There aint no financial perpetual motion machines either,
only disguised rip-off, churning & Ponzi schemes - Iconoclast

Ponzi Schemes

courtesy by: Swiss Investors Protection Association - url: ¦ PONZI video | .../capitalism.html
.../porkbellies.htm ¦ .../wealth.htm ¦ .../QI.htm ¦ .../1929.htm ¦ .../barbarians.htm ¦ .../buccaneers.htm ¦ .../caisses.htm
../hedge.htm ¦ ../goldies.htm ¦ ../swissbanks.htm ¦ ../costbenefit.htm ¦ ../oecdmandate.htm ¦ ../crime.htm ¦ ../glasnost.htm
tks 4 notification of errors, comments & suggestions: +4122-7400362 ¦ - copyright

11.Mär 11  Laurence Kotlikoff: «Die USA stehen schlechter da als Griechenland», NZZ Online, Marco Metzler
11 Aug 10   Laurence Kotlikoff: U.S. Is Bankrupt and We Don't Even Know It, Bloomberg
12 Apr 09   Perpetual motion in finance is illusory: 20th century iconoclast Soddy showed, NYT, Eric Zencey
30 Mar 09   Madoff of economies: America turns out to have been a fraud all along, NYT, Paul Krugman
27 Mar 09   Failure of a self-serving overgrown banking model which did more harm than good, NYT, Paul Krugman
26 Mar 09   Geithner to Outline Major Overhaul of Finance Rules, NYT, Edmund L. Andrews et al.
20 Mar 09   U.S. regulator probing "Ponzimonium", IHT, Reuters, Jason Szep
20 Mar 09   After Madoff, CTFC discovers 'Rampant Ponzimonium', Dow Jones, John Kell
19 Mar 09   Hyperinflation, war & /or monetary reform: Fed creates $1 Trillion "out of thin air", NYT, E.L.Andrews
18.Mär 09  Modellschreiner & Gier: Eine falsch angewendete Formel und ihre Folgen, NZZ
4 Feb 09   Wall Street Bonuses Are an Outrage, WSJ, THOMAS FRANK
4 Feb 09   Mating Season Is Over for Alpha Males of Banking, Bloomberg, Matthew Lynn, commentary
4 Feb 09   SEC’s Madoff Miss Fits Pattern Set With Pequot, Bloomberg, Gary J. Aguirre, commentary
2 Feb 09   ‘Prison for Dummies’ Is a Ponzi Guy’s Must-Read, Bloomberg, Susan Antilla, commentary
2.Feb 09   Majestix und Miraculix auf den Finanzmärkten, DER STANDARD, Johannes M. Lehner
1 Feb 09   Disgorge, Wall Street Fat Cats, NYT, MAUREEN DOWD
30 Jan 09   Obama Calls Wall Street Bonuses ‘Shameful’, NYT, SHERYL GAY STOLBERG et al.
29 Jan 09   What Red Ink? Wall Street Paid Hefty Bonuses, NYT, BEN WHITE
28 Jan 09   Troubled Times Bring Mini-Madoffs to Light, NYT, LESLIE WAYNE
27 Jan 09   Bonus culture: Money for Nothing, NYT, DAVE KRASNE
26 Jan 09   To save the banks we must stand up to the bankers, FT, Peter Boone et al.
25 Jan 09   Time to herald the Age of Responsibility, FT, Robert Zoellick
22 Jan 09   The right and wrong way to bail out the banking sector, FT, George Soros
7 Jan 09   Mad Men, WSJ, Holman W. Jenkins, Jr.
6 Jan 09   Goebbel's dictum: the bigger the repeated lie ... Fraud's Perfect Cloak, WP, Allan Sloan
3 Jan 09   The U.S., a Disintegrating Ponzi Scheme? Critics Come Unglued, WP, Joel Garreau
1 Jan 09   annus horribilis 2008: world's stockmarkets lost $14 trillion, Guardian, Julia Kollewe
Jan 2009   Ist das ganze Weltfinanzsystem ein riesiger Madoff-Schwindel?, Neue Solidarität, Helga Zepp-LaRouche
31 Dec 08   Madoff Hits Feeder Funds, Auditors,, Jane Bryant Quinn
30.Dez 08   Madoff: Der Milliardendieb war auch Kassenwart, Die Weltwoche, Roger Köppel
30 Dec 08   UBP Scrambles to Explain Madoff Ties, WSJ, Cassell Bryan-Low et al.
29 Dec 08    Igor Panarin:The pyramid scheme America will disintegrate in 2010, WSJ, Andrew Osborn
27 Dec 08   Fellow-Americans, co-racketeers & co-profiteers: Stop Being Stupid, NYT, Bob Herbert
27 Dec 08   Ponzi Schemes: The Haul Gets Bigger, but the Fraud Never Changes, NYT, Eduardo Porter
24 Dec 08   Madoff dealings tarnish a private Swiss bank, IHT, Nelson D. Schwartz
20 Dec 08   Madoff Scheme Kept Rippling Outward, Across Borders, NYT, Diana B. Henriques et al.
20 Dec 08   One Name, Charles Ponzi, Stands Alone in The Grand Scheme of It All, WP, David Montgomery
19 Dec 08   The Madoff, i.e. Ponzi Economy, NYT, Paul Krugman
18 Dec 08   On Wall Street, Bonuses, Not Profits, Were Real, NYT, Louise Story
16 Dec 08   Put Madoff In Charge of Social Security, WSJ, Holman W. Jenkins, Jr.
16 Dec 08   Strauss-Kahn fears social unrest without $1.2 trillion action on economy, Times, Gary Duncan
16 Dec 08   Pyramid Schemes Are as American as Apple Pie, WSJ, John Steele Gordon
13 Dec 08   Madoff Affaire: Now Accused of Fraud, Wall St. Wizard Had His Skeptics, NYT, Alex Berenson et al.
Jun 2006   Private, national & common wealth in the post-socialism/capitalism era, Iconoclast


