence” and “faith” in capitalism will be worthless if we still can’t see what’s going on in the counting rooms. In his role as chairman of the Federal Reserve Bank of New York, Timothy Geithner, Barack Obama’s nominee for Treasury secretary, has been at the center of the action in the bailout’s black box, including the still-murky and conflicting actions (and nonactions) taken with Lehman and A.I.G. His confirmation hearings demand questions every bit as tough as those that were lobbed at the executives from Detroit’s Big Three.
On Friday, Geithner’s partner in bailout management, Paulson, asked Congress to give the Treasury the second half of the $700 billion bailout stash. But without transparency and accountability in Washington’s black box, as well as Wall Street’s, there will continue to be no trust in the system, no matter how many cops the S.E.C. puts on the beat. Even the family-owned real-estate company of Eliot Spitzer, the former “Sheriff of Wall Street,” had entrusted money with Madoff.
We’ll keep believing, not without reason, that the whole game is as corrupt as the game show in “Slumdog Millionaire” — only without the Hollywood/Bollywood ending. We’ll keep wondering how so many at the top keep avoiding responsibility and reaping taxpayers’ billions while relief for those at the bottom remains as elusive as straight answers from those Mumbai call centers fielding American debtors.
This wholesale loss of confidence is a catastrophe that not even the new president’s most costly New Deal can set right.
www.nytimes.com
by FRANK RICH
DURING the Great Depression, American moviegoers seeking escape could ogle platoons of glamorous chorus girls in “Gold Diggers of 1933.” Our feel-good movie of the year is “Slumdog Millionaire,” a Dickensian tale in which we root for an impoverished orphan from Mumbai’s slums to hit the jackpot on the Indian edition of “Who Wants to Be a Millionaire.”
It’s a virtuoso feast of filmmaking by Danny Boyle, but it’s also the perfect fairy tale for our hard times. The hero labors as a serf in the toilet of globalization: one of those mammoth call centers Westerners reach when ringing an 800 number to, say, check on credit card debt. When he gets his unlikely crack at instant wealth, the whole system is stacked against him, including the corrupt back office of a slick game show too good to be true.
We cheer the young man on screen even if we’ve lost the hope to root for ourselves. The vicarious victory of a third world protagonist must be this year’s stocking stuffer. The trouble with “Slumdog Millionaire” is that it, like all classic movie fables, comes to an end — as it happens, with an elaborately choreographed Bollywood musical number redolent of “Gold Diggers of 1933.” Then we are delivered back to the inescapable and chilling reality outside the theater’s doors.
Just when we thought that reality couldn’t hit a new bottom it did with Bernie Madoff, a smiling shark as sleazy as the TV host in “Slumdog.” A pillar of both the Wall Street and Jewish communities — a former Nasdaq chairman, a trustee at Yeshiva University — he even victimized Elie Wiesel’s Foundation for Humanity with his Ponzi scheme. A Jewish financier rips off millions of dollars devoted to memorializing the Holocaust — who could make this stuff up? Dickens, Balzac, Trollope and, for that matter, even Mel Brooks might be appalled.
Madoff, of course, made up everything. When he turned himself in, he reportedly declared that his business was “all just one big lie.” (The man didn’t call his 55-foot yacht “Bull” for nothing.) As Brian Williams of NBC News pointed out, the $50 billion thought to have vanished is roughly three times as much as the proposed Detroit bailout. And no one knows how it happened, least of all the federal regulators charged with policing him and protecting the public. If Madoff hadn’t confessed — for reasons that remain unclear — he might still be rounding up new victims.
There is a moral to be drawn here, and it’s not simply that human nature is unchanging and that there always will be crooks, including those in high places. Nor is it merely that Wall Street regulation has been a joke. Of what we’ve learned about Madoff so far, the most useful lesson can be gleaned from how his smart, well-heeled clients routinely characterized the strategy that generated their remarkably steady profits. As The Wall Street Journal noted, they “often referred to it as a ‘black box.’ ”
In the investment world “black box” is tossed around to refer to a supposedly ingenious financial model that is confidential or incomprehensible or both. Most of us know the “black box” instead as that strongbox full of data that is retrieved (sometimes) after a plane crash to tell the authorities what went wrong. The only problem is that its findings arrive too late to save the crash’s victims. The hope is that the information will instead help prevent the next disaster.
The question in the aftermath of the Madoff calamity is this: Why do we keep ignoring what we learn from the black boxes being retrieved from crash after crash in our economic meltdown? The lesson could not be more elemental. If there’s a mysterious financial model producing miraculous returns, odds are it’s a sham — whether it’s an outright fraud, as it apparently is in Madoff’s case, or nominally legal, as is the case with the Wall Street giants that have fallen this year.
Wall Street’s black boxes contained derivatives created out of whole cloth, deriving their value from often worthless subprime mortgages. The enormity of the gamble went undetected not only by investors but by the big brains at the top of the firms, many of whom either escaped (Merrill Lynch’s E. Stanley O’Neal) or remain in place (Citigroup’s Robert Rubin) after receiving obscene compensation for their illusory short-term profits and long-term ignorance.
There has been no punishment for many of those who failed to heed this repeated lesson. Quite the contrary. The business magazine Portfolio, writing in mid-September about one of the world’s biggest insurance companies, observed that “now that A.I.G is battling to survive, it is its black box that may save it yet.” That box — stuffed with “accounting or investments so complex and arcane that they remain unknown to most investors” — was so huge that Washington might deem it “too big to fail.”
Sure enough — and unlike its immediate predecessor in collapse, Lehman Brothers — A.I.G. was soon bailed out to the tune of $123 billion. Most of that also disappeared by the end of October. But not before A.I.G. executives were caught spending $442,000 on a weeklong retreat to a California beach resort.
There are more black boxes still to be pried open, whether at private outfits like Madoff’s or at publicly traded companies like General Electric, parent of the opaque GE Capital Corporation, the financial services unit that has been the single biggest contributor to the G.E. bottom line in recent years. But have we yet learned anything? Incredibly enough, as we careen into 2009, the very government operation tasked with repairing the damage caused by Wall Street’s black boxes is itself a black box of secrecy and impenetrability.
Last week ABC News asked 16 of the banks that have received handouts from the Treasury Department’s $700 billion Troubled Asset Relief Program the same two direct questions: How have you used that money, and how much have you spent on bonuses this year? Most refused to answer.
Congress can’t get the answers either. Its oversight panel declared in a first report this month that the Treasury is doling out billions “without seeking to monitor the use of funds provided to specific financial institutions.” The Treasury prefers instead to look at “general metrics” indicating the program’s overall effect on the economy. Well, we know what the “general metrics” tell us already: the effect so far is nil. Perhaps if we were let in on the specifics, we’d start to understand why.
In its own independent attempt to penetrate the bailout, the Government Accountability Office learned that “the standard agreement between Treasury and the participating institutions does not require that these institutions track or report how they plan to use, or do use, their capital investments.” Executives at all but two of the bailed-out banks told the G.A.O. that the “money is fungible,” so they “did not intend to track or report” specifically what happens to the taxpayers’ cash.
Nor is there any serious accounting for executive pay at these seminationalized companies. As Amit Paley of The Washington Post reported, a last-minute, one-sentence loophole added by the Bush administration to the original bailout bill gutted the already minimal restrictions on executive compensation. And so when Goldman Sachs, Henry Paulson’s Wall Street alma mater, says that it is not using public money to pay executives, we must take it on faith.
In the wake of the Madoff debacle, there are loud calls to reform the Securities and Exchange Commission, including from the president-elect. Under both Clinton and Bush, that supposed watchdog agency ignored repeated and graphic warnings of Madoff’s Ponzi scheme as studiously as Bush ignored Al Qaeda’s threats during the summer of 2001.
But fixing that one agency is no panacea. All the talk about restoring “confidence” and “faith” in capitalism will be worthless if we still can’t see what’s going on in the counting rooms. In his role as chairman of the Federal Reserve Bank of New York, Timothy Geithner, Barack Obama’s nominee for Treasury secretary, has been at the center of the action in the bailout’s black box, including the still-murky and conflicting actions (and nonactions) taken with Lehman and A.I.G. His confirmation hearings demand questions every bit as tough as those that were lobbed at the executives from Detroit’s Big Three.
On Friday, Geithner’s partner in bailout management, Paulson, asked Congress to give the Treasury the second half of the $700 billion bailout stash. But without transparency and accountability in Washington’s black box, as well as Wall Street’s, there will continue to be no trust in the system, no matter how many cops the S.E.C. puts on the beat. Even the family-owned real-estate company of Eliot Spitzer, the former “Sheriff of Wall Street,” had entrusted money with Madoff.
We’ll keep believing, not without reason, that the whole game is as corrupt as the game show in “Slumdog Millionaire” — only without the Hollywood/Bollywood ending. We’ll keep wondering how so many at the top keep avoiding responsibility and reaping taxpayers’ billions while relief for those at the bottom remains as elusive as straight answers from those Mumbai call centers fielding American debtors.
This wholesale loss of confidence is a catastrophe that not even the new president’s most costly New Deal can set right.
Saturday, December 20, 2008
Birds of a Feather: Madoff & Wall Street
December 20th, 2008 ·
How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The Ponzi scheme of Bernard Madoff didn’t affect me much. I’ve got too much of my money tied up in these things call bills. But he rooked a hell of a lot of people. And you can’t call it greed. As He Who Must Be Read points out, the entire financial sector was invested in bullshit. The only difference between the Madoff and the rest of his colleagues was he was only fooling his customers. The rest were fooling themselves.
how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.
How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The Ponzi scheme of Bernard Madoff didn’t affect me much. I’ve got too much of my money tied up in these things call bills. But he rooked a hell of a lot of people. And you can’t call it greed. As He Who Must Be Read points out, the entire financial sector was invested in bullshit. The only difference between the Madoff and the rest of his colleagues was he was only fooling his customers. The rest were fooling themselves.
how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.
Betrayal of trust a Wall St. tradition
The Madoff allegations should surprise no one. Your mind can go numb recalling the many major episodes of financial fraud at individual investors' expense just in the last decade.
Tom Petruno, Market Beat December 20, 2008
www.latimes.com
It's conventional wisdom that Bernie Madoff, with his alleged $50-billion Ponzi scheme, has dealt a massive blow to Wall Street's credibility.That idea ought to give many individual investors a good laugh at the end of a devastating year for their own finances.I don't want to minimize the path of destruction, financial and psychological, that Madoff blazed. But I'm amazed that there seems to be such shock out there that the man could have ripped off people who trusted him.On Wall Street, we've seen time and again that the obliteration of investor trust is the house specialty.
The only real surprise here is the length of Madoff's blue-chip client list.Indeed, the small investor who would never have been invited into Madoff's club can be excused for harboring a tinge of schadenfreude about this affair. We now see the rich can be suckered too.Your mind can go numb recalling the many major episodes of financial fraud at individual investors' expense just in the last decade.Remember how brokerages gamed the market for initial public stock offerings in the dot-com era, awarding hot shares to favored clients who paid kickbacks? That ensured that the average investor couldn't get in on the deals.That era also brought us the Wall Street analyst scandal, which ultimately cost big brokerages a total of $1.4 billion in fines.
The crime: To make their fee-hungry investment banking units happy, analysts would routinely exhort investors to buy stocks that they privately regarded as garbage. Nice touch, eh?We had barely digested that debacle in 2003 when we found out that mutual fund firms were allowing hedge fund clients to trade illegally in fund shares after market hours.Then the brokerage business had to 'fess up about pressuring brokers to pitch to clients only those funds that provided kickbacks.Along the way, investors suffered through the Enron and WorldCom accounting frauds that helped drive the U.S. market down as much as 32% in 2002, extending the bear market that began in 2000 and that might otherwise have been nearing its end.Is Bernie Madoff worse than all that? To his hapless clients he is, but for the rest of us, many other recent scandals have had much greater reach, implications and shock value.
This year, trust in Wall Street was already well on its way to a wipeout before Madoff's apparent scam surfaced a week ago.As we know, the mortgage market bust fueled a credit crisis of proportions few investment professionals believed possible.At the heart of the mortgage disaster was a borrowing mania financed by the unfathomable debt securities concocted by brokerage rocket scientists and hawked to investors worldwide.And for the longest time, as it all went bad, the Bush administration and the Federal Reserve kept assuring us that the problem was "contained."The fallout from this nightmare has left the average U.S. stock mutual fund down nearly 40% this year, and pushed the economy into a deep recession.So how much Wall Street credibility was there left for Madoff to snuff out?
There's even a case to be made that his alleged fraud, and the unrelated demise of so many hedge funds for the well-heeled, might actually help rebuild the credibility and appeal of some plain-vanilla investments -- including mutual funds, despite their losses this year.Why? Losing 40% in a mutual fund has to feel better than losing every penny in Madoff's fund. And mutual funds, for the most part, are designed to be transparent in terms of where they put your money, their performance and the fees they charge.With Madoff, otherwise intelligent investors simply went along blindly, failing to ask even the most basic questions about what he was doing with their capital. Neither, apparently, was the Securities and Exchange Commission inclined to ask questions.If there is a lasting effect from Madoff, it will be to accelerate a shift already well underway: the idea that, when it comes to their money, the only thing many Americans now truly trust is a specific government promise.In his inaugural address in 1981, President Reagan intoned that "government is not the solution to our problem; government is the problem."In this financial mess, government is turning out to be the only solution.
There have been runs on plenty of hedge funds this year, but no run on the banks overall, because the government insures deposits and most people (thankfully) still have faith in that insurance.Likewise, many investors have been happy to sink their savings into low-yielding U.S. Treasury securities because they're confident that, at the very least, Uncle Sam will return their principal intact.At the SEC, libertarian-minded Chairman Christopher Cox will be replaced by Mary Schapiro, the career financial-industry regulator who was picked for the post by President-elect Barack Obama.Schapiro will be asked to do whatever it takes to make sure more Madoffs don't happen. Of course, that's an impossible task. But we don't disband our police departments because we figure they'll never eradicate all crime.As for the issue of Wall Street's wretched image, history is clear: It's nothing that a good bull market, somewhere down the line, won't make a lot people forget, if not forgive.tom.petruno@latimes.com
The Looting of America by Bush and Congress’s Wall Street Cronies
by Gil Villagrán, MSW ( gvillagran [at] casa.sjsu.edu )
Thursday Dec 18th, 2008 8:48 PM
The massive trillion dollar Wall Street bailout is actually a massive looting of the American taxpayer by the corporate oligarchy class being perpetrated by a complicit Congress and Oval Office "confederacy of dunces" being managed by the very Wall Street robber bureaucrats who created the crisis through lobbyist fueled de-regulation of the nation's casino financial systems.
