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).
Wednesday, December 17, 2008
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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