Friday, December 12, 2008

When these are small crimes, something is very wrong

In case you did not see it, and one would surprised if you did since it was not even front page news, yesterday,

"Bernard L. Madoff, the founder of Bernard L. Madoff Investment Securities LLC, a registered investment adviser, and former Chairman of the NASDAQ Stock Market, was arrested today and charged with one count of securities fraud."

Honestly, this does not seem like a big deal these days. One more corporate Wall Street guy arrested for monkeying with securities in an illegal way. Its almost commonplace and boring ... which in and of itself is not good because we should not be so blaise about this type of crime. But these days it is common and not even that exciting, what with all the Blagojovich talk.

But there is something worth noting about this that is unique, namely that,

"On Dec. 10, 2008, Madoff informed the Senior Employees, in substance, that his investment advisory business was a fraud. Madoff stated that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme. Madoff stated that the business was insolvent, and that it had been for years. Madoff also stated that he estimated the losses from this fraud to be at least approximately $50 billion. Madoff further informed the Senior Employees that, in approximately one week, he planned to surrender to authorities, but before he did that, he had approximately $200-300 million left, and he planned to use that money to make payments to certain selected employees, family and friends. Madoff, 70, currently resides in New York City."

Whoa.

That is an AIG like number. That is like the GDP of Croatia or a quarter of Africa ... not that these places are economic powerhouses, but these are country sized numbers. I know, I know. Over the last few weeks we keep hearing about 700$ billion, 150$ billion, 300$ billion, so a paltry 50$ billion seems like not so much. And the major banks and insurance companies in the country have all lost sums like that recently, so the number is not so unusual.

But you have to remember, these are exceptional times. Not seven years ago WorldCom went bankrupt and caused stockholder losses of .... 11$ billion. And at the time, that was the largest bankruptcy filing in US history. It is one thing for giant companies like AIG or Lehman Brothers to lose 50$ or 100$ billion, these are some of the largest, most widely connected companies in the world. The losses they incurred in the last two years are horrible, and the regulations that allowed it were a terrible mistake, but you would like to think that losses of this magnitude were restricted to the giant companies that deal with these huge sums of money.

So when a private investment firm (a big player, but still not one of the big investment houses) loses such a vast sum of money, in such a ridiculous way, and there is only a minor amount of reporting on the subject you have to wonder a) what the hell is wrong with our countries financial regulations and regulators that this sort of thing could even happen, b) how are we so out of whack that this type of thing does not get way more play in the press and c) how can people still argue that deregulation and removal of financial oversight is a good thing?

Update (Monday Dec 15th) - This story is now gaining a lot of steam and being reported more widely. In particular, an article in Saturday's WSJ noted that there were a number of "red flags" and other signs that the Madoffs' investment firm was delivering false results, yet government regulators, particularly the SEC, chose to do nothing about it. Several other stories are now circulating about the fallout from Madoffs' fraud, how many of Madoffs' wealthy, elderly investors are now in serious financial trouble. On Morning Joe this morning, I saw them describe a report that a pawn shop in Palm Beach was offered a lamboghini, a yacht and a tiffany watch by some of Madoffs' Florida based clientele.

1 comment:

Carlo said...

It's on all the front pages now.
Between this, the bailouts, Bush ducking flying shoes, McCain-Palin, one might get the idea that America was deliberately trying to become the laughingstock of the planet.