The Looting of America by Bush and Congress’s Wall Street Cronies By Gil Villagrán, MSW El Observador, San Jose, Dec. 18, 2008 It’s been said of our justice system that if you “steal a loaf of bread, they send you to the penitentiary, if you steal a railroad, they send you to the U.S. Congress.” But why steal a railroad in this era of decaying infrastructure, even with Amtrak subsidies? Similarly why steal from a bank when one can steal the whole bank, especially if you are the bank CEO? But why steal or embezzle depositors’ funds, when President Bush and Congress have devised a vastly more effective plan for looting not only depositors’ savings and retirement funds, but also the vastly greater funds of the American people—our taxes today, tomorrow and into several generations? The Wall Street bailout, rescue, looting spree, give-away, toxic paper exchange--whatever we call it, is a slow-motion robbery of the American people designed by the Bush Treasury Secretary Henry Paulson, a billionaire former CEO of Goldman Sachs, with personal earnings of $38 million in 2005 as reward for profits of $5.6 billion that year.
Paulson’s former employer is one of the fallen financial giants, called too big to allow to fail, that he is now rescuing, and first in line for the multi-billion dollar corporate welfare. Last month Goldman Sachs got a $ 9.8 billion in bailout, and paid $11 billion in bonuses! So as American workers are locked out of factories, many sent home without pay for unused sick leave, vacation or severance, without so much as a “thank-you for your years of labor,” their company CEOs lobby Congress for taxpayers’ billions, tax write-offs, additional subsidies, and eliminated environmental regulations. And as the CEOs private-jet to ski vacation homes for Christmas or Hanukah, the laid-off workers pack up their foreclosed homes, hoping for low-income apartments in not too rundown crime-ridden neighborhoods, hoping for that rare good school district.
Middle-class Americans fearfully open their bank statements to find their retirement 401(k) nest egg disappearing with tens of thousand dollar losses. Can it get any worse? But the answer seems to be: it can, it is, and it will get worse as our nation’s economy slowly twists in the wind of a dissipating American Dream. This slow motion bank robbery, brewing for years of lobbyist driven legislated de-regulation, but surfacing just months ago; continues gradually with nightly news reports of Congressional hearing and Treasury Department multi-billion dollar payouts, yet the nation pathetically watches with only mild outrage toward massive Wall Street banks? Curiously, there is focused outrage toward the big three automakers.
Congress scolded the Detroit CEOs, demanded specific restructure plans, required their salaries reduced to $1 per year, and to give up their corporate jets. But why no such scolding for the big bankers? Could Congressional campaign contributions have convinced legislators of the ethics and fiscal wisdom of their Wall Street cronies, but missing from Detroit CEOs? Perhaps there is a lesson for us in the story of Hitler, in his last days, saying, “If I had a ‘do-over,’ I would announce my intention to kill six million Jews and seven postmen. 'Why the seven postmen?' someone naively asked. 'You make my point for me,' he replied. 'Everybody would be so curious about why the seven postmen that they'd never notice the six million Jews killed.'”
In a similar fashion, Congress and the nation are so focused on a bailout for the big three auto companies seeking a combined $ 15 billion loan, that they have accepted the grotesquely greater banks bailouts ballooning beyond one trillion dollars. It's been said, "Behind every great fortune lies a great crime." It appears that in front of Wall Street’s great fortunes, Congress is eager to allow the continuing slow motion great crime of robbery of the American people.
Thursday Dec 18th, 2008 8:48 PM
The massive trillion dollar Wall Street bailout is actually a massive looting of the American taxpayer by the corporate oligarchy class being perpetrated by a complicit Congress and Oval Office "confederacy of dunces" being managed by the very Wall Street robber bureaucrats who created the crisis through lobbyist fueled de-regulation of the nation's casino financial systems.
The Looting of America by Bush and Congress’s Wall Street Cronies By Gil Villagrán, MSW El Observador, San Jose, Dec. 18, 2008 It’s been said of our justice system that if you “steal a loaf of bread, they send you to the penitentiary, if you steal a railroad, they send you to the U.S. Congress.” But why steal a railroad in this era of decaying infrastructure, even with Amtrak subsidies? Similarly why steal from a bank when one can steal the whole bank, especially if you are the bank CEO? But why steal or embezzle depositors’ funds, when President Bush and Congress have devised a vastly more effective plan for looting not only depositors’ savings and retirement funds, but also the vastly greater funds of the American people—our taxes today, tomorrow and into several generations? The Wall Street bailout, rescue, looting spree, give-away, toxic paper exchange--whatever we call it, is a slow-motion robbery of the American people designed by the Bush Treasury Secretary Henry Paulson, a billionaire former CEO of Goldman Sachs, with personal earnings of $38 million in 2005 as reward for profits of $5.6 billion that year.
Paulson’s former employer is one of the fallen financial giants, called too big to allow to fail, that he is now rescuing, and first in line for the multi-billion dollar corporate welfare. Last month Goldman Sachs got a $ 9.8 billion in bailout, and paid $11 billion in bonuses! So as American workers are locked out of factories, many sent home without pay for unused sick leave, vacation or severance, without so much as a “thank-you for your years of labor,” their company CEOs lobby Congress for taxpayers’ billions, tax write-offs, additional subsidies, and eliminated environmental regulations. And as the CEOs private-jet to ski vacation homes for Christmas or Hanukah, the laid-off workers pack up their foreclosed homes, hoping for low-income apartments in not too rundown crime-ridden neighborhoods, hoping for that rare good school district.
Middle-class Americans fearfully open their bank statements to find their retirement 401(k) nest egg disappearing with tens of thousand dollar losses. Can it get any worse? But the answer seems to be: it can, it is, and it will get worse as our nation’s economy slowly twists in the wind of a dissipating American Dream. This slow motion bank robbery, brewing for years of lobbyist driven legislated de-regulation, but surfacing just months ago; continues gradually with nightly news reports of Congressional hearing and Treasury Department multi-billion dollar payouts, yet the nation pathetically watches with only mild outrage toward massive Wall Street banks? Curiously, there is focused outrage toward the big three automakers.
Congress scolded the Detroit CEOs, demanded specific restructure plans, required their salaries reduced to $1 per year, and to give up their corporate jets. But why no such scolding for the big bankers? Could Congressional campaign contributions have convinced legislators of the ethics and fiscal wisdom of their Wall Street cronies, but missing from Detroit CEOs? Perhaps there is a lesson for us in the story of Hitler, in his last days, saying, “If I had a ‘do-over,’ I would announce my intention to kill six million Jews and seven postmen. 'Why the seven postmen?' someone naively asked. 'You make my point for me,' he replied. 'Everybody would be so curious about why the seven postmen that they'd never notice the six million Jews killed.'”
In a similar fashion, Congress and the nation are so focused on a bailout for the big three auto companies seeking a combined $ 15 billion loan, that they have accepted the grotesquely greater banks bailouts ballooning beyond one trillion dollars. It's been said, "Behind every great fortune lies a great crime." It appears that in front of Wall Street’s great fortunes, Congress is eager to allow the continuing slow motion great crime of robbery of the American people.
Friday, December 19, 2008
Ponzi scam artists share charm, respectability
Ponzi scam artists share charm, respectability
By DENISE LAVOIE, AP
December 19,2008
– They're smart and charming. They have an aura of success about them and exude respectability. Above all, they instill confidence.
Which is, after all, why they are called con men.
Bernard Madoff, the Wall Street trader accused of running the biggest Ponzi scheme in history — $50 billion — dealt in more astounding numbers than others but shares many of the basic qualities of Ponzi swindlers through history, according to law enforcement authorities and others who have studied such scams.
"They seem trustworthy because of their charm, their command of finance and the unshakable confidence that they portray," said Jacob Frenkel, a former Securities and Exchange Commission enforcement lawyer. "The Bernie Madoffs of the world are the people you want to sit next to on an airplane."
Much like the original Ponzi schemer, Charles Ponzi. He was an Italian immigrant to Boston who worked as a waiter, bank teller and nurse before he talked investors into sinking their money into a complex — and, it turned out, bogus — scheme involving postal currency.
His short-lived swindle in 1919-20 cheated thousands of people out of $10 million but was so wildly lucrative for some early investors that he was hailed as a hero in the Italian community. He was convicted of mail fraud and sent to prison before being deported in 1934.
A Ponzi scheme, or pyramid scheme, is a scam in which people are persuaded to invest in a fraudulent operation that promises unusually high returns. The early investors are paid their returns out of money put in by later investors.
"It used to be called `robbing Peter to pay Paul,'" said Mitchell Zuckoff, a Boston University journalism professor who wrote a biography of Ponzi in 2005.
Ponzi's scheme became one of the most famous con games of his time, and his name has been attached to similar frauds ever since.
People who run Ponzis generally fall into two categories: hucksters like Ponzi who plan to cheat investors and get out quickly, often fleeing the country, and people who start a legitimate investment venture but lose money, then try desperately to cover it up and dig themselves into a deeper and deeper hole. Ultimately, it all comes crashing down.
Some have speculated that Madoff — once a highly respected figure on Wall Street and a former Nasdaq chairman — falls into the latter category.
Bookish and bespectacled with a wise smile, Madoff had multiple homes, fancy cars and memberships at exclusive country clubs. He gave millions to charity from his own fortune.
"Looking successful is the key because everyone's first question is going to be, `If this is such a great deal, then why are you wearing a cheap suit?'" said Eric Sussman, a former federal prosecutor from Chicago who helped on about a dozen Ponzi cases. "They have to have all the accoutrements of success."
Investigators said that only $200 million to $300 million of Madoff's investors' money is left. Where the rest went is a mystery.
The Madoff debacle appears to be typical of Ponzi schemes in another way: They are typically orchestrated by people who look to their own churches or ethnic groups for investors. A large number of Madoff's victims are, like Madoff himself, Jewish.
"They are done in groups where people trust each other," said Peter Henning, a former SEC enforcement lawyer and now a professor at Wayne State University Law School in Detroit. "Any Ponzi scheme is built on trust. People can't ask too many questions."
Madoff passed that test long ago. At the exclusive Palm Beach Country Club — founded by Jews in the 1950s, when the other clubs in town were restricted — he proved himself a person of character by giving hundreds of thousands of dollars to charity each year, a substantial portion of it to Jewish causes.
One of the most famous pyramid schemes occurred just before the turn of the 20th century. William Miller of Brooklyn, N.Y., cheated investors out of $1 million by claiming he had inside information on stocks and promising interest of an astounding 10 percent a week. For that, he was nicknamed "520 Percent."
Some modern-day Ponzi operators include Democratic fundraiser Norman Hsu, a former men's sportswear executive who was indicted last year on charges of duping investors out of at least $20 million. He was known for his impeccable attire and warm personality.
Former boy-band promoter Lou Pearlman, who is serving a 25-year prison sentence for cheating investors out of $300 million in a scheme that lasted more than a decade, was a rotund man nicknamed Big Poppa. He was known for his smooth talk and easygoing style.
By DENISE LAVOIE, AP
December 19,2008
– They're smart and charming. They have an aura of success about them and exude respectability. Above all, they instill confidence.
Which is, after all, why they are called con men.
Bernard Madoff, the Wall Street trader accused of running the biggest Ponzi scheme in history — $50 billion — dealt in more astounding numbers than others but shares many of the basic qualities of Ponzi swindlers through history, according to law enforcement authorities and others who have studied such scams.
"They seem trustworthy because of their charm, their command of finance and the unshakable confidence that they portray," said Jacob Frenkel, a former Securities and Exchange Commission enforcement lawyer. "The Bernie Madoffs of the world are the people you want to sit next to on an airplane."
Much like the original Ponzi schemer, Charles Ponzi. He was an Italian immigrant to Boston who worked as a waiter, bank teller and nurse before he talked investors into sinking their money into a complex — and, it turned out, bogus — scheme involving postal currency.
His short-lived swindle in 1919-20 cheated thousands of people out of $10 million but was so wildly lucrative for some early investors that he was hailed as a hero in the Italian community. He was convicted of mail fraud and sent to prison before being deported in 1934.
A Ponzi scheme, or pyramid scheme, is a scam in which people are persuaded to invest in a fraudulent operation that promises unusually high returns. The early investors are paid their returns out of money put in by later investors.
"It used to be called `robbing Peter to pay Paul,'" said Mitchell Zuckoff, a Boston University journalism professor who wrote a biography of Ponzi in 2005.
Ponzi's scheme became one of the most famous con games of his time, and his name has been attached to similar frauds ever since.
People who run Ponzis generally fall into two categories: hucksters like Ponzi who plan to cheat investors and get out quickly, often fleeing the country, and people who start a legitimate investment venture but lose money, then try desperately to cover it up and dig themselves into a deeper and deeper hole. Ultimately, it all comes crashing down.
Some have speculated that Madoff — once a highly respected figure on Wall Street and a former Nasdaq chairman — falls into the latter category.
Bookish and bespectacled with a wise smile, Madoff had multiple homes, fancy cars and memberships at exclusive country clubs. He gave millions to charity from his own fortune.
"Looking successful is the key because everyone's first question is going to be, `If this is such a great deal, then why are you wearing a cheap suit?'" said Eric Sussman, a former federal prosecutor from Chicago who helped on about a dozen Ponzi cases. "They have to have all the accoutrements of success."
Investigators said that only $200 million to $300 million of Madoff's investors' money is left. Where the rest went is a mystery.
The Madoff debacle appears to be typical of Ponzi schemes in another way: They are typically orchestrated by people who look to their own churches or ethnic groups for investors. A large number of Madoff's victims are, like Madoff himself, Jewish.
"They are done in groups where people trust each other," said Peter Henning, a former SEC enforcement lawyer and now a professor at Wayne State University Law School in Detroit. "Any Ponzi scheme is built on trust. People can't ask too many questions."
Madoff passed that test long ago. At the exclusive Palm Beach Country Club — founded by Jews in the 1950s, when the other clubs in town were restricted — he proved himself a person of character by giving hundreds of thousands of dollars to charity each year, a substantial portion of it to Jewish causes.
One of the most famous pyramid schemes occurred just before the turn of the 20th century. William Miller of Brooklyn, N.Y., cheated investors out of $1 million by claiming he had inside information on stocks and promising interest of an astounding 10 percent a week. For that, he was nicknamed "520 Percent."
Some modern-day Ponzi operators include Democratic fundraiser Norman Hsu, a former men's sportswear executive who was indicted last year on charges of duping investors out of at least $20 million. He was known for his impeccable attire and warm personality.
