The 50-billion-dollar Ponzi scheme

[FarmallMTA]

How nice of your employer to give you that much time off.

Especially enough time off to be able to go get the degree in soil-engineering.

(What? You mean you didn't do your own analysis? How do you know the soil engineers weren't trying to do you over?)

I'm a self employed agronomist.

 

[FarmallMTA]

I think I see part of the problem here.

The chief thing we're addressing is Bernie Madoff's Ponzi scheme (which isn't a clear cut Ponzi scheme, by the way). You're now mis-applying my original illustration to various things that are completely different. Don't be trying to apply information about blue cats to space shuttles... it's just too much of a stretch to make it work.

Bear in mind there are three major types of economic goods categories.

1) PRODUCT, a tangible good that has mass and displaces volume, such as an apple.

2) SERVICE, an action performed having definable and verifiable physical result, such as window washing

3) SCHEME, a conceptual or notional arrangement almost always predicated on increase of representations or substitutes for goods, i.e. money.

Insurance in which you pay a small amount in return for promise of a large amount under defined circumstances, money investments holding out the promise of more money to be returned, the lottery, Social Security, Peter Popoff's double portions, and your brother-in-law promising you to pay back a $100 loan now with $150 after the horse race, are all among the most common of schemes.

The scrap metal man I cited earlier is not avoiding goods or services by any means... he's avoiding schemes that rely on unverifiable promises from others. Our hero avoids the Bernie Madoff's and all others that look, act, and talk like Bernie Madoff.

 

[drkitten]

I'm a self employed agronomist.

... and evidently independently wealthy as well, since you seem to work for only one client.

 

[drkitten]

The scrap metal man I cited earlier is not avoiding goods or services by any means... he's avoiding schemes that rely on unverifiable promises from others.

You're focusing on the wrong part of that sentence.

The problem isn't with the word "schemes," but with the phrase "unverifiable promises."

To use your terminology, I can easily sell you a cut-glass "diamond" ring (a good), or "seal" your driveway with black paint (a service). I can "fertilize" your lawn with tap water, or sell you a "Monet" on which the paint is barely dry. And if I'm good enough, you'll never even know that I made you a promise and didn't keep it until I'm long gone.

That's what "due diligence" is supposed to be; verifying any of the facts upon which you rely in making your (investment) decisions. The fact that Madoff's investors didn't or couldn't do that kind of "due diligence" doesn't damn the whole industry.

 

[The Central Scrutinizer]

Cute! You suckered me into your humor and I didn't see it. I need to sharpen up a bit here.

True, we do rely on cooperation in ways such as specialization and expertise to accomplish intricate objectives that modern Society demands. The alternative is a lifestyle along the lines of the Old Order Amish (which, in many ways, they have a lot of wisdom and merit in philosophy going on there).

But the Willie Sutton's and Bernie Madoff's generally aren't looking to assist folks in constructing products and services that improve matters for us. Rather, they're generally scheming to take away the bundle of cash we've generated through our efforts to create and improve.

It's that ready and waiting bundle of cash that attracts the worst of the crooks and charlatans, not the work that goes into making it in the first place (ignoring for the moment our somewhat incompetent and corrupt workplace and product/service cultures).

Therefore, we need to NOT be handing our cash to Cheatum, Fleecem, Madoff, and Scramm Investment Advisors, LLC. and expecting to be better off.

As Fred Sanford, of the TV show Sanford and Son said, "If you want it done right, you got to do it your own fool self" when it comes to maintaining your small/medium/large wad of cash.

So, since one broker was a crook, they all are? What a sad way to go through life.

 

[marting]

Back to the OP.

Here's the avuncular Bernie discoursing on regulation, Oct 20, 2007, and the shift from commissions as source of profit to proprietary trading in the I Banks:

http://www.youtube.com/watch?v=auSfaavHDXQ

One of the more interesting comments occurs early where it is stated 10% of US stock transactions occur through his firm.

Another interesting discussion is on correlated risk vs uncorrelated risk. Particularly how correlated risk was at the heart of the mortgage backed securities crisis just then starting to unravel. A rather large, and obvious, oversight.

Bernie jokes about his niece marrying a regulator. Hmm.

It's ironic that "Madoff" is actually pronounced "made off."

 

[FarmallMTA]

Scheme, as used here, is a technical term, as commonly is used by the British. Not a pejorative, as often used in America. The problem with economic schemes is that they are the preferred arena in which flim-flam artists prefer to operate. Here's the rub with Bernie: by all accounts he was honest when he started out. And perhaps honest for many years. He was THE top-flight, highly regarded, creme de la creme, gold standard of investing probity and wisdom. That's what is so unique about the case. Many very good investors got taken in by him. VERY GOOD in terms of THOUGHT to be very good. Turns out they're incompetents.

To use your terminology, I can easily sell you a cut-glass "diamond" ring (a good), or "seal" your driveway with black paint (a service). I can "fertilize" your lawn with tap water, or sell you a "Monet" on which the paint is barely dry. And if I'm good enough, you'll never even know that I made you a promise and didn't keep it until I'm long gone.

Only if I let you.

You see, a shoddy good or service is possible to foist off only if the target permits it out of ignorance, confusion, or negligence on the part of the consumer. A scheme is much easier to foist off since the large payout is ALWAYS in the future while the smaller payin is always in the present. It's your smaller present payin that evaporates in a diabolical scheme, not just the larger future payout

That's why it's absolutely imperative to assume that EVERY purveyor of a scheme is a crook, a charlatan, or incompetent. Hope for the best if you will, but expect the worst. That way you won't be disappointed when Bernie goes tits up.

Again, put all your eggs into YOUR basket and WATCH THAT BASKET.

