As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Thursday, January 08, 2009

Scumbag Millionaires

You can be forgiven for wondering why Bernard Madoff would try to steal billions in the first place. He was already rich and well-respected, and none of his investors would have complained, presumably, about losses in the midst of the economic collapse of the past few years. But what's coming out in the past 48 hours, about how Madoff had signed checks totaling $173 million ready to pass off to employees at the time of his arrest (I'm assuming to hold it for him), and how he's been mailing jewelry and watches SINCE his arrest, suggests that he's just one of these "greed is good" thieves who always needed more, no matter his position or standing.

The detail was provided in a court filing Thursday as prosecutors argued that Madoff should have his bail revoked and be sent to jail. They said the checks were further evidence that he wants to keep his assets away from burned investors.

In the filing, Assistant U.S. Attorney Marc Litt said Madoff cannot be trusted because he had long engaged in a "scheme that required the defendant to lie routinely to thousands of people and a scheme which has caused extraordinary damage to individuals, families, and institutions all over the world."

The judge will now decide whether Madoff should be sent to jail or remain free on bail in his luxury Upper East Side penthouse.

I would say jail at the very least. And some investors or the US Treasury could use all those assets, too.

As for what to do about the larger problem of financial industry fraud, the SEC is broadening their investigation, and even Republican Congressmen are talking about a "statutory and regulatory structure for the 21st century." I would hope that this doesn't narrow into a solution about how to stop Ponzi schemes. The sickness lies in the lack of regulation throughout the financial services industry. Here's what the President-elect had to say about it, and I think it's largely on point.

Obama: Well, by the time that G-20 meeting takes place, we, I believe, will have presented our approach to financial regulation. I think some international coordination has to be done. But right now, we just have to take care ... (unintelligible) ... and Wall Street has not worked, our regulatory system has not worked the way it's supposed to. So it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency. We're going to have to look at this alphabet soup of agencies and figure out how do we get them to work together more effectively. We've got to stop splintering functions in such a way that capital in one form is treated one way and capital in another form is treated another way, because these days in global financial markets, they're all fungible. And there's systemic risks that are possible, whether it's in the form of derivatives or insurance or traditional bank deposits. So we've got to update the whole system to meet the needs of the 21st century. This is an assignment that my team is already beginning to work on and I think that we will have, fairly shortly, a package that we've worked alongside Barney Frank and Chris Dodd, to present to the American people.

This is the perspective we need. The failure of the SEC to recognize the Madoff crime is shameful, especially considering the warning signs were there and investment officers were actually trying to warn them. But the real failure is that the financial industry as an institution was disinclined to blow the whistle.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

(More here.)

You can say much the same about credit default swaps, or mortgage-backed securities, or the credit-rating industry, or any of the instruments and institutions that failed the country. In short there was nothing stopping them from maximizing their own interests and insulating themselves, not the economy, from risk. The problem is bad incentives, and they directly stem from free-market fundamentalism without limits or controls. It's a system where cheerleading is encouraged and dissent is verboten. Where the interests of the shareholders are subservient to the interests of the bondholders and the CEOs. And that MUST change. To quote Gordon Brown, one of the few leaders on the global scene during this crisis:

The prime minister said 2008 would be remembered as the year in which "the old era of unbridled free market dogma was finally ushered out". In his traditional new year message, Brown struck a tone of tempered optimism, saying that Britain can this year build a better tomorrow through strategic investments while dealing with the dangerous challenges of today.

He said: "The failure of previous governments in previous global downturns was to succumb to political expediency and to cut back investment across the board, thereby stunting our ability to grow and strangling hope during the upturn. This will not happen on my watch."

Absolutely. 2008 was the year when free market dogma became so toxic it nearly swallowed up the entire financial system and the fortunes of untold millions. Madoff is not an oddity; he's an EXAMPLE. An example of what can never happen again.

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