Former boy-band promoter Lou Pearlman, who is serving a 25-year prison sentence for cheating investors out of $300 million in a scheme that lasted more than a decade, was a rotund man nicknamed Big Poppa. He was known for his smooth talk and easygoing style.
The Madoff Economy
December 19, 2008
By PAUL KRUGMAN
www.nytimes.com
The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.
Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
O.K., maybe my example wasn’t hypothetical after all.
So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.
Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.
By PAUL KRUGMAN
www.nytimes.com
The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.
Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?
The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.
Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.
But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.
Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.
O.K., maybe my example wasn’t hypothetical after all.
So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.
We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.
But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.
At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.
Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?
Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.
Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.
After all, that’s why so many people trusted Mr. Madoff.
Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.
Thursday, December 18, 2008
Fed unleashes greatest bubble of all
December 18th, 2008
reuters.com
By: John Kemp
– John Kemp is a Reuters columnist. The views expressed are his own –
Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.
Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.
THE ASYMMETRIC EXPERIMENT
Bubble mania is no accident. It is the direct consequence of the Fed’s asymmetric response to shifts in asset prices. Pressed to “lean against the wind” and adopt counter-cyclical interest rate and credit policies in the asset market, senior Fed policymakers have repeatedly demurred.
Led by Bernanke and Greenspan, officials have argued it is too hard and subjective to identify bubbles until afterwards, and not the Fed’s job to second-guess asset allocation decisions of professional investors.
Even if bubbles could be identified, they argue, pricking them would require swingeing rate rises that would inflict widespread damage on the rest of the economy.
Far less damaging to allow asset markets to follow their natural cycle and stand by to cut interest rates sharply, supply liquidity and contain the fallout when the bubble bursts.
But the Fed’s asymmetric policy response to rising and falling asset prices (colloquially known as the “Greenspan/Bernanke put”) directly led to much of the excessive risk-taking which has humbled the financial system over the last eighteen months.
More importantly, the Fed’s decision to respond to the collapse of the technology and stock market bubble by lowering rates to 1 percent and holding them there for an extended period is now widely accepted as a mistake that contributed to the bond bubble and subsequent housing market boom in the middle of the decade.
If the low-rate strategy was a mistake, it was a conscious one. In testimony to the UK Parliament last year, former Bank of England Governor Eddie George admitted the bank had deliberately sought to stimulate the housing market and house prices to support consumption during the downturn.
Greenspan, Bernanke and Co seem to have adopted a similar approach in the United States.The real mistake, however, was not creating one bubble to offset the collapse of another, but believing they could control what they had wrought.
When the Fed did eventually start to raise short-term interest rates in 2004, long rates remained stubbornly low for a year, and then rose much more slowly than anticipated, a development the puzzled Fed chairman and his able assistant Dr Bernanke described as “the Great Conundrum”.
Even as rates eventually rose, the alchemy of securitization ensured the real cost of credit remained far too low until the subprime bubble finally burst in late 2007.
The second mistake is a basic design flaw in the Fed’s “risk-management” approach to setting monetary policy. Risk management is a nice idea, but not terribly useful. As engineer will explain, risk management involves trade offs and is not cost-free.
The Fed has struggled to formulate a response to “low probability, high impact” events such as the threat of deflation in the early 2000s. Its response has been to cut rates aggressively to ward off the danger of extreme downside events, a strategy officials liken to taking out an insurance policy.
That’s fine, but when these low risk events have not in fact occurred, as was never statistically likely, the resulting policy settings have proved far too loose, and the central bank much too slow to change it.
Concentrating on theoretical but small risks such as deflation has too often blinded the Fed to much larger risks near at hand of bubbles and asset inflation.
INTO THE UNKNOWN
Even as officials recognize policy has played a role stimulating an endless series of bubbles, the Fed finds itself trapped with no way out. Following the collapse of much of the modern banking system, the risk of pernicious deflation is now very real–more so than in the early 2000s.
So like the sorcerer’s apprentice, the Fed has cranked up the Great Bubble Machine for what policymakers hope will be one final time.
The Fed’s “unconventional” monetary strategy comes in four parts:
(1) Cutting interest rates to near-zero to lower the cost of borrowing.
(2) Injecting short-term liquidity into the financial system in the form of bank reserves (quantitative easing).
(3) Trying to pull down yields on longer-dated Treasury bonds through a combination of the jawbone (promising to keep short rates low for an extended period) and the threat to intervene in the market directly by buying longer-dated paper.
(4) Trying to reduce credit spreads above the Treasury yield for other borrowers, and increase the quantity of credit available, by buying mortgage-backed agency bonds for its own account, and financing other market participants to buy securities backed by other consumer credits, auto loans and student loans.
Most attention has focused on the zero-rate policy and quantitative easing at the short end of the curve. But the real significance lies in the unconventional operations targeting Treasury yields and eventually credit spreads at the long end.
Operations at the short end are designed to bolster the banking system and restart lending. But the Fed knows the banking system is not large enough to replace the much more important sources of credit from securities markets.
Operations at the long end are designed to get bond finance and securitized credit flowing. Short-end interest rates and quantitative operations are significant because they help shape the whole term structure of interest rates embedded in the curve.
ONE LAST SUPER-BUBBLE
The strategy has already succeeded in halving yields from over 4 percent in mid October to just 2.25 percent now.
By convincing investors interest rates will remain ultra low for a long period, the Fed has made them willing to lend to the U.S. government for up to ten years for what is a paltry return.
There are two risks. First, the massive rise in bond prices and compression of yields has come in the secondary market. The U.S. Treasury has not yet succeeded in placing much of its massively expanded debt and new requirements for next year at such low levels. But given the panic-driven demand for default-free assets, officials should not have too much difficulty.
The bigger one is that the Fed is misleading investors into the biggest bubble of all time. Bernanke is making what learned economists call a “time-inconsistent” promise to hold interest rates at ultra low levels for an extended period.
The problem is that if the unconventional monetary policy works, and the economy picks up, the Fed will come under pressure to “normalize” rates and reduce excess liquidity to prevent a rise in inflation. The resulting rate rises will inflict massive losses on anyone who bought bonds at today 2.25 percent rate.
Bizarrely, Bernanke and Co are in fact inviting investors to bet the policy will fail, the economy will remain mired in slump for a long period, deflation will occur and interest rates will remain on the floor, as Japan’s have done since the 1990s.
Buyers of real estate and subprime securities have recently been lampooned for foolishly overpaying at the top of the market. Bernanke and Co are gambling memories will prove short and investors will prove just as eager to pay top prices for long-term government and private debt even though the downside is large.
Let us have one last bubble, and when it collapses, we promise not to do any more in future…honest.
reuters.com
By: John Kemp
– John Kemp is a Reuters columnist. The views expressed are his own –
Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.
Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.
THE ASYMMETRIC EXPERIMENT
Bubble mania is no accident. It is the direct consequence of the Fed’s asymmetric response to shifts in asset prices. Pressed to “lean against the wind” and adopt counter-cyclical interest rate and credit policies in the asset market, senior Fed policymakers have repeatedly demurred.
Led by Bernanke and Greenspan, officials have argued it is too hard and subjective to identify bubbles until afterwards, and not the Fed’s job to second-guess asset allocation decisions of professional investors.
Even if bubbles could be identified, they argue, pricking them would require swingeing rate rises that would inflict widespread damage on the rest of the economy.
Far less damaging to allow asset markets to follow their natural cycle and stand by to cut interest rates sharply, supply liquidity and contain the fallout when the bubble bursts.
But the Fed’s asymmetric policy response to rising and falling asset prices (colloquially known as the “Greenspan/Bernanke put”) directly led to much of the excessive risk-taking which has humbled the financial system over the last eighteen months.
More importantly, the Fed’s decision to respond to the collapse of the technology and stock market bubble by lowering rates to 1 percent and holding them there for an extended period is now widely accepted as a mistake that contributed to the bond bubble and subsequent housing market boom in the middle of the decade.
If the low-rate strategy was a mistake, it was a conscious one. In testimony to the UK Parliament last year, former Bank of England Governor Eddie George admitted the bank had deliberately sought to stimulate the housing market and house prices to support consumption during the downturn.
Greenspan, Bernanke and Co seem to have adopted a similar approach in the United States.The real mistake, however, was not creating one bubble to offset the collapse of another, but believing they could control what they had wrought.
When the Fed did eventually start to raise short-term interest rates in 2004, long rates remained stubbornly low for a year, and then rose much more slowly than anticipated, a development the puzzled Fed chairman and his able assistant Dr Bernanke described as “the Great Conundrum”.
Even as rates eventually rose, the alchemy of securitization ensured the real cost of credit remained far too low until the subprime bubble finally burst in late 2007.
The second mistake is a basic design flaw in the Fed’s “risk-management” approach to setting monetary policy. Risk management is a nice idea, but not terribly useful. As engineer will explain, risk management involves trade offs and is not cost-free.
The Fed has struggled to formulate a response to “low probability, high impact” events such as the threat of deflation in the early 2000s. Its response has been to cut rates aggressively to ward off the danger of extreme downside events, a strategy officials liken to taking out an insurance policy.
That’s fine, but when these low risk events have not in fact occurred, as was never statistically likely, the resulting policy settings have proved far too loose, and the central bank much too slow to change it.
Concentrating on theoretical but small risks such as deflation has too often blinded the Fed to much larger risks near at hand of bubbles and asset inflation.
INTO THE UNKNOWN
Even as officials recognize policy has played a role stimulating an endless series of bubbles, the Fed finds itself trapped with no way out. Following the collapse of much of the modern banking system, the risk of pernicious deflation is now very real–more so than in the early 2000s.
So like the sorcerer’s apprentice, the Fed has cranked up the Great Bubble Machine for what policymakers hope will be one final time.
The Fed’s “unconventional” monetary strategy comes in four parts:
(1) Cutting interest rates to near-zero to lower the cost of borrowing.
(2) Injecting short-term liquidity into the financial system in the form of bank reserves (quantitative easing).
(3) Trying to pull down yields on longer-dated Treasury bonds through a combination of the jawbone (promising to keep short rates low for an extended period) and the threat to intervene in the market directly by buying longer-dated paper.
(4) Trying to reduce credit spreads above the Treasury yield for other borrowers, and increase the quantity of credit available, by buying mortgage-backed agency bonds for its own account, and financing other market participants to buy securities backed by other consumer credits, auto loans and student loans.
Most attention has focused on the zero-rate policy and quantitative easing at the short end of the curve. But the real significance lies in the unconventional operations targeting Treasury yields and eventually credit spreads at the long end.
Operations at the short end are designed to bolster the banking system and restart lending. But the Fed knows the banking system is not large enough to replace the much more important sources of credit from securities markets.
Operations at the long end are designed to get bond finance and securitized credit flowing. Short-end interest rates and quantitative operations are significant because they help shape the whole term structure of interest rates embedded in the curve.
ONE LAST SUPER-BUBBLE
The strategy has already succeeded in halving yields from over 4 percent in mid October to just 2.25 percent now.
By convincing investors interest rates will remain ultra low for a long period, the Fed has made them willing to lend to the U.S. government for up to ten years for what is a paltry return.
There are two risks. First, the massive rise in bond prices and compression of yields has come in the secondary market. The U.S. Treasury has not yet succeeded in placing much of its massively expanded debt and new requirements for next year at such low levels. But given the panic-driven demand for default-free assets, officials should not have too much difficulty.
The bigger one is that the Fed is misleading investors into the biggest bubble of all time. Bernanke is making what learned economists call a “time-inconsistent” promise to hold interest rates at ultra low levels for an extended period.
The problem is that if the unconventional monetary policy works, and the economy picks up, the Fed will come under pressure to “normalize” rates and reduce excess liquidity to prevent a rise in inflation. The resulting rate rises will inflict massive losses on anyone who bought bonds at today 2.25 percent rate.
Bizarrely, Bernanke and Co are in fact inviting investors to bet the policy will fail, the economy will remain mired in slump for a long period, deflation will occur and interest rates will remain on the floor, as Japan’s have done since the 1990s.
Buyers of real estate and subprime securities have recently been lampooned for foolishly overpaying at the top of the market. Bernanke and Co are gambling memories will prove short and investors will prove just as eager to pay top prices for long-term government and private debt even though the downside is large.
Let us have one last bubble, and when it collapses, we promise not to do any more in future…honest.
Wednesday, December 17, 2008
Pyramid Schemes Are as American as Apple Pie
How President Grant was taken by the Madoff of his day.
By JOHN STEELE GORDON
WSJ.COM
OPINION
DECEMBER 17, 2008, 11:46 P.M
By his own admission, Bernard Madoff has catapulted himself into the major leagues of Wall Street fraud. That is no small accomplishment, given some of the more famous frauds of the past. But a $50 billion Ponzi scheme is no small thing.
To be sure, the number of still unanswered questions is huge. How could a Ponzi scheme last as long as this one and reach so fantastic a sum? Why didn't he take the money and decamp to some extradition-free country instead of admitting the fraud and waiting for the cops to show up? And, of course, how could so many sophisticated people be fooled for so long by an operation that, at least in retrospect, had red flags all over it?
Ponzi schemes, where early investors are paid dividends out of the money put in by later investors, usually last only a few months. Charles Ponzi's eponymous scheme in 1919 started with just 16 investors and $870. Six months later, there were 20,000 investors who had put in $10,000,000. Ten million was a whole lot of money in 1919 and when it attracted attention, Ponzi soon found himself with a five-year jail term and the dubious honor of adding his name to the English language for a type of fraud he hadn't even invented.
Most Ponzi schemes are penny-ante affairs, such as chain letters, that bilk their victims out of a few dollars each. Even Charles Ponzi's investors put in an average of only $500 each. But Wall Street's most famous Ponzi scheme was, like the present one, no small affair. And its principal victim was a man few associate with Wall Street at all -- Ulysses S. Grant.
Ulysses Grant Jr., known as Buck, had been trained in the law and tried several businesses without success before coming to Wall Street. There he was befriended by Ferdinand Ward, a typical all-hat-and-no-cattle fast talker whom Grant was too naive to recognize as such. They soon formed a brokerage firm named Grant and Ward.
Ward hoped to trade on the Grant name and when Gen. Grant moved to New York in 1881, four years after serving as president, he came into the firm as a limited partner, investing $200,000, virtually his entire net worth. Many people, hoping to profit by a connection with the former president's access to power in Washington, opened accounts with the firm.
When Ward attempted to borrow money from the Marine National Bank, its president, James D. Fish, wrote Grant, who, as naive as his son, replied "I think the investments are safe, and I am willing that Mr. Ward should derive what profit he can for the firm that the use of my name and influence may bring." Grant meant it only in a general sense, but Fish thought the fix was in on government contracts going to companies that Ward said he controlled.