 

[FarmallMTA]

So, since one broker was a crook, they all are? What a sad way to go through life.

Close. Because MANY financiers are crooks, assume that they all are. What you decide to do from there is your own business. Feel free to invest with whomever you please. It's your money. I don't care what you do with your money.

Just wondering how to go about proving WHICH ones are crooks seems to be a problem, wouldn't you say? Especially since the proof is well into the future AFTER you've turned your money over to the financier. Crook or not crook? That is the ultimately unknowable answer... at least until later.

And yes, I agree with you, it's a sad way to go through life. But I've been sad ever since I learned there wasn't a Santa Claus back when I was 8 or so years old. You just need to get over it and deal with reality, not continue with the wishful thinking.

 

[The Central Scrutinizer]

Close. Because MANY financiers are crooks, assume that they all are.

Like I said, what a sad way to go through life.

 

[Francesca R]

Again, put all your eggs into YOUR basket and WATCH THAT BASKET.

I don't trust that bogus advice. I think you're trying to screw everyone over.

 

[timhau]

Here is a little piece on Madoff's auditor. It appears it's a really small company that has told the American Institute of Certified Public Accountants for the past 15 years that it doesn't do audits.

 

[drkitten]

You see, a shoddy good or service is possible to foist off only if the target permits it out of ignorance, confusion, or negligence on the part of the consumer.

And similarly, a shoddy scheme is only possible to foist off if the target permits if out of ignorance, confusion, or negligence on the part of the consumer.

That's why it's absolutely imperative to assume that EVERY purveyor of a scheme is a crook, a charlatan, or incompetent.

I'm running out of polite ways to tell you that you've got your head up your arse.

 

[rwguinn]

And similarly, a shoddy scheme is only possible to foist off if the target permits if out of ignorance, confusion, or negligence on the part of the consumer.



I'm running out of polite ways to tell you that you've got your head up your arse.

Stand by for total Internet failure:
I agree with drkitten.
At some point, you have to make a decision and assume that the other guy is as good at his chosen profession as you are at yours, and that he subscribes to that code of ethics as rigorously as you do yours.
You don't buy a watchdog and spend all your time barking yourself!

 

[FarmallMTA]

Stand by for total Internet failure:
I agree with drkitten.
At some point, you have to make a decision and assume that the other guy is as good at his chosen profession as you are at yours, and that he subscribes to that code of ethics as rigorously as you do yours.
You don't buy a watchdog and spend all your time barking yourself!

*Clap, clap, clap, clap, clap, clap, clap, clap, clap, clap...*

I'd totally believe you except... that's EXACTLY what Bernie's fans said as they were in the process of losing over $50B. Turns out if your watchdog may be sleeping, you'd better be doing the watching yourself.

You are so adamant about being so clearly wrong that this is funny. Been a while since I've enjoyed shooting fish in a barrel.

Keep 'em coming. You're "reasoning" is a hoot. Next?

 

[timhau]

With reasoning like that, you can never ride a taxi or the bus. Or board a commercial airplane, where you can't even see what the charlatan in the cockpit is doing.

 

[rwguinn]

With reasoning like that, you can never ride a taxi or the bus. Or board a commercial airplane, where you can't even see what the charlatan in the cockpit is doing.

Or drive a car, or enter a public building... Definitely cross no bridges you didn't design and build yourself...
You can't even cower in you basement away from the world, since the guy(s) who mixed the concrete may have cheated on the mix...

 

[Darth Rotor]

Here is a little piece on Madoff's auditor. It appears it's a really small company that has told the American Institute of Certified Public Accountants for the past 15 years that it doesn't do audits.

I read that twice. I am chortling with glee, sort of, and wondering if my mutual fund company has lost me any money via this gent, somehow. Probably did, and don't know it yet.

DR

 

[rwguinn]

I read that twice. I am chortling with glee, sort of, and wondering if my mutual fund company has lost me any money via this gent, somehow. Probably did, and don't know it yet.

DR

More telling, and related to the "Due Diligence" and trust posts:

In Hedges' view, those that went with Madoff chose faith over evidence. "You've got people who were disintermediated [i.e., didn't have a professional representative], or unsophisticated, or went in through a personal relationship. That's what a con man is -- a confidence man is somebody that engenders a relationship and then subsequently lures somebody into doing something that they shouldn't do." (According to the federal criminal complaint against him, Madoff has confessed that he ran a "giant Ponzi scheme." His lawyer, Ira Sorkin, declined to comment.)

 

[Francesca R]

Bernard L. Madoff, a 70-year-old Wall Street big shot, is accused of running a Ponzi scheme fund that may end up costing his clients $50 billion.

The report to the SEC in 2005 by Harry Markopolos, who spent 9 years independently investigating Madoff is here. It is very detailed and has 29 "red-flag" warnings about how the fund's returns cannot be real. The SEC visited Madoff's place in 2006 armed with this information and gave Madoff a clean bill of health. Ostensibly, all of the investors who went through the FOF route did not know, and were not allowed to know, that they were invested in the Madoff "fund".

The "investment returns", collected by the biggest FOF investor and biggest loser (Fairfield Greenwich) are at the end of the memo.

 

[a_unique_person]

Ding ding ding ding! We have a winner!

This is the problem of pensions in general, both private and public. Here in Illinois the state worker's pensions alone are many billions of dollars underfunded. Gonna be a mess when the feces hits the fan.

That will only happen if a whole lot of taxpayers disappear. There is a whole discipline devoted to calculating the risks of pensions, insurance, etc. If it is done right, and the politicians listen to the actuaries, many billions can be a reasonable amount. It is possible that in Illinois the professionals haven't been listened to, but that's not a fault with the pension process, which works successfully in many countries and states, it's a fault with those who run them.