Boston Public Library, Print Department

In a Ponzi scheme, potential investors are wooed with promises of unusually large returns, usually attributed to the investment manager’s savvy, skill or some other secret sauce.

The returns are repaid, at least for a time, out of new investors’ principal, not from profits. This can continue as long as new investors line up with cash, and old investors don’t try to withdraw too much of their money at once.

Ponzi schemes are also known as pyramid schemes, from the shape of any chart that reflects their basic premise -- that ever-growing layers of new recruits are needed to provide gains to the smaller, earlier cohorts. A gigantic pyramid scheme virtually bankrupted Albania after the fall of Communism.

Ponzi schemes are named after Charles Ponzi, the flamboyant con man whose scam followed a particularly spectacular course. Mr. Ponzi began telling New York investors in December 1919 that investments in foreign postage coupons could yield 50 percent returns in 45 days. By redeeming coupons bought cheaply overseas for much higher amounts in the United States, he could double their money in three months, he claimed.

Mr. Ponzi was a fast-talking immigrant and college dropout, and his scheme — according to Mitchell Zuckoff, Mr. Ponzi’s biographer — rested on the eagerness of ordinary working people to benefit from the wealth they saw being generated around them as the economy recovered from World War I.

As the fever spread, millions of dollars were coming in every week, most of it from ordinary working-class people investing as little as $10 at a time. It's estimated that nearly three-quarters of the Boston Police Department invested in "Ponzi notes," as they became known.

With successive waves of people entrusting him with their cash, Ponzi needed only enough money to pay off those people redeeming their coupons. Of course, with the prospect of increasing their savings exponentially every couple of months, few ever redeemed anything.

A born overreacher, Mr. Ponzi sketched out ever more grandiose financial schemes and, always smiling, talked as fast as he could. It was not enough. The Boston Post, the financial journalist Clarence W. Barron and state banking officials began digging, and the more they dug, the more they found. In the end, the prison gates swung open once again, investors were left holding the bag and the brief, brilliant reign of Charles Ponzi came to an end.

Mr. Ponzi was convicted of mail fraud in 1920 and served time in federal and state prisons before he was deported to Italy in 1934, never having become a citizen. He died penniless in Rio de Janeiro in 1949 and was buried in a pauper’s cemetery there.

The $50 billion fraud that federal authorities say Bernard L. Madoff perpetrated has been called the largest Ponzi scheme in history. Though the magnitude, scale and details are different, Mr. Ponzi’s scheme and the fraud that Mr. Madoff has been charged with each reflect their respective, super-heated financial eras.