But Grant, as honest as he was foolish about business matters, had flatly refused to lobby for government contracts. So Ward just lied and solicited investments from Grant's friends and well-wishers, promising large dividends to come from lucrative government contracts with the firms he was investing in. He then took the money and speculated with it. He kept the promised large dividends flowing by paying them out of the money new investors put in.
It worked for awhile and, with the help of thoroughly cooked books, Grant and his son thought they were both seriously rich, worth $2 million and $1 million respectively. Grant began to go downtown regularly to the Grant and Ward offices, where he would greet new investors, who were suitably impressed to meet him. He didn't have a clue what was really going on.
And of course, it all fell apart. Had Ward been a talented speculator he might have made it work. But he was utterly incompetent. By April, 1884, he was desperate. He had borrowed so much money from Marine National Bank that it would fail along with Grant and Ward, possibly setting off a major panic on the Street. So, ever the con man, he told Grant that it was the Marine National Bank that was in trouble and needed $150,000 to avoid failure, possibly bringing down Grant and Ward with it.
Grant went to see William H. Vanderbilt, the richest man in the world, on the evening of May 5. Vanderbilt, anything but naive and never tactful, told Grant that "What I've heard about that firm would not justify me in lending it a dime." But Vanderbilt let him have the money, saying "to you -- to General Grant -- I'm making this loan." He wrote out a check for $150,000.
Grant returned home and turned it over to a waiting Ferdinand Ward. When Grant went downtown the next morning his son told him that Ward -- and the money -- had vanished and that both Marine National and their own firm were bankrupt. Grant spent several hours alone in his office and when he left he passed through the crowd that had gathered outside, without speaking. Everyone in the crowd removed their hats as a sign of respect.
Pyramid Schemes Are as American as Apple Pie – John Steele Gordon
Low-Interest Mortgages Are the Answer – R. Glenn Hubbard and Christopher J. Mayer
Defeat Malaria? Yes We Can – Jean Stéphenne
Ward was soon caught and thrown into the Ludlow Street Jail. He spent 10 years in prison for grand larceny. But there was no saving Grant and Ward, which was found to have assets of $67,174 and liabilities of $16,792,640. By June, Grant had only about $200 in cash to his name. The failure, of course, was front-page news and people began sending him checks spontaneously, which he had no option but to accept. One man added a note to his check, "On account of my share for services ending in April, 1865."
Every cloud, of course, has a silver lining, including the failure of Grant and Ward and the embarrassment of a national hero. Desperate to provide for his family, Grant finally agreed to write his memoirs, something he had stoutly resisted for nearly 20 years, thinking he couldn't write. Mark Twain's publishing firm gave him an advance of $25,000 -- a huge sum for that time. Soon after he began work, Grant learned that he had throat cancer and he hurried to finish the book so as not to leave his family destitute. He died three days after he completed the manuscript.
The book was a titanic success, selling over 300,000 copies and earning Grant's heirs half a million in royalties. But the book was more than just a best seller. It was a masterpiece. With his honesty and simple, forthright style, Grant created the finest work of military history of the 19th century. Even today, most historians and literary critics regard Grant's memoirs as equaled in the genre only by Caesar's "Commentaries."
One can only hope that something even half as good and significant can come out of the peculations of Bernard Madoff.
Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).
By JOHN STEELE GORDON
WSJ.COM
OPINION
DECEMBER 17, 2008, 11:46 P.M
By his own admission, Bernard Madoff has catapulted himself into the major leagues of Wall Street fraud. That is no small accomplishment, given some of the more famous frauds of the past. But a $50 billion Ponzi scheme is no small thing.
To be sure, the number of still unanswered questions is huge. How could a Ponzi scheme last as long as this one and reach so fantastic a sum? Why didn't he take the money and decamp to some extradition-free country instead of admitting the fraud and waiting for the cops to show up? And, of course, how could so many sophisticated people be fooled for so long by an operation that, at least in retrospect, had red flags all over it?
Ponzi schemes, where early investors are paid dividends out of the money put in by later investors, usually last only a few months. Charles Ponzi's eponymous scheme in 1919 started with just 16 investors and $870. Six months later, there were 20,000 investors who had put in $10,000,000. Ten million was a whole lot of money in 1919 and when it attracted attention, Ponzi soon found himself with a five-year jail term and the dubious honor of adding his name to the English language for a type of fraud he hadn't even invented.
Most Ponzi schemes are penny-ante affairs, such as chain letters, that bilk their victims out of a few dollars each. Even Charles Ponzi's investors put in an average of only $500 each. But Wall Street's most famous Ponzi scheme was, like the present one, no small affair. And its principal victim was a man few associate with Wall Street at all -- Ulysses S. Grant.
Ulysses Grant Jr., known as Buck, had been trained in the law and tried several businesses without success before coming to Wall Street. There he was befriended by Ferdinand Ward, a typical all-hat-and-no-cattle fast talker whom Grant was too naive to recognize as such. They soon formed a brokerage firm named Grant and Ward.
Ward hoped to trade on the Grant name and when Gen. Grant moved to New York in 1881, four years after serving as president, he came into the firm as a limited partner, investing $200,000, virtually his entire net worth. Many people, hoping to profit by a connection with the former president's access to power in Washington, opened accounts with the firm.
When Ward attempted to borrow money from the Marine National Bank, its president, James D. Fish, wrote Grant, who, as naive as his son, replied "I think the investments are safe, and I am willing that Mr. Ward should derive what profit he can for the firm that the use of my name and influence may bring." Grant meant it only in a general sense, but Fish thought the fix was in on government contracts going to companies that Ward said he controlled.
But Grant, as honest as he was foolish about business matters, had flatly refused to lobby for government contracts. So Ward just lied and solicited investments from Grant's friends and well-wishers, promising large dividends to come from lucrative government contracts with the firms he was investing in. He then took the money and speculated with it. He kept the promised large dividends flowing by paying them out of the money new investors put in.
It worked for awhile and, with the help of thoroughly cooked books, Grant and his son thought they were both seriously rich, worth $2 million and $1 million respectively. Grant began to go downtown regularly to the Grant and Ward offices, where he would greet new investors, who were suitably impressed to meet him. He didn't have a clue what was really going on.
And of course, it all fell apart. Had Ward been a talented speculator he might have made it work. But he was utterly incompetent. By April, 1884, he was desperate. He had borrowed so much money from Marine National Bank that it would fail along with Grant and Ward, possibly setting off a major panic on the Street. So, ever the con man, he told Grant that it was the Marine National Bank that was in trouble and needed $150,000 to avoid failure, possibly bringing down Grant and Ward with it.
Grant went to see William H. Vanderbilt, the richest man in the world, on the evening of May 5. Vanderbilt, anything but naive and never tactful, told Grant that "What I've heard about that firm would not justify me in lending it a dime." But Vanderbilt let him have the money, saying "to you -- to General Grant -- I'm making this loan." He wrote out a check for $150,000.
Grant returned home and turned it over to a waiting Ferdinand Ward. When Grant went downtown the next morning his son told him that Ward -- and the money -- had vanished and that both Marine National and their own firm were bankrupt. Grant spent several hours alone in his office and when he left he passed through the crowd that had gathered outside, without speaking. Everyone in the crowd removed their hats as a sign of respect.
Pyramid Schemes Are as American as Apple Pie – John Steele Gordon
Low-Interest Mortgages Are the Answer – R. Glenn Hubbard and Christopher J. Mayer
Defeat Malaria? Yes We Can – Jean Stéphenne
Ward was soon caught and thrown into the Ludlow Street Jail. He spent 10 years in prison for grand larceny. But there was no saving Grant and Ward, which was found to have assets of $67,174 and liabilities of $16,792,640. By June, Grant had only about $200 in cash to his name. The failure, of course, was front-page news and people began sending him checks spontaneously, which he had no option but to accept. One man added a note to his check, "On account of my share for services ending in April, 1865."
Every cloud, of course, has a silver lining, including the failure of Grant and Ward and the embarrassment of a national hero. Desperate to provide for his family, Grant finally agreed to write his memoirs, something he had stoutly resisted for nearly 20 years, thinking he couldn't write. Mark Twain's publishing firm gave him an advance of $25,000 -- a huge sum for that time. Soon after he began work, Grant learned that he had throat cancer and he hurried to finish the book so as not to leave his family destitute. He died three days after he completed the manuscript.
The book was a titanic success, selling over 300,000 copies and earning Grant's heirs half a million in royalties. But the book was more than just a best seller. It was a masterpiece. With his honesty and simple, forthright style, Grant created the finest work of military history of the 19th century. Even today, most historians and literary critics regard Grant's memoirs as equaled in the genre only by Caesar's "Commentaries."
One can only hope that something even half as good and significant can come out of the peculations of Bernard Madoff.
Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).
Obama works to Overhaul TARP
DECEMBER 17, 2008
Team Tries to Meld Some Paulson Ideas With Aid to Borrowers Facing Foreclosure
By DEBORAH SOLOMON
WASHINGTON -- The incoming Obama administration is considering a series of initiatives to combat the financial crisis, including some efforts to help banks that the Bush administration has tried with limited success.
Among the plans being discussed are injecting more capital into banks, creating a market for illiquid assets clogging the books of financial institutions and helping borrowers who are having trouble making their mortgage payments.
Getty Images
President-elect Barack Obama greets people Tuesday in Chicago, where he met with his economic team about ways to address the financial crisis.
On Tuesday, members of President-elect Barack Obama's economic team briefed Mr. Obama on ways to address the financial crisis and also on plans for an economic-stimulus package.
While Treasury Secretary Henry Paulson has seized on equity investments in banks as Treasury's primary mechanism to help resolve the financial crisis, the Obama team is developing a broader approach that would likely incorporate multiple remedies.
The new administration is "trying to put components together that...will be complementary...while recognizing there's no easy answer," said a person familiar with its plans.
The Obama team, hoping to avoid the criticism leveled at Mr. Paulson by lawmakers that he lacks a consistent strategy, is also working to come up with a way to cogently explain the rationale behind its approach.
One key distinction will be in the approach to helping homeowners facing foreclosure. Mr. Paulson and the White House have resisted calls to embark on a government rescue of homeowners. The Obama team, by contrast, sees that as a critical leg of its financial-crisis rescue plan, people familiar with the matter said.
Democratic lawmakers are pushing for Mr. Obama to take steps quickly to help at-risk borrowers. Details of the Obama foreclosure plan aren't known, in part because they are still being hashed out.
In a fresh sign of the magnitude of the financial crisis, the Federal Deposit Insurance Corp. braced for more bloodletting in the U.S. banking industry. The five-member board of the FDIC, which is in charge of unwinding failed banks, voted Tuesday to increase the agency's 2009 budget to $2.24 billion, an increase of $1 billion, compared with 2008, and said it planned to beef up its bank-examination and supervisory staff by more than 500 to 6,269. It would pay for the increase by levying higher fees on banks.
While it is unclear exactly what the Obama financial rescue will look like, it is expected to continue Mr. Paulson's attempts at addressing the lack of capital at financial institutions. That could mean additional equity injections, as well as an effort to have the government boost the value of troubled assets, such as mortgage-backed securities.
"We are looking at a number of initiatives that will allow us to move aggressively and responsibly to address the economic and financial crisis both on Wall Street and Main Street, including programs to provide targeted foreclosure relief," said Stephanie Cutter, an Obama spokeswoman.
Mr. Paulson initially planned to help financial institutions by purchasing troubled assets through the $700 billion Troubled Asset Relief Program approved by Congress in October. Banks are struggling with a glut of those assets, which continue to fall in price, forcing the banks to write down the losses and take a financial hit.
But Mr. Paulson jettisoned that idea in favor of taking $250 billion of equity stakes in banks, arguing that was a quicker and more effective way to encourage banks to lend money to consumers, businesses and each other. However, the credit crisis has continued despite Treasury's efforts, prompting criticism from lawmakers and Wall Street.
On Tuesday, Mr. Paulson acknowledged that banks aren't lending enough money despite the government infusion, but said the U.S. didn't want to nationalize the industry and dictate the loans banks make.
Much of the Obama team's financial rescue package likely won't be known until the new administration takes office next month. Some of it depends on whether Mr. Paulson seeks the second half of the promised $700 billion. Treasury's initial $350 billion batch is rapidly dwindling and could be further drained by aid to struggling U.S. auto makers.
Lawmakers have made it clear that if Treasury wants to get the next tranche, it will need to come up with a foreclosure-mitigation plan and enact stricter requirements on banks that get government funds. Mr. Paulson has said he wants the Obama team to support any new programs, but the Obama team has yet to engage with Treasury on current efforts.
Mr. Paulson, in an interview with CNBC on Tuesday, said the government had enough "firepower," and suggested he had no current plans to tap the second tranche.
Some lawmakers want Mr. Paulson to request the funds. House Financial Services Chairman Barney Frank (D., Mass.) said he has told the Obama team it should work with Mr. Paulson to request the second $350 billion and embark quickly on a foreclosure-prevention plan.
"My hope is for them to agree with Paulson that he should request the second $350 billion as soon as we [Congress] reconvene," Mr. Frank said in an interview.—
Jessica Holzer contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com
Team Tries to Meld Some Paulson Ideas With Aid to Borrowers Facing Foreclosure
By DEBORAH SOLOMON
WASHINGTON -- The incoming Obama administration is considering a series of initiatives to combat the financial crisis, including some efforts to help banks that the Bush administration has tried with limited success.
Among the plans being discussed are injecting more capital into banks, creating a market for illiquid assets clogging the books of financial institutions and helping borrowers who are having trouble making their mortgage payments.
Getty Images
President-elect Barack Obama greets people Tuesday in Chicago, where he met with his economic team about ways to address the financial crisis.
On Tuesday, members of President-elect Barack Obama's economic team briefed Mr. Obama on ways to address the financial crisis and also on plans for an economic-stimulus package.
While Treasury Secretary Henry Paulson has seized on equity investments in banks as Treasury's primary mechanism to help resolve the financial crisis, the Obama team is developing a broader approach that would likely incorporate multiple remedies.
The new administration is "trying to put components together that...will be complementary...while recognizing there's no easy answer," said a person familiar with its plans.
The Obama team, hoping to avoid the criticism leveled at Mr. Paulson by lawmakers that he lacks a consistent strategy, is also working to come up with a way to cogently explain the rationale behind its approach.
One key distinction will be in the approach to helping homeowners facing foreclosure. Mr. Paulson and the White House have resisted calls to embark on a government rescue of homeowners. The Obama team, by contrast, sees that as a critical leg of its financial-crisis rescue plan, people familiar with the matter said.
