Madoff-o-nomics

Paul Krugman had a piece last Friday on the Madoff economy where he asked the key question: "How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?" The financial industry, after all, turned mortgages into mortgage-backed securities and sold them all over the world, based on the obviously false presumption that US mortgages would go up perpetually. They created exotic instruments and spread risk everywhere, covering their bets by over-leveraging and using the money to make side bets on the very securities they were parceling out. And while they were setting up the larger economy for a huge crash, they were drawing enormous salaries, taking fabulous trips and buying multiple homes. In fact, even NOW, after getting billions in taxpayer money in the bailout, they continue to fly corporate jets, evade their taxes and take billions in bonuses.

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Madoff eliminated the middle man, stealing from investors directly instead of tying them up in doomed securities while taking big profits. Whether they were con artists or honest businessmen gone wrong depends on whether you think they knew what they were doing was fated to fail. Either way, the result is essentially the same.

...it would be nice if the Washington Post just came out and said that they want their rich friends to keep their money. Again, eliminating the middle man. All of these articles about how terribly difficult it is to limit CEO compensation and how politicians shouldn't even try really betray their bias.

...and if you think you need to know where your taxpayer money is going once the banks get their hands on it, well, you don't. Hope that clears things up.

The Bigger Con Is SEC Officials Pretending To Work

Yesterday, Chris Cox, the chairman of the SEC threw his mercy on the court.

The Commission has learned that credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action.

Cox is authorizing an Inspector General probe. Someone honorable might resign in disgrace. Apparently, the investigations of Madoff it finally got around to relied on VOLUNTARY information from Madoff himself. Madoff's niece married an SEC official who was involved in oversight of Madoff's brokerage business. The amount of obvious, credible warning signs that the SEC missed in this case are growing. I would simply have looked at the fact that Madoff's own sons' foundations invested elsewhere is a pretty decent sign in its own right. The reason that nobody at the SEC went after Madoff is that he was a "master of the universe."

Fusfeld added that during the 90's he had used Madoff as a witness in a securities case to which Madoff was tangentially connected. "The man had charisma," said Fusfeld."He was one of those people that, when he walked into a room, everyone stopped what they were doing and watched him."

Had the SEC watched him a little closer, however, numerous investors might have been saved some crippling losses.

Unbelievable.

Today, President-elect Obama introduced Mary Schapiro, a longtime regulator, to replace Chris Cox at the SEC. It's impossible for her to do worse, and I hope she wields the Madoff scandal as an impetus to do rigorous and effective oversight over these clowns, and I hope she is provided new regulatory tools to conduct that oversight.

Other regulatory appointments are profiled here.

Not A Bug But A Feature

This Bernard Madoff Ponzi scheme is really kind of incredible, if only because we haven't seen such a con on a high level like this in so many years. In fact, probably not since Charles Ponzi, the original scam artist. Maybe in the future they will be called Madoff schemes. As Anonymous Liberal notes, this is a tragedy for the federal government as well, because there will be billions lost in expected capital gains tax revenue as a result of the crime. All these investor losses will be deductible, as well as rebates of past capital gains that they've paid, and the cost to the Feds could rival the amounts talked about in the auto industry rescue.

Now, I think there's a reason this will wind up to be such a massive loss for those involved, and that's because this is not separate from the current financial crisis, but part and parcel of it. Because in this era of trusting the market, in believing in magical men who make money appear in everyone's numbered back account, the SEC didn't come close to investigating the scheme.

Bloomberg reported yesterday that since Madoff registered the investment arm with the Securities and Exchange Commission in 2006, that agency hadn't got around to looking at the business's books. The SEC usually tries to go through the books of newly registered firms in their first year.

"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," one expert told the Associated Press.

But the problem doesn't appear to have started in 2006.

As early as 1999, an executive in the securities industry had urged the SEC to probe Madoff, on the basis of the remarkably steady returns that his investment business seemed to provide. The executive, Harry Markopolos, argued that Madoff must be generating those returns by "front-running" -- that is, using the brokerage arm of his company to illegally provide information to the investment arm.

The SEC said in a statement that it had conducted two investigations into the brokerage arm -- not the investment arm -- of Madoff's company, in 2005 and 2007. The first, begun in response to allegations of front-running, found three violations of rules requiring brokers to obtain the best possible price for customer orders. That investigation appears to have led to Madoff agreeing to register with the SEC the following year, giving the agency access to far more information than it previously had. But the 2007 probe, conducted after Madoff registered, found no evidence of anything improper.

Investment firms were as off-limits under Clinton as they were under Bush. In fact, as long as everyone made money, regulators weren't much exercised to investigate. This is the same root cause that led us to the crisis. Nobody checked the derivatives, nobody checked the CDOs and the credit default swaps, and nobody checked out Bernie Madoff. In good times, these bullets could be dodged. Not so now.

This is why you can't base an economy on pushing paper and inventing sums of money to trade, dependent almost entirely on greed.

The Paranoia Industry

I know that everyone is scratching their heads over why every conservative and their brother is freaking out over how Barack Obama is going to reinstitute the Fairness Doctrine and kick Rush and Sean off the air, even though that was never part of his platform, no bill has been introduced in Congress to that effect since the Democrats got the majority, and the sum total of the "evidence" for this nefarious scheme is a couple off-hand comments made by two Democratic Senators. James Rainey writes about it today.