Democratic lawmakers are pushing for Mr. Obama to take steps quickly to help at-risk borrowers. Details of the Obama foreclosure plan aren't known, in part because they are still being hashed out.
In a fresh sign of the magnitude of the financial crisis, the Federal Deposit Insurance Corp. braced for more bloodletting in the U.S. banking industry. The five-member board of the FDIC, which is in charge of unwinding failed banks, voted Tuesday to increase the agency's 2009 budget to $2.24 billion, an increase of $1 billion, compared with 2008, and said it planned to beef up its bank-examination and supervisory staff by more than 500 to 6,269. It would pay for the increase by levying higher fees on banks.
While it is unclear exactly what the Obama financial rescue will look like, it is expected to continue Mr. Paulson's attempts at addressing the lack of capital at financial institutions. That could mean additional equity injections, as well as an effort to have the government boost the value of troubled assets, such as mortgage-backed securities.
"We are looking at a number of initiatives that will allow us to move aggressively and responsibly to address the economic and financial crisis both on Wall Street and Main Street, including programs to provide targeted foreclosure relief," said Stephanie Cutter, an Obama spokeswoman.
Mr. Paulson initially planned to help financial institutions by purchasing troubled assets through the $700 billion Troubled Asset Relief Program approved by Congress in October. Banks are struggling with a glut of those assets, which continue to fall in price, forcing the banks to write down the losses and take a financial hit.
But Mr. Paulson jettisoned that idea in favor of taking $250 billion of equity stakes in banks, arguing that was a quicker and more effective way to encourage banks to lend money to consumers, businesses and each other. However, the credit crisis has continued despite Treasury's efforts, prompting criticism from lawmakers and Wall Street.
On Tuesday, Mr. Paulson acknowledged that banks aren't lending enough money despite the government infusion, but said the U.S. didn't want to nationalize the industry and dictate the loans banks make.
Much of the Obama team's financial rescue package likely won't be known until the new administration takes office next month. Some of it depends on whether Mr. Paulson seeks the second half of the promised $700 billion. Treasury's initial $350 billion batch is rapidly dwindling and could be further drained by aid to struggling U.S. auto makers.
Lawmakers have made it clear that if Treasury wants to get the next tranche, it will need to come up with a foreclosure-mitigation plan and enact stricter requirements on banks that get government funds. Mr. Paulson has said he wants the Obama team to support any new programs, but the Obama team has yet to engage with Treasury on current efforts.
Mr. Paulson, in an interview with CNBC on Tuesday, said the government had enough "firepower," and suggested he had no current plans to tap the second tranche.
Some lawmakers want Mr. Paulson to request the funds. House Financial Services Chairman Barney Frank (D., Mass.) said he has told the Obama team it should work with Mr. Paulson to request the second $350 billion and embark quickly on a foreclosure-prevention plan.
"My hope is for them to agree with Paulson that he should request the second $350 billion as soon as we [Congress] reconvene," Mr. Frank said in an interview.—
Jessica Holzer contributed to this article.
Write to Deborah Solomon at deborah.solomon@wsj.com
How the SEC Got in Bed with the Madoff.Literally.
How the SEC Got in Bed with the Madoffs. Literally.
by Charlie Gasparino
December 16, 2008 11:35pm
thedailybeast.com
Inside the twisted loyalties and conflicts that kept Wall Street’s top cop from catching one of the biggest Ponzi schemes in history.
Since the story of Bernard Madoff’s massive Ponzi scheme broke, a recurring theme has been shock over how Wall Street’s top cop—the Securities and Exchange Commission—missed so many red flags. Knowing more about who did the SEC’s investigations makes it all less surprising.
In 1999 and then again in 2004, Eric Swanson, an assistant director in the inspections division of the SEC, was part of the team that examined Madoff’s brokerage firm. During those exams, the SEC team said it found almost nothing wrong, certainly not the fraud that the firm’s chief executive, Bernard Madoff admitted to last Thursday evening, as he sat in the FBI’s New York offices with his one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney, the famed white-collar lawyer Ira Lee Sorkin.
Madoff sat in the FBI’s New York offices with one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney.
Swanson doesn’t lead the SEC office in charge of such inspections; Lori Richards has that job. But he is noteworthy for another reason: Swanson married Madoff’s niece, Shana, in 2007, and knew members of the Madoff family well. Shana was the Madoff firm’s compliance counsel, one of the people in charge of making sure the firm played by the rules. The two had met at industry conferences.
In 2006, while at the SEC, Swanson sat on a panel sponsored by the Securities Traders Association, a leading market trade group that deals with regulators and the government over policy issue. Also on that panel was Robert Colby, the head of market regulation at the SEC, and Mark Madoff, Bernard’s son, who worked at the firm as well. Adding another level of intrigue, Swanson’s future and current father in law, Peter Madofff, is in charge of compliance for the Madoff operations. Swanson is now the general counsel for a company called BATs, which is an electronic trading company. As most people on Wall Street know, Bernard Madoff is one of the fathers of the electronic trading business, having been one of the founders of the Nasdaq stock market.
After I broke the story of Shana Madoff's relationship with Eric Swanson Monday night on CNBC, the criticism of the SEC's handling of the case and its conflicts heated up. The following day, SEC chairman Chris Cox launched an internal investigation on how the SEC dropped the ball, despite numerous "credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, (that) were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action."
I doubt an in-house investigation will do much to satisfy the SEC critics given the size and scope of the scandal and the Swanson-Madoff family connection, which has been a particular source of tension among the many investors who lost big money from the Madoff scam. If you live in New York, you don’t have to look far to find victims. A friend of mine is a member of the exclusive Glen Oaks country club in Long Island, which was one of the pools of wealth the Madoff operations focused on. He told me at least 100 of the club’s approximately 200 members lost money, “I know of at least 10 people who lost $20 to $30 million each,” he said.
He also told me that while Madoff himself may be Public Enemy No. 1, the SEC is a close second. What they can’t understand is how securities regulators ignored a least one letter calling Madoff’s operations a “Ponzi Scheme,” and a slew of red flags –including nearly two decades of uninterrupted positive returns, and an auditor who worked out of a tiny one-man shop in upstate New York. And that’s why, in their view, Eric Swanson’s relationship with Shana Madoff and her family is so significant, and why in my view, the SEC must be replaced by an agency where such ties are disclosed or eliminated.
The SEC as an institution is loaded with conflicts of interest. Former SEC enforcement attorneys are littered across Wall Street. Many others work at big law firms that have lucrative contracts with big Wall Street firms. It’s called the revolving door, and its one of Wall Street’s dirty little secrets: You work at of Wall Street’s regulating institutions, and then graduate to the big bucks on the street a few years later. The dealings between the two sides are hardly adversarial; they appear on panels together; they negotiate regulations, set broad policy and also and most significantly negotiate fines and civil charges the SEC might ultimately bring for violations of securities laws.
I have to say upfront, I have no reason to believe either Shana Madoff, her dad, Peter Madoff, or Swanson himself did anything wrong. So far, my sources close to the investigation say prosecutors are focusing on Bernard Madoff as the sole mastermind of the swindle. Two nights ago, I spoke to Rusty Wing, the attorney for Peter Madoff, who spoke on behalf of Shana. He went to great lengths to point out that Swanson and Shana Madoff were acquaintances during the SEC’s various investigations of the Madoff firm, and weren’t romantically involved until sometime later. A spokesman for Swanson said he “intends to fully co-operate” with the SEC investigation into his relationship with the Madoffs and that “his romantic relationship with his wife began years after the compliance team he helped supervise made an inquiry about Bernard Madoff’s securities operations.”
Lori Richards, Swanson’s old boss, has issued a similar statement on behalf of the SEC stating that Swanson only worked on exams in 1999 and 2004, not a subsequent 2005 examination (in all cases the SEC came up relatively empty handed) and that the “SEC has very strict rules prohibiting SEC staff from participating in matters involving firms where they have a personal interest. Subsequently, Swanson did not work on any other examination matters involving the Madoff firm before leaving the agency."
All of which, I believe, misses the larger point, which goes beyond whether Swanson, Shana Madoff or anyone other than Bernard are responsible for what may be the largest Ponzi in modern history. Conflicts of interest are rarely of the Blogojivich variety—where people in power allegedly demand actual monetary payoffs from people who can benefit from their power. Conflicts of interest are more often much more subtle. In bureaucratic institutions like the SEC they stifle skepticism and impose group think of the sort that people you’re regulating or investigating couldn’t have done anything wrong, because, well, you know them so well.
I’ve seen the SEC in action for so many years. SEC attorneys are by and large good people who want to do the right thing. But they haven’t broken a scandal in years, precisely because the people they’re regulating are often their friends so they’re less inclined to think the worse of people they actually like.
If you don’t believe me, listen to Arthur Levitt, the former SEC chairman talk about Bernard Madoff. "You can see where people would pull the shades down over their eyes in terms of recognizing what could be one of the great frauds of our time," Levitt said in a Bloomberg Television interview. "I've known him for nearly 35 years, and I'm absolutely astonished."
Later when questioned by the New York Post about whether he was too close to Madoff, Levitt fired back: "I knew Bernie the way I know Sandy Weill (the former CEO of Citigroup) or Tully,” a reference to Dan Tully, the former CEO of Merrill Lynch. “He received no special breaks from the commission."
But that’s exactly my point. Levitt was close to both Weill and Tully—he worked for Weill early in his career, and during his time at the SEC, Weill’s firm was often the focus of some of the most serious scandals in the securities business. As for Tully, Levitt told me on several occasions how much he admired the former Merrill chief, who he appointed to head a commission in the 1990s to reform abuses in the brokerage business. It’s worth noting that the brokerage business, including Tully’s old firm, later violated some of the reforms the “Tully Commission” advocated.
Bernie Madoff found his way onto some of these same commissions as well, where he worked with people like Levitt to develop rules and regulations and became a well known, and well-liked figure. I met Bernie a couple years ago, when I interviewed him for my book, King of The Club, which was about former New York Stock Exchange Chairman Dick Grasso. I liked him as well, but unlike the SEC, I checked out what he was saying.
The solution: Disband the SEC once and for all, and leave the enforcement of securities laws to criminal authorities. If civil fines and actions don’t deter bad behavior, maybe jail time will.
Charles Gasparino appears as a daily member of CNBC's ensemble. Gasparino, in his role as on-air Editor, provides reports based on his reporting throughout the day and has broken some of the biggest stories affecting the financial markets in recent months. He is also a columnist for Trader Monthly Magazine, and a freelance writer for New York Magazine, Forbes and other publications.
by Charlie Gasparino
December 16, 2008 11:35pm
thedailybeast.com
Inside the twisted loyalties and conflicts that kept Wall Street’s top cop from catching one of the biggest Ponzi schemes in history.
Since the story of Bernard Madoff’s massive Ponzi scheme broke, a recurring theme has been shock over how Wall Street’s top cop—the Securities and Exchange Commission—missed so many red flags. Knowing more about who did the SEC’s investigations makes it all less surprising.
In 1999 and then again in 2004, Eric Swanson, an assistant director in the inspections division of the SEC, was part of the team that examined Madoff’s brokerage firm. During those exams, the SEC team said it found almost nothing wrong, certainly not the fraud that the firm’s chief executive, Bernard Madoff admitted to last Thursday evening, as he sat in the FBI’s New York offices with his one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney, the famed white-collar lawyer Ira Lee Sorkin.
Madoff sat in the FBI’s New York offices with one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney.
Swanson doesn’t lead the SEC office in charge of such inspections; Lori Richards has that job. But he is noteworthy for another reason: Swanson married Madoff’s niece, Shana, in 2007, and knew members of the Madoff family well. Shana was the Madoff firm’s compliance counsel, one of the people in charge of making sure the firm played by the rules. The two had met at industry conferences.
In 2006, while at the SEC, Swanson sat on a panel sponsored by the Securities Traders Association, a leading market trade group that deals with regulators and the government over policy issue. Also on that panel was Robert Colby, the head of market regulation at the SEC, and Mark Madoff, Bernard’s son, who worked at the firm as well. Adding another level of intrigue, Swanson’s future and current father in law, Peter Madofff, is in charge of compliance for the Madoff operations. Swanson is now the general counsel for a company called BATs, which is an electronic trading company. As most people on Wall Street know, Bernard Madoff is one of the fathers of the electronic trading business, having been one of the founders of the Nasdaq stock market.
After I broke the story of Shana Madoff's relationship with Eric Swanson Monday night on CNBC, the criticism of the SEC's handling of the case and its conflicts heated up. The following day, SEC chairman Chris Cox launched an internal investigation on how the SEC dropped the ball, despite numerous "credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, (that) were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action."
I doubt an in-house investigation will do much to satisfy the SEC critics given the size and scope of the scandal and the Swanson-Madoff family connection, which has been a particular source of tension among the many investors who lost big money from the Madoff scam. If you live in New York, you don’t have to look far to find victims. A friend of mine is a member of the exclusive Glen Oaks country club in Long Island, which was one of the pools of wealth the Madoff operations focused on. He told me at least 100 of the club’s approximately 200 members lost money, “I know of at least 10 people who lost $20 to $30 million each,” he said.
He also told me that while Madoff himself may be Public Enemy No. 1, the SEC is a close second. What they can’t understand is how securities regulators ignored a least one letter calling Madoff’s operations a “Ponzi Scheme,” and a slew of red flags –including nearly two decades of uninterrupted positive returns, and an auditor who worked out of a tiny one-man shop in upstate New York. And that’s why, in their view, Eric Swanson’s relationship with Shana Madoff and her family is so significant, and why in my view, the SEC must be replaced by an agency where such ties are disclosed or eliminated.
The SEC as an institution is loaded with conflicts of interest. Former SEC enforcement attorneys are littered across Wall Street. Many others work at big law firms that have lucrative contracts with big Wall Street firms. It’s called the revolving door, and its one of Wall Street’s dirty little secrets: You work at of Wall Street’s regulating institutions, and then graduate to the big bucks on the street a few years later. The dealings between the two sides are hardly adversarial; they appear on panels together; they negotiate regulations, set broad policy and also and most significantly negotiate fines and civil charges the SEC might ultimately bring for violations of securities laws.
I have to say upfront, I have no reason to believe either Shana Madoff, her dad, Peter Madoff, or Swanson himself did anything wrong. So far, my sources close to the investigation say prosecutors are focusing on Bernard Madoff as the sole mastermind of the swindle. Two nights ago, I spoke to Rusty Wing, the attorney for Peter Madoff, who spoke on behalf of Shana. He went to great lengths to point out that Swanson and Shana Madoff were acquaintances during the SEC’s various investigations of the Madoff firm, and weren’t romantically involved until sometime later. A spokesman for Swanson said he “intends to fully co-operate” with the SEC investigation into his relationship with the Madoffs and that “his romantic relationship with his wife began years after the compliance team he helped supervise made an inquiry about Bernard Madoff’s securities operations.”
Lori Richards, Swanson’s old boss, has issued a similar statement on behalf of the SEC stating that Swanson only worked on exams in 1999 and 2004, not a subsequent 2005 examination (in all cases the SEC came up relatively empty handed) and that the “SEC has very strict rules prohibiting SEC staff from participating in matters involving firms where they have a personal interest. Subsequently, Swanson did not work on any other examination matters involving the Madoff firm before leaving the agency."
All of which, I believe, misses the larger point, which goes beyond whether Swanson, Shana Madoff or anyone other than Bernard are responsible for what may be the largest Ponzi in modern history. Conflicts of interest are rarely of the Blogojivich variety—where people in power allegedly demand actual monetary payoffs from people who can benefit from their power. Conflicts of interest are more often much more subtle. In bureaucratic institutions like the SEC they stifle skepticism and impose group think of the sort that people you’re regulating or investigating couldn’t have done anything wrong, because, well, you know them so well.
I’ve seen the SEC in action for so many years. SEC attorneys are by and large good people who want to do the right thing. But they haven’t broken a scandal in years, precisely because the people they’re regulating are often their friends so they’re less inclined to think the worse of people they actually like.
If you don’t believe me, listen to Arthur Levitt, the former SEC chairman talk about Bernard Madoff. "You can see where people would pull the shades down over their eyes in terms of recognizing what could be one of the great frauds of our time," Levitt said in a Bloomberg Television interview. "I've known him for nearly 35 years, and I'm absolutely astonished."
Later when questioned by the New York Post about whether he was too close to Madoff, Levitt fired back: "I knew Bernie the way I know Sandy Weill (the former CEO of Citigroup) or Tully,” a reference to Dan Tully, the former CEO of Merrill Lynch. “He received no special breaks from the commission."
But that’s exactly my point. Levitt was close to both Weill and Tully—he worked for Weill early in his career, and during his time at the SEC, Weill’s firm was often the focus of some of the most serious scandals in the securities business. As for Tully, Levitt told me on several occasions how much he admired the former Merrill chief, who he appointed to head a commission in the 1990s to reform abuses in the brokerage business. It’s worth noting that the brokerage business, including Tully’s old firm, later violated some of the reforms the “Tully Commission” advocated.
Bernie Madoff found his way onto some of these same commissions as well, where he worked with people like Levitt to develop rules and regulations and became a well known, and well-liked figure. I met Bernie a couple years ago, when I interviewed him for my book, King of The Club, which was about former New York Stock Exchange Chairman Dick Grasso. I liked him as well, but unlike the SEC, I checked out what he was saying.
The solution: Disband the SEC once and for all, and leave the enforcement of securities laws to criminal authorities. If civil fines and actions don’t deter bad behavior, maybe jail time will.
Charles Gasparino appears as a daily member of CNBC's ensemble. Gasparino, in his role as on-air Editor, provides reports based on his reporting throughout the day and has broken some of the biggest stories affecting the financial markets in recent months. He is also a columnist for Trader Monthly Magazine, and a freelance writer for New York Magazine, Forbes and other publications.
Monday, December 15, 2008
Victims of Madoff's alleged Wall Street scam spread to Europe
Victims of Madoff's alleged Wall Street scam spread to Europe
By Jeffrey Stinson, USA TODAY
LONDON — The list of victims of an alleged Wall Street swindle of giant proportions spread into Europe on Monday, raising questions about the level of competence of U.S. financial regulators.
Britain's Royal Bank of Scotland acknowledged it was exposed to $600 million in possible losses in hedge funds managed by Bernard Madoff, who was arrested last week and accused of running a $50 billion Ponzi scheme.
The Financial Times reported that HSBC Holdings Plc had emerged as one of the Wall Street fund managers largest possible victims, with potential exposure of about $1 billion. HSBC has yet to comment.
STILL AMAZED: Financial world in a daze
The largest banks in Spain and France — Santander and BNP Paribas — said Sunday they faced possible losses of $3.07 billion and $460 million, respectively.
Italy's second largest bank, UniCredit SpA, said it was exposed to about $100 million in potential losses. Other banks and investment houses in Britain, France and Switzerland also reported exposure.
The alleged scam by Madoff, 70, once unassailable on Wall Street, is possibly the world's biggest investment fraud run by a single person.
It follows the collapse last year of the U.S. subprime mortgage market, which exposed European and other world banks to billions in losses in securities backed by worthless mortgages.
And it sparked questions on this side of the Atlantic about whether U.S. financial regulators are on top of anything and whether U.S. investments are safe.
"The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the U.S.," the British investment firm Bramdean Asset Management said in a statement.
Nicola Horlick, the firm's boss, went further, questioning whether Europeans should invest in any U.S. financial markets and instruments.
"I think now it is very difficult for people to invest in things that are meant to be regulated in America because they have fallen down on the job," she told the BBC.
Andrew Clare of the Cass Business School at City University London said that while the alleged fraud was "more embarrassing than the credit crunch" there always would be "smart individuals who can pull the wool over the eyes of regulators."
Regulators and big institutional investors can always ask questions, Clare said, but there aren't always foolproof ways of detecting when people are lying.
U.S. securities authorities say that Madoff oversaw a fraud of epic proportions through his hedge fund and investment advisory business. He is alleged to have falsified reports from a secretive money management service that he owned separately from his main stock transaction firm. That made the firm appear to be more successful than it was.
He allegedly kept the fund going in a traditional Ponzi scheme method: by taking money from new investors to pay off existing investors who wanted to cash out. Authorities say Madoff privately put the losses at $50 billion.
Madoff's lawyers have denied the allegations.
Other European banks and investment houses reporting exposure included:
•The Man Group, the world's largest publicly traded fund manager. It reported exposure of around $360 million, saying, "It appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls."
•The French bank Natixis said it was exposed to possibly $605 million in losses.
•Reichmuth, a private Swiss bank, reported Sunday that it had about $330 million exposed.
The potential losses spread beyond Europe. The Japanese financial house, Nomura Holdings, said it had $306 million at risk.
By Jeffrey Stinson, USA TODAY
LONDON — The list of victims of an alleged Wall Street swindle of giant proportions spread into Europe on Monday, raising questions about the level of competence of U.S. financial regulators.
Britain's Royal Bank of Scotland acknowledged it was exposed to $600 million in possible losses in hedge funds managed by Bernard Madoff, who was arrested last week and accused of running a $50 billion Ponzi scheme.
The Financial Times reported that HSBC Holdings Plc had emerged as one of the Wall Street fund managers largest possible victims, with potential exposure of about $1 billion. HSBC has yet to comment.
STILL AMAZED: Financial world in a daze
The largest banks in Spain and France — Santander and BNP Paribas — said Sunday they faced possible losses of $3.07 billion and $460 million, respectively.
Italy's second largest bank, UniCredit SpA, said it was exposed to about $100 million in potential losses. Other banks and investment houses in Britain, France and Switzerland also reported exposure.
The alleged scam by Madoff, 70, once unassailable on Wall Street, is possibly the world's biggest investment fraud run by a single person.
It follows the collapse last year of the U.S. subprime mortgage market, which exposed European and other world banks to billions in losses in securities backed by worthless mortgages.
And it sparked questions on this side of the Atlantic about whether U.S. financial regulators are on top of anything and whether U.S. investments are safe.
"The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the U.S.," the British investment firm Bramdean Asset Management said in a statement.
Nicola Horlick, the firm's boss, went further, questioning whether Europeans should invest in any U.S. financial markets and instruments.
"I think now it is very difficult for people to invest in things that are meant to be regulated in America because they have fallen down on the job," she told the BBC.
Andrew Clare of the Cass Business School at City University London said that while the alleged fraud was "more embarrassing than the credit crunch" there always would be "smart individuals who can pull the wool over the eyes of regulators."
Regulators and big institutional investors can always ask questions, Clare said, but there aren't always foolproof ways of detecting when people are lying.
U.S. securities authorities say that Madoff oversaw a fraud of epic proportions through his hedge fund and investment advisory business. He is alleged to have falsified reports from a secretive money management service that he owned separately from his main stock transaction firm. That made the firm appear to be more successful than it was.
He allegedly kept the fund going in a traditional Ponzi scheme method: by taking money from new investors to pay off existing investors who wanted to cash out. Authorities say Madoff privately put the losses at $50 billion.
Madoff's lawyers have denied the allegations.
Other European banks and investment houses reporting exposure included:
•The Man Group, the world's largest publicly traded fund manager. It reported exposure of around $360 million, saying, "It appears that a systematic and comprehensive fraud may have been committed, evading a range of structural controls."
•The French bank Natixis said it was exposed to possibly $605 million in losses.
•Reichmuth, a private Swiss bank, reported Sunday that it had about $330 million exposed.
The potential losses spread beyond Europe. The Japanese financial house, Nomura Holdings, said it had $306 million at risk.
Hedge Funds Are Victims, Raising Further Questions
December 13, 2008
Hedge Funds Are Victims, Raising Further Questions
By MICHAEL J. de la MERCED
Frauds on Wall Street aren’t unheard of. But a $50 billion Ponzi scheme, one that prosecutors say struck at boldface names on several continents, is a bombshell by any standard.
The case against Bernard L. Madoff, the respected longtime trader accused of running one of the biggest frauds in Wall Street history, has been Topic A in the investor community. But close behind is a heated discussion of how the sordid drama will affect the already-battered community of hedge funds and other investment firms — many of which invested with Mr. Madoff.
Mr. Madoff’s case could hardly have come at a worse time for hedge funds. The whipsawing markets and suddenly unfriendly lenders have already taken their toll on high financiers, and many have already suffered what amounts to runs on the bank by investors clamoring to withdraw their investments.
“It can’t help but have the effect of further chipping away at the confidence that the investor community has in the hedge fund industry,” said Ralph L. Schlosstein, the chief executive of Highview Investment Group, a money management firm and a former president of BlackRock. “But like many things that come at moments of fragility, its impact is magnified.”
The collapse of Mr. Madoff’s firm took the vast majority of investors by surprise. Mr. Madoff, once the largest market maker on the Nasdaq stock market, was known for his modest demeanor and, perhaps more important, his steady and overwhelmingly positive returns. That in turn appears to have attracted scores of investors, from Palm Beach country clubs to Manhattan social circles.
It is difficult to map out the swath of damage that the Madoff firm’s collapse is likely to cut through the hedge fund industry, not to mention a wide range of other investors. But among its biggest investors were funds of funds, firms that invest in several hedge funds and are nominally among the most sophisticated judges of character in the industry. Because Mr. Madoff reported consistently positive returns for more than a decade — some say impossibly so — he drew vast amounts of business from them.
Now, the collateral damage is likely to add to the chaos that has already been ravaging hedge funds. Spooked by losses and forced to raise cash quickly as the financial crisis ballooned, investors have sought to pull out their money from hedge funds, causing serious pain, and even some forced closures. A growing list of large, well-known firms have sought to block redemption requests in an effort to stem a mass exodus of investors who now desperately want to get into cash.
In a letter sent Friday, the Citadel Investment Group said it was halting redemptions at its two largest hedge funds through March 31.
Confidence will only weaken further with the Madoff firm scandal, intensifying pain for the industry.
“If you couple this with the deleveraging already, this means one thing: more redemptions,” said Campbell R. Harvey, a professor at the Fuqua School of Business at Duke University.
The losses from the Madoff firm will also raise more questions about how well funds of funds perform due diligence, a concern already magnified by losses in the hedge fund industry.
“Funds of funds that invested in Madoff will get a double whammy,” said Whitney Tilson, who runs the T2 Partners hedge fund. “Not only will they have to take a loss, but they are going to have to do an awful lot of explaining for how they ever got fooled here.”
Indeed, while many investors are asking how regulators could have missed a towering Ponzi scheme, some are beginning to question the whole process of due diligence. Several potential investors had raised questions about Mr. Madoff’s claims of steady returns over the years, but regulators apparently took few steps to investigate.
“Where were the auditors?” asked Bill Grayson, the president of Falcon Point Capital, a hedge fund based in San Francisco. “Where was his chief compliance officer? Where was the S.E.C.?”
Already under heightened scrutiny, the collapse of the Madoff firm is likely to propel calls for greater regulation of the hedge fund industry, beyond the current optional registration with the Securities and Exchange Commission.
What’s more, many investors in hedge funds are likely to ask tougher questions of the managers of these firms. Executives who are loath to disclose their investment strategies — instead running a “black box” model, as Mr. Madoff infamously did — will probably come under increased pressure to open the lid on their operations, at least a little bit.
“I suspect that many investors are going to start asking many more questions of their managers,” Mr. Tilson said. “They will be much less tolerant of black box managers.”
Still, some disagree that Mr. Madoff’s arrest will lead to widespread contagion throughout the industry. Mr. Tilson argued that most investors would see the case as an unusual circumstance whose breadth and brazenness is unlikely to be duplicated. “This is not a Lehman Brothers,” he said.
Hedge Funds Are Victims, Raising Further Questions
By MICHAEL J. de la MERCED
Frauds on Wall Street aren’t unheard of. But a $50 billion Ponzi scheme, one that prosecutors say struck at boldface names on several continents, is a bombshell by any standard.
The case against Bernard L. Madoff, the respected longtime trader accused of running one of the biggest frauds in Wall Street history, has been Topic A in the investor community. But close behind is a heated discussion of how the sordid drama will affect the already-battered community of hedge funds and other investment firms — many of which invested with Mr. Madoff.
Mr. Madoff’s case could hardly have come at a worse time for hedge funds. The whipsawing markets and suddenly unfriendly lenders have already taken their toll on high financiers, and many have already suffered what amounts to runs on the bank by investors clamoring to withdraw their investments.
“It can’t help but have the effect of further chipping away at the confidence that the investor community has in the hedge fund industry,” said Ralph L. Schlosstein, the chief executive of Highview Investment Group, a money management firm and a former president of BlackRock. “But like many things that come at moments of fragility, its impact is magnified.”
The collapse of Mr. Madoff’s firm took the vast majority of investors by surprise. Mr. Madoff, once the largest market maker on the Nasdaq stock market, was known for his modest demeanor and, perhaps more important, his steady and overwhelmingly positive returns. That in turn appears to have attracted scores of investors, from Palm Beach country clubs to Manhattan social circles.