Now, you can argue out whether or not there should be a Fairness Doctrine. But the answer to why conservative hucksters keep harping on it, of course, is that this is how the conservative movement keeps flush with direct-mail cash during their years in the wilderness. During the Clinton Administration there were all sorts of crackpot delusions about what Bill Clinton was preparing to do to stick it to conservatives and bring about the second coming of Armageddon. But you always have to read to the end of these missives, when they ask for "just $5 or $10" to save the Republic and fight the efforts to silence their voices. Conservatives understood the sense of engagement that comes with small-dollar donations long before Democrats caught up to them. The difference is that conservatives basically use it as a con game, stirring up emotional furies to part unwitting folks from their money. Rick Perlstein has a phrase for this: Conservatives treat their constituents like suckers.

It's exactly the same with this run on gun sales. While the actual evidence of an increase in gun sales since the election is somewhat thin (although FBI requests for background checks are way up), it is clear that gun sellers are using the spectre of Obama taking away Second Amendment rights to hawk their wares.

Some gun sellers like Wild West Guns in Anchorage, AK are holding “Obama Sale” events to take advantage of their customers’ misinformed fears and news outlets from NPR to Fox News have produced reports documenting the gun buying binge [...]

What the major media outlets overlook is that the Obama gun sale boom appears to be the result of a multimillion dollar effort launched by the National Rifle Association last summer to misinform voters about Obama’s gun policy proposals. As Politico reported in June:

The National Rifle Association plans to spend about $40 million on this year’s campaign, with $15 million of that devoted to portraying Barack Obama as a threat to the Second Amendment rights. … This fall, NRA members will get automated phone calls, mail pieces and pre-election editions of the group’s three magazines making the case against Obama.

So the NRA whips up fear about the imminent loss of gun rights, leading to a run on gun sales that benefits gun stores and manufacturers. Quid, pro, quo.

Fortunately for them, there's a conservative born every minute. (though hopefully more liberals!)

Republican 419 Schemes, Cont'd

It's pretty hilarious that Michelle Malkin's secret weapon, the candidate who was going to stick it to that traitor and coward Jack Murtha, is one of the useful idiots propping up BMW Direct's Republican thievery project:

Lt. Col. William Russell is a clean-cut Army veteran who served in Iraq, the Gulf War and at the Pentagon on 9/11, according to a campaign Web site.

Malkin claims there's been a "great media wall of silence around Russell's upstart campaign." OK, let's break that silence and take a close look.

In the most recent quarter Russell raised $669,534, almost all from out-of-state donors who presumably are on BMW Direct's list of self-styled conservatives with a good track record of responding to direct-mail fundraising.

At the same time, he spent $442,990, almost all of it on expenses related to the direct mail effort and paid to BMW Direct and its affiliates (some of which share the same downtown Washington office).

The only expenses that appear to be spent on an actual campaign totaled about $20,000 for Web site design, a low-budget video and a campaign consultant based in Pennsylvania rather than Washington.

He reports having $269,953 in cash on hand. But he also reports debts totaling $242,521 -- almost all for direct mail expenses to BMW Direct and its vendors.

So that leaves him only about $27,431 ahead -- not much for a guy who's raised a total of nearly $1 million this election cycle.

Hilarious. Republicans really do treat their supporters like complete suckers. And they come back over and over again. La Malkin has responded to this with crickets, so far. Wonder if she got any BMW Direct kickbacks for talking up one of their "heroes"?

Con Men

Rick Perlstein used to call his blog The Big Con, and he explained that modern conservatism was, at its root, a giant con game on its own constituency.

Have I got a story for him.

During the first quarter of 2008, BMW Direct, a conservative political firm in Washington, helped raise more than $500,000 for an obscure Republican longshot running for Congress in Georgia.

But in a replay of the firm's modus operandi in a Massachusetts race, as chronicled by the Boston Globe, most of the money raised by BMW Direct in the Georgia race has come from out-of-state contributors and been spent on supposed campaign-related services provide by the firm and its affiliates.

A half a million dollars in a single quarter is a substantial haul for even well-financed, high-profile candidates, let alone someone like like Deborah Travis Honeycutt, who ran for the seat in 2006 and lost by 38 points [...]

Honeycutt's campaign has brought in more than $1.7 million so far this election cycle. It has also spent more than $1.5 million.

For the most recent quarter, the campaign raised $620,016.72 in mostly small donations from across the country, according to her most recent FEC filing. And she spent $537,622.68 during the first quarter, most of which was to cover the costs of the direct mail campaign.

Only a small fraction of the money went to pay for a campaign on the ground. The total money spent in Georgia was $16,695. That covered expenses listed as political field work, public relations and media.

However, more than $314,000 went to BMW Direct and its affiliates who all work in the same downtown Washington office building. That's not including the other large payments to other Washington-area firms for direct mail-related expenses.

The best ending to this story would be if there were no Deborah Travis Honeycutt, only a photo grabbed out of a K-Mart picture frame.

This is the modern conservative movement distilled to its very essence - stealing from its most ardent supporters, using politics for profit-taking, promising the world and giving back nothing. If I didn't know any better I'd think it was a evangelical ministry.

It seems fairly clear that this is theft, and yet I'm struggling to determine how this would be prosecuted as a crime. Honeycutt is on the ballot as a candidate, complying with FEC reports, and using the small-dollar donations to pay staff, a legitimate expense. If she didn't exist I suppose there would be something about bilking people out of cash under false pretenses, but then the same could be said of every Republican who promised to overturn Roe and limit the size of government. I don't know if there is a relevant statute. Just a short con by some low-lifes. Or, if you prefer, the Grand Old Party.

...speaking of con men, see too the "PUMAs," supposedly Hillary supporters who are organizing to stop Obama, run by a woman who's made one substantive political donation in her life, and it was to John McCain. Rick Perlstein, late of The Big Con, has more.