It is difficult to map out the swath of damage that the Madoff firm’s collapse is likely to cut through the hedge fund industry, not to mention a wide range of other investors. But among its biggest investors were funds of funds, firms that invest in several hedge funds and are nominally among the most sophisticated judges of character in the industry. Because Mr. Madoff reported consistently positive returns for more than a decade — some say impossibly so — he drew vast amounts of business from them.
Now, the collateral damage is likely to add to the chaos that has already been ravaging hedge funds. Spooked by losses and forced to raise cash quickly as the financial crisis ballooned, investors have sought to pull out their money from hedge funds, causing serious pain, and even some forced closures. A growing list of large, well-known firms have sought to block redemption requests in an effort to stem a mass exodus of investors who now desperately want to get into cash.
In a letter sent Friday, the Citadel Investment Group said it was halting redemptions at its two largest hedge funds through March 31.
Confidence will only weaken further with the Madoff firm scandal, intensifying pain for the industry.
“If you couple this with the deleveraging already, this means one thing: more redemptions,” said Campbell R. Harvey, a professor at the Fuqua School of Business at Duke University.
The losses from the Madoff firm will also raise more questions about how well funds of funds perform due diligence, a concern already magnified by losses in the hedge fund industry.
“Funds of funds that invested in Madoff will get a double whammy,” said Whitney Tilson, who runs the T2 Partners hedge fund. “Not only will they have to take a loss, but they are going to have to do an awful lot of explaining for how they ever got fooled here.”
Indeed, while many investors are asking how regulators could have missed a towering Ponzi scheme, some are beginning to question the whole process of due diligence. Several potential investors had raised questions about Mr. Madoff’s claims of steady returns over the years, but regulators apparently took few steps to investigate.
“Where were the auditors?” asked Bill Grayson, the president of Falcon Point Capital, a hedge fund based in San Francisco. “Where was his chief compliance officer? Where was the S.E.C.?”
Already under heightened scrutiny, the collapse of the Madoff firm is likely to propel calls for greater regulation of the hedge fund industry, beyond the current optional registration with the Securities and Exchange Commission.
What’s more, many investors in hedge funds are likely to ask tougher questions of the managers of these firms. Executives who are loath to disclose their investment strategies — instead running a “black box” model, as Mr. Madoff infamously did — will probably come under increased pressure to open the lid on their operations, at least a little bit.
“I suspect that many investors are going to start asking many more questions of their managers,” Mr. Tilson said. “They will be much less tolerant of black box managers.”
Still, some disagree that Mr. Madoff’s arrest will lead to widespread contagion throughout the industry. Mr. Tilson argued that most investors would see the case as an unusual circumstance whose breadth and brazenness is unlikely to be duplicated. “This is not a Lehman Brothers,” he said.
Saturday, December 13, 2008
Wall Street Banks are Robbing Us Blind
Wall Street Banks are Robbing Us Blind
by Doug Page / December 13th, 2008
www.dissidentvoice.org
President Obama: You have set up a web site and invite comment from your supporters. Here is something we are profoundly concerned about. We your loyal sovereign supporters and voters are being robbed blind by Wall Street. Professor Michael Hudson tells us that Two Trillion Dollars have been given to 15% or so of the wealthiest banks on Wall Street, investment banks like those that Robert Rubin, Senator Charles Schumer, Senator Chris Dodd and Vice President Biden and many other Senators have long supported. Our money is still being poured out to Wall Street. There is no end in sight.
The phony rationale has been that we all will fall into a deep economic depression unless we make it possible for these banks again to extend credit, to make loans. First off, they are not doing this. These banks are, according to Professor Hudson, hoarding the money so that they can deal with their huge, but as yet unaudited, liabilities on collateralized debt obligations, credit default stops and the like.
The Bank of America even used bailout money to buy a bank in China. Moreover, the stated objective makes no sense. No sane person wants to jump start the real estate bubble, the Silicon Valley bubble or any other bubble. Yet, that is the stated objective. These few banks seek to “solve” the real problem of our insufficient purchasing power in an awkward indirect tickle down way by transferring public money to the top 1% in the hope that the top 1% will find profit making opportunities and lend, invest, create employment, pay existing or lower wages, and thus finally “restore” our purchasing power. If these Wall Street banks mean what they say, this “solution” was not working before the crisis, has not worked since 1980, and especially will not work now. If these Wall Street bankers are spinning the facts to cover an outright theft of our money as appears to be the case, they should be prosecuted. These banks should be allowed to fall into bankruptcy, and a more direct, creative and effective use should be made with our bailouts.
President Obama, we, being some of your sovereign voters who gave you campaign money and who elected you want you to know that we have come to a startling realization: Our national market economy, our capitalism has “blown its engine.” No new inputs of oil or fuel or cash will jump start this blown engine. We must meet the immediate need of getting survival cash in our hands, then analyze why the engine failed, and then fix the defect. There are many among us who because of habit, obliviousness or temporary advantage have not yet accepted the fact that our national capitalism has permanently stalled beyond anybody’s capacity to restore it. We all soon will.
Have you noticed the spin on the real cause of the depression we now face? The main stream media incessantly label it as a “credit crisis,” and a “liquidity crisis” of Wall Street. Ben Bernanke and Henry Paulson were the first users of these words when the investment banks stopped lending because of their vast liability exposure in collateralized debt obligations. The use of these words as obfuscating spin continues inaccurately and inappropriately now that we are in a full blown depression. Their analysis is faulty.
They either have not examined the dynamics of capitalism or they find it advantageous not to deal with the dynamics in public. Our diminishing or non-existent paychecks are the cause of Wall Street’s crisis and of our own crisis. Millions of us cannot afford to buy what multinational capitalism produces and attempts to sell at a profit. Naturally, high unemployment does not help. Stephen Lendman reported,
“Economist John Williams corrects it (official statistics) by including what BLS leaves out, and through November reports unemployment at 16.5% or more than double the manipulated government data.”
There is suddenly an “overproduction” of houses that can be sold at a profit although millions are homeless. We do not need more credit in order to buy. We need much more adequate salaries and wages and we need full employment. In capitalism’s gigantic siphoning of money from the production process in the form of CEO salaries and perks, dividends, and interest, capitalism has created a small wealthy group of about 33,000 of us who have as much income and wealth as the bottom 300,000,000 of us. It has left the rest of us with insufficient wages and salaries to buy the houses and cars that capitalism produces.
There is a limit to the number of houses the members of the top 33,000 very wealthy want, so their purchases do not keep capitalism going. Five or more mansions spread around the planet for each of them is enough. The Wall Street spin, if honestly presented seeks to preserve the profit making opportunities, salaries, perks, dividends, interest, and power of the top 1%, and for the wealthiest investment banks of Wall Street. We emphasize: This strategy will not work even for Wall Street capitalists because it does nothing directly to restore our employee purchasing power upon which capitalism is so desperately dependent.
Our tax money is thus contributing to the continuation of the very dynamic that caused the crisis and blew up the economic engine we call capitalism. The bailout is not made on condition that employees be paid more so that they can buy what is produced. There is no condition imposed that the profit CEO salaries, perks, dividends, or interest of those who receive this public bailout be curtailed or eliminated. It is analogous to pouring more and more oil into a blown engine of an Indy race car. Pouring more and more oil will not start this blown engine and put it back in the race.
It is significant that the Wall Street spin studiously avoids suggesting an immediate direct solution to our real crisis: the quick transfer of public money to those who will quickly spend it, such as generously enhanced unemployment pay and a negative income tax. It is sad that even the UAW is part of the spin and is marching to Washington offering benefit concessions while forgetting Henry Ford’s dceision that he had to pay his employees more generously so that they could buy the Model Ts that their labor produced on the assembly line. With UAW concessions and support of the “credit crisis,” Ford employees will not be buying many Fords.
These observations are neither left nor right. They are simply observations of Wall Street acts and Wall Street’s stated purposes as communicated to us by the Wall Street owned media.
What underlying truth is this obfuscating spin hiding? In the case of the bailout of Wall Street investment banks and insurance companies, it may be a case of the top 1% getting all of our money they can “while the getting is good,” and hiding it away in their personal accounts overseas before we wise up. The Wall Street spin may conceal the largest theft of public funds we humans have ever experienced.
The rationalizations and justifications for national capitalism have been totally discredited. National capitalism is neither meeting human needs nor its own needs. It is not efficiently managed. It is not innovating. Any economic system whose normal dynamics can take us into the dark ages must be abolished. It is the height of stupidity to support an economic system that creates a few persons with the power to destroy our well-being.
Is capitalism providing society with good efficient management in its search for profit? Robert Rubin, Secretary Paulson and other top bankers of Wall Street were not very efficient in getting us into the subprime and collateralized debt obligation mess, and in their failure to deal with the core defect of inadequate purchasing power that has been with us since 1980. The management of capitalism’s best and brightest in the auto industry has brought the auto industry to bankruptcy.
Is American capitalism providing society with innovation in its relentless search for profit? Certainly not in the auto industry or in the housing industry. What about new products like hydrogen fuel cells? So far as I have been able to find, the main source of innovation is the University of California at Irvine where a public employee, Professor Scott Samuelsen is a world wide leader of hydrogen cell research and applications. Unfortunately for us, Wall Street capitalism has innovated and ineptly managed a large number of ways to make a short term profit without producing anything we need.
This management has brought capitalism to its knees and begging for public bailout. Innovation and good management? What about Bear Stearns and Citibank? What about AIG? Lehman Brothers? The coal industry is spending millions in false advertising and PR to sell “clean coal” when no such thing now exists and is not predicted to exist for at least 2 decades. We are experiencing unthinking greed by our brightest national capitalists and not good management and innovation.
The point of all this is not to pick on human beings, misled and oblivious as they may be. Ben Bernanke is a brilliant human being with an IQ far above most of us mortals. He is moral and civilized. Capitalism did not self destruct for the want of human intelligence. The point here is to analyze and recognize the inevitably self destructive dynamic of capitalism itself. Former capitalists and present defenders and revivers of capitalism, Ben Bernanke, liberals like Paul Krugman and Robert Reich, and most importantly our elected Senators must face the facts. Capitalism has now destroyed itself at least at the national and global levels. National capitalists have successfully demanded that we turn over the management of our economy to them. “Privatize” and “let the market handle it” they said.
They asked for freedom to invest abroad. We met their demands, loosened regulation, and provided billions and billions of public money to stimulate capitalism. We gave them unfettered freedom to invest and take their production facilities anywhere on the planet Despite this capitalism and capitalists have totally failed us. There is no point in trying to revive this blown economic engine at the national level.
We, through our democratic government, led by our new President Obama must take over the overall management of our national economy and our currency away from the market, away from Wall Street and away from the Federal Reserve Bank. We must use our public money much more directly and efficiently to solve real problems. For example, to meet the tragedy of those whose pensions are now vastly diminished in value, we must use public money to meet legitimate expectations. We must tax the wealth of those who “made out” during the bubbles and bailouts to fund what needs to be done
Our local capitalism in our local communities should not be much affected. A Federal Loan Bank can supply local auto dealers, hardware stores, and grocery stores with routine business loans for innovation. This Federal Bank could supply us with affordable housing loans. We are apparently not ready as citizens and voters to manage our local economies. Local capitalism should continue in our local communities. The civic impulse in us Americans seems to be in relatively short supply.
We can barely manifest enough civic energy to vote periodically. Most union members do not attend union meetings. We so far do not have enough civic energy or interest to manage our local businesses through employee ownership and management. If bursts of civic energy should emerge to challenge capitalism on the local level, employees and voters can form Mondragon co-operatives so that they can be owner-managers of local business.
We challenge any and all remaining defenders of capitalism to show precisely how this analysis is wrong. If President Obama’s official advisors, or any one thinks that it is, put forth what you believe to be a more accurate analysis of the inner dynamics of capitalism.
by Doug Page / December 13th, 2008
www.dissidentvoice.org
President Obama: You have set up a web site and invite comment from your supporters. Here is something we are profoundly concerned about. We your loyal sovereign supporters and voters are being robbed blind by Wall Street. Professor Michael Hudson tells us that Two Trillion Dollars have been given to 15% or so of the wealthiest banks on Wall Street, investment banks like those that Robert Rubin, Senator Charles Schumer, Senator Chris Dodd and Vice President Biden and many other Senators have long supported. Our money is still being poured out to Wall Street. There is no end in sight.
The phony rationale has been that we all will fall into a deep economic depression unless we make it possible for these banks again to extend credit, to make loans. First off, they are not doing this. These banks are, according to Professor Hudson, hoarding the money so that they can deal with their huge, but as yet unaudited, liabilities on collateralized debt obligations, credit default stops and the like.
The Bank of America even used bailout money to buy a bank in China. Moreover, the stated objective makes no sense. No sane person wants to jump start the real estate bubble, the Silicon Valley bubble or any other bubble. Yet, that is the stated objective. These few banks seek to “solve” the real problem of our insufficient purchasing power in an awkward indirect tickle down way by transferring public money to the top 1% in the hope that the top 1% will find profit making opportunities and lend, invest, create employment, pay existing or lower wages, and thus finally “restore” our purchasing power. If these Wall Street banks mean what they say, this “solution” was not working before the crisis, has not worked since 1980, and especially will not work now. If these Wall Street bankers are spinning the facts to cover an outright theft of our money as appears to be the case, they should be prosecuted. These banks should be allowed to fall into bankruptcy, and a more direct, creative and effective use should be made with our bailouts.
President Obama, we, being some of your sovereign voters who gave you campaign money and who elected you want you to know that we have come to a startling realization: Our national market economy, our capitalism has “blown its engine.” No new inputs of oil or fuel or cash will jump start this blown engine. We must meet the immediate need of getting survival cash in our hands, then analyze why the engine failed, and then fix the defect. There are many among us who because of habit, obliviousness or temporary advantage have not yet accepted the fact that our national capitalism has permanently stalled beyond anybody’s capacity to restore it. We all soon will.
Have you noticed the spin on the real cause of the depression we now face? The main stream media incessantly label it as a “credit crisis,” and a “liquidity crisis” of Wall Street. Ben Bernanke and Henry Paulson were the first users of these words when the investment banks stopped lending because of their vast liability exposure in collateralized debt obligations. The use of these words as obfuscating spin continues inaccurately and inappropriately now that we are in a full blown depression. Their analysis is faulty.
They either have not examined the dynamics of capitalism or they find it advantageous not to deal with the dynamics in public. Our diminishing or non-existent paychecks are the cause of Wall Street’s crisis and of our own crisis. Millions of us cannot afford to buy what multinational capitalism produces and attempts to sell at a profit. Naturally, high unemployment does not help. Stephen Lendman reported,
“Economist John Williams corrects it (official statistics) by including what BLS leaves out, and through November reports unemployment at 16.5% or more than double the manipulated government data.”
There is suddenly an “overproduction” of houses that can be sold at a profit although millions are homeless. We do not need more credit in order to buy. We need much more adequate salaries and wages and we need full employment. In capitalism’s gigantic siphoning of money from the production process in the form of CEO salaries and perks, dividends, and interest, capitalism has created a small wealthy group of about 33,000 of us who have as much income and wealth as the bottom 300,000,000 of us. It has left the rest of us with insufficient wages and salaries to buy the houses and cars that capitalism produces.
There is a limit to the number of houses the members of the top 33,000 very wealthy want, so their purchases do not keep capitalism going. Five or more mansions spread around the planet for each of them is enough. The Wall Street spin, if honestly presented seeks to preserve the profit making opportunities, salaries, perks, dividends, interest, and power of the top 1%, and for the wealthiest investment banks of Wall Street. We emphasize: This strategy will not work even for Wall Street capitalists because it does nothing directly to restore our employee purchasing power upon which capitalism is so desperately dependent.
Our tax money is thus contributing to the continuation of the very dynamic that caused the crisis and blew up the economic engine we call capitalism. The bailout is not made on condition that employees be paid more so that they can buy what is produced. There is no condition imposed that the profit CEO salaries, perks, dividends, or interest of those who receive this public bailout be curtailed or eliminated. It is analogous to pouring more and more oil into a blown engine of an Indy race car. Pouring more and more oil will not start this blown engine and put it back in the race.
It is significant that the Wall Street spin studiously avoids suggesting an immediate direct solution to our real crisis: the quick transfer of public money to those who will quickly spend it, such as generously enhanced unemployment pay and a negative income tax. It is sad that even the UAW is part of the spin and is marching to Washington offering benefit concessions while forgetting Henry Ford’s dceision that he had to pay his employees more generously so that they could buy the Model Ts that their labor produced on the assembly line. With UAW concessions and support of the “credit crisis,” Ford employees will not be buying many Fords.
These observations are neither left nor right. They are simply observations of Wall Street acts and Wall Street’s stated purposes as communicated to us by the Wall Street owned media.
What underlying truth is this obfuscating spin hiding? In the case of the bailout of Wall Street investment banks and insurance companies, it may be a case of the top 1% getting all of our money they can “while the getting is good,” and hiding it away in their personal accounts overseas before we wise up. The Wall Street spin may conceal the largest theft of public funds we humans have ever experienced.
The rationalizations and justifications for national capitalism have been totally discredited. National capitalism is neither meeting human needs nor its own needs. It is not efficiently managed. It is not innovating. Any economic system whose normal dynamics can take us into the dark ages must be abolished. It is the height of stupidity to support an economic system that creates a few persons with the power to destroy our well-being.
Is capitalism providing society with good efficient management in its search for profit? Robert Rubin, Secretary Paulson and other top bankers of Wall Street were not very efficient in getting us into the subprime and collateralized debt obligation mess, and in their failure to deal with the core defect of inadequate purchasing power that has been with us since 1980. The management of capitalism’s best and brightest in the auto industry has brought the auto industry to bankruptcy.
Is American capitalism providing society with innovation in its relentless search for profit? Certainly not in the auto industry or in the housing industry. What about new products like hydrogen fuel cells? So far as I have been able to find, the main source of innovation is the University of California at Irvine where a public employee, Professor Scott Samuelsen is a world wide leader of hydrogen cell research and applications. Unfortunately for us, Wall Street capitalism has innovated and ineptly managed a large number of ways to make a short term profit without producing anything we need.
This management has brought capitalism to its knees and begging for public bailout. Innovation and good management? What about Bear Stearns and Citibank? What about AIG? Lehman Brothers? The coal industry is spending millions in false advertising and PR to sell “clean coal” when no such thing now exists and is not predicted to exist for at least 2 decades. We are experiencing unthinking greed by our brightest national capitalists and not good management and innovation.
The point of all this is not to pick on human beings, misled and oblivious as they may be. Ben Bernanke is a brilliant human being with an IQ far above most of us mortals. He is moral and civilized. Capitalism did not self destruct for the want of human intelligence. The point here is to analyze and recognize the inevitably self destructive dynamic of capitalism itself. Former capitalists and present defenders and revivers of capitalism, Ben Bernanke, liberals like Paul Krugman and Robert Reich, and most importantly our elected Senators must face the facts. Capitalism has now destroyed itself at least at the national and global levels. National capitalists have successfully demanded that we turn over the management of our economy to them. “Privatize” and “let the market handle it” they said.
They asked for freedom to invest abroad. We met their demands, loosened regulation, and provided billions and billions of public money to stimulate capitalism. We gave them unfettered freedom to invest and take their production facilities anywhere on the planet Despite this capitalism and capitalists have totally failed us. There is no point in trying to revive this blown economic engine at the national level.
We, through our democratic government, led by our new President Obama must take over the overall management of our national economy and our currency away from the market, away from Wall Street and away from the Federal Reserve Bank. We must use our public money much more directly and efficiently to solve real problems. For example, to meet the tragedy of those whose pensions are now vastly diminished in value, we must use public money to meet legitimate expectations. We must tax the wealth of those who “made out” during the bubbles and bailouts to fund what needs to be done
Our local capitalism in our local communities should not be much affected. A Federal Loan Bank can supply local auto dealers, hardware stores, and grocery stores with routine business loans for innovation. This Federal Bank could supply us with affordable housing loans. We are apparently not ready as citizens and voters to manage our local economies. Local capitalism should continue in our local communities. The civic impulse in us Americans seems to be in relatively short supply.
We can barely manifest enough civic energy to vote periodically. Most union members do not attend union meetings. We so far do not have enough civic energy or interest to manage our local businesses through employee ownership and management. If bursts of civic energy should emerge to challenge capitalism on the local level, employees and voters can form Mondragon co-operatives so that they can be owner-managers of local business.
We challenge any and all remaining defenders of capitalism to show precisely how this analysis is wrong. If President Obama’s official advisors, or any one thinks that it is, put forth what you believe to be a more accurate analysis of the inner dynamics of capitalism.
Charity Caught Up in Wall Street Ponzi Scandal
Saturday , December 13, 2008
By Roger Friedman
Charity Caught Up In Wall Street Ponzi Scandal
There was at least one warning sign everyone missed in the Bernard Madoff story. Madoff, a former Nasdaq chairman who reportedly created the largest swindle in Wall Street history, liked to spread around the money he allegedly stole to make himself look good.
Madoff was arrested on one charge of securities fraud Thursday and released on $10 million bail. He faces up to 20 years in jail in what authorities say was "a giant Ponzi scheme." Such a scheme can involve taking investments from clients, spending the money on yourself and repay the clients out of other clients' accounts. Readers of this column may recall such a case with Hollywood money manager Dana Giacchetto back in 2001.
Madoff kept his story secret for years, and got away with it. "Everyone wanted him to manage their money. They would say, If only I get with Bernie Madoff," a very rich media person told me Thursday night.
There were some indications that Madoff might have been in trouble. The signs were there. Last year, his own Madoff Family Foundation gave only $95,000 to other charity groups.
This was a significant drop from 2006, and from every year since 2000. In 2006, Madoff (which is pronounced "made-off," as in, made off with all our money) gave away a total $1,277,600. It's surprising no one noticed the difference in 2007 since it affected a number of hospitals and other health organizations.
The Madoff family established its charity in 1998 and since then have given multimillion-dollar donations to New York's big-league charities.
These donations afforded the Madoff family — Bernard, his wife, Ruth, their two sons and the sons' wives — the chance to play with the rich and powerful in various New York society circles.
The charity started out slowly with the Madoffs putting in around $4 million for each of the first two years. But in 2000, they parked an astounding $25 million in their tax-free Madoff Family Foundation. It was then that they turned into big-time givers.
Madoff's knack for largesse also spread to members of his family. One son, Andrew, has a tax-free foundation that lists $5 million in assets. Another son, Mark, has one with $2 million in assets.
But it's Bernard and Ruth Madoff's foundation that might be interesting for investigators to look at. In 2007, though they claimed on their federal tax Form 990 total assets in the fund of $19.1 million, the Madoffs also noted a "gross sales price for all assets" — meaning stocks, bonds, and securities — of $182 million.
However, the couple's annual charitable contributions have never exceeded $7 million and have dipped as low as $90,000.
Cancer, lymphoma especially, became a cause close to the Madoffs when son Andrew was diagnosed with it a few years ago. Ironically, according to reports, it was Andrew and his brother, Mark, who discovered their father's alleged pyramid scheme and may have alerted authorities.
In fact, the Madoffs have poured millions upon millions into lymphoma research — just under $6 million in just 2003, their peak year of total giving to charities.
In 2004, a year when their total donations came to almost $6 million, the Madoffs sent $2.5 million to Memorial Sloan Kettering Hospital and $1.7 million to the Leukemia and Lymphoma Society.
Some non-cancer charities made out pretty well in 2005. Girls Inc – a sort of "Big Sisters" group — got $25,000; Lincoln Center put $50,000 in its till; the Special Olympics had a gift of $25,000 and Robin Hood Foundation, $30,000.
Madoff wasn't stupid, either. In 2005, he donated $100,000 to the famous Manhattan private school for rich kids, Dalton; and $25,000 to Prep for Prep, which takes poor kids who are smart and sends them to boarding school on an Ivy League track.
In 2006, that huge total sum included one big winner: the Gift of Life Bone Marrow Foundation, which received $1 million. The contribution earned the couple the right to be chairmen of the charity's annual gala dinner. And son Andrew became chairman of the Lymphoma Research Foundation.
Meanwhile, New York's Lincoln Center — currently in a huge rebuilding phase — got a healthy additional $77,500; Jessica Seinfeld's Baby Buggy charity received $12,500; Madoff sent the Robin Hood Foundation another $30,000; and Girls Inc. $25,000 more. The latter two groups have received money from the Madoffs in most years.
Last year, things changed quite dramatically. Gone were the many millions for cancer research and other groups. Despite the $19.1 million in assets, the Madoffs gave away their least amount so far, divided among New York's Public Theater ($50,000), $25,000 to a Girls, Inc., $15,000 to a children's welfare group and $5,000 to The Door.
The significant drop from 2006 to 2007 should have been a signal to the Madoff's regular recipients that something bad was about to happen. And it did.
By Roger Friedman
Charity Caught Up In Wall Street Ponzi Scandal
There was at least one warning sign everyone missed in the Bernard Madoff story. Madoff, a former Nasdaq chairman who reportedly created the largest swindle in Wall Street history, liked to spread around the money he allegedly stole to make himself look good.
Madoff was arrested on one charge of securities fraud Thursday and released on $10 million bail. He faces up to 20 years in jail in what authorities say was "a giant Ponzi scheme." Such a scheme can involve taking investments from clients, spending the money on yourself and repay the clients out of other clients' accounts. Readers of this column may recall such a case with Hollywood money manager Dana Giacchetto back in 2001.
Madoff kept his story secret for years, and got away with it. "Everyone wanted him to manage their money. They would say, If only I get with Bernie Madoff," a very rich media person told me Thursday night.
There were some indications that Madoff might have been in trouble. The signs were there. Last year, his own Madoff Family Foundation gave only $95,000 to other charity groups.
This was a significant drop from 2006, and from every year since 2000. In 2006, Madoff (which is pronounced "made-off," as in, made off with all our money) gave away a total $1,277,600. It's surprising no one noticed the difference in 2007 since it affected a number of hospitals and other health organizations.
The Madoff family established its charity in 1998 and since then have given multimillion-dollar donations to New York's big-league charities.
These donations afforded the Madoff family — Bernard, his wife, Ruth, their two sons and the sons' wives — the chance to play with the rich and powerful in various New York society circles.
The charity started out slowly with the Madoffs putting in around $4 million for each of the first two years. But in 2000, they parked an astounding $25 million in their tax-free Madoff Family Foundation. It was then that they turned into big-time givers.
Madoff's knack for largesse also spread to members of his family. One son, Andrew, has a tax-free foundation that lists $5 million in assets. Another son, Mark, has one with $2 million in assets.
But it's Bernard and Ruth Madoff's foundation that might be interesting for investigators to look at. In 2007, though they claimed on their federal tax Form 990 total assets in the fund of $19.1 million, the Madoffs also noted a "gross sales price for all assets" — meaning stocks, bonds, and securities — of $182 million.
However, the couple's annual charitable contributions have never exceeded $7 million and have dipped as low as $90,000.
Cancer, lymphoma especially, became a cause close to the Madoffs when son Andrew was diagnosed with it a few years ago. Ironically, according to reports, it was Andrew and his brother, Mark, who discovered their father's alleged pyramid scheme and may have alerted authorities.
In fact, the Madoffs have poured millions upon millions into lymphoma research — just under $6 million in just 2003, their peak year of total giving to charities.
In 2004, a year when their total donations came to almost $6 million, the Madoffs sent $2.5 million to Memorial Sloan Kettering Hospital and $1.7 million to the Leukemia and Lymphoma Society.
Some non-cancer charities made out pretty well in 2005. Girls Inc – a sort of "Big Sisters" group — got $25,000; Lincoln Center put $50,000 in its till; the Special Olympics had a gift of $25,000 and Robin Hood Foundation, $30,000.
Madoff wasn't stupid, either. In 2005, he donated $100,000 to the famous Manhattan private school for rich kids, Dalton; and $25,000 to Prep for Prep, which takes poor kids who are smart and sends them to boarding school on an Ivy League track.
In 2006, that huge total sum included one big winner: the Gift of Life Bone Marrow Foundation, which received $1 million. The contribution earned the couple the right to be chairmen of the charity's annual gala dinner. And son Andrew became chairman of the Lymphoma Research Foundation.
Meanwhile, New York's Lincoln Center — currently in a huge rebuilding phase — got a healthy additional $77,500; Jessica Seinfeld's Baby Buggy charity received $12,500; Madoff sent the Robin Hood Foundation another $30,000; and Girls Inc. $25,000 more. The latter two groups have received money from the Madoffs in most years.
Last year, things changed quite dramatically. Gone were the many millions for cancer research and other groups. Despite the $19.1 million in assets, the Madoffs gave away their least amount so far, divided among New York's Public Theater ($50,000), $25,000 to a Girls, Inc., $15,000 to a children's welfare group and $5,000 to The Door.
The significant drop from 2006 to 2007 should have been a signal to the Madoff's regular recipients that something bad was about to happen. And it did.
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