Private, national & common wealth in the post-socialism/capitalism era
Bewildered by what's been happening, both nationally and globally, in the wake of the fall of the Berlin Wall?
I.e. where the unwittingly weakened nation-state - formerly a bulwark against plain-levelling & globalization -
no longer tempers the social, economic & other pitfalls foreseen by Marx, Gramsci, Minsky, McCulley,etc.
Where - as the Laffer & Rider Curves illustrate in the tax & the social fields - excessive poor/rich gradients
upset the social fabric, wash away fertility factors with uncontrolled erosive powers & contribute to famine.
Where indeed, as Patrick Martin pointed out, monopolistic capitalism and the associated reckless greed
are no longer kept in check by Adam Smith' invisible hand, i.e. by the balance of contradictory interests.
And where the capacity for self-correction is increasingly inhibited by loss of freedom, mooring & orientation
which led to market frenzies & false alpha birds feeding on hype & bubbles, reminiscent of the Roaring 20s.
IMF & FATF estimate black funds (drugs, tax evasion etc) to be 2-5% of world's GDP (2006: $960-2400bn).
An IMF Report indicates these funds to be increasingly chased under anti-terrorism & ever flimsier pretexts.
Courtesy by the IV Reich's Secret Service, the world has indeed been made hostage of ill-considered rules
which impede more legitimate business than crime. For big time money laundering, the US Treasury set the
standard in 2001 with its 31% confiscatory backup withholding tax on unidentified investors in US securities,
turning foreign bankers from trustees of clients into IRS agents (qualified intermediaries) subject to US laws.
Private equity & hedge funds thus found a government-sponsored access to black funds, while the latters'
entry into subprime markets was also eased by the Internet. Results: predatory lending & systemic risks.
Society's organization needs re-thinking with Plato, G.Duttweiler, M,Yunus, J.M.Arizmendiarrieta etc.
For man's evolution may only be stressed by technological leaps but not accelerated beyond natural limits.
Return on investment rates above productivity gains/organic growth are not sustainable, predatory & usuric.
If driven by managers, lawyers & funds on the back of other stakeholders, M&As are thus Ponzi schemes
where shareholder value adepts can maraud with stacked Monopoly cards, helped by micro-economic laws.
Like compulsory social insurance systems whose doom is delayed or obscured only by inflation, war, etc.
And where the cunniest operators are state-supported by myopic magistrates hood-winked into fiscal deals.
Gary J. Aguirre's US Senate testimony details fraud & market mechanics which were at work before 1929,
e.g. Ponzi structures, unregulated pools of money, siphoning from unsuspecting mutual fund investors, and
abuse-prone market dominance: hedge funds' $1.5 trillion drive half of the $28 trillion NYSE's daily trading.
Tongue-in-cheek, Warren Buffet famously opined: "derivatives are financial weapons of mass destruction";
yet, under increasing performance & compliance pressures, some bankers still see a future in fee hunting.
Society wised up against churning of accounts by undelicate trustees, but not yet against macro-parasitism
which feasts on ignorance, sucks & devours a firm's life-preserving substance, & weakens society's pillars.
Which turns economic rat races into societal tailspins with early burn-outs & senior citizens being wasted,
& instills values causing youth to be educated out of sync, resulting in drug, violence & €1000 generations.
With profit-driven quarterly thinking & cost-cuttings also eroding due infrastructure maintenance & renewal,
& democracy's promises ridiculed by Fatf, EU & UN bureaucratic lawmaking as if Berlin Wall fell eastwards.
So why not thinking things over & Revisiting Das Kapital while some dance on the Titanic”?
Iconoclast - June 2006 (rev. 3/9/08)

December 13, 2008

Madoff Affaire
Now Accused of Fraud, Wall St. Wizard Had His Skeptics

For years, investors, rivals and regulators all wondered how Bernard L. Madoff worked his magic.

But on Friday, less than 24 hours after this prominent Wall Street figure was arrested on charges connected with what authorities portrayed as the biggest Ponzi scheme in financial history, hard questions began to be raised about whether Mr. Madoff acted alone and why his suspected con game was not uncovered sooner.

As investors from Palm Beach to New York to London counted their losses on Friday in what Mr. Madoff himself described as a $50 billion fraud, federal authorities took control of what remained of his firm and began to pore over its books.

But some investors said they had questioned Mr. Madoff’s supposed investment prowess years ago, pointing to his unnaturally steady returns, his vague investment strategy and the obscure accounting firm that audited his books.

Despite these and other red flags, hedge fund companies kept promoting Mr. Madoff’s funds to other funds and individuals. More recently, banks like Nomura, the Japanese firm, began soliciting investors for Mr. Madoff internationally. The Securities and Exchange Commission, which investigated Mr. Madoff in 1992 but cleared him of wrongdoing, appears to have been completely surprised by the charges of fraud.

Now thousands, possibly tens of thousands, of investors confront losses that range from serious to devastating. Some families said on Friday that they believed they had lost all their savings. A charity in Massachusetts said it had lost essentially its entire endowment and would have to close.

According to an affidavit sworn out by federal agents, Mr. Madoff himself said the fraud had totaled approximately $50 billion, a figure that would dwarf any previous financial fraud.

At first, the figure seemed impossibly large. But as the reports of losses mounted on Friday, the $50 billion figure looked increasingly plausible. One hedge fund advisory firm alone, Fairfield Greenwich Group, said on Friday that its clients had invested $7.5 billion with Mr. Madoff.

The collapse of Mr. Madoff’s firm is yet another blow in a devastating year for Wall Street and investors. While Mr. Madoff’s firm was not a hedge fund, the scope of the fraud is likely to increase pressure on hedge funds to accept greater regulation and transparency and protect their investors.

On Thursday, the Federal Bureau of Investigation and S.E.C. said that Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, ran a giant Ponzi scheme, a type of fraud in which earlier investors are paid off with money raised from later victims — until no money can be raised and the scheme collapses.

Most Ponzi schemes collapse relatively quickly, but there is fragmentary evidence that Mr. Madoff’s scheme may have lasted for years or even decades. A Boston whistle-blower has claimed that he tried to alert the S.E.C. to the scheme as early as 1999, and the weekly newspaper Barron’s raised questions about Mr. Madoff’s returns and strategy in 2001, although it did not accuse him of wrongdoing.

Investors may have been duped because Mr. Madoff sent detailed brokerage statements to investors whose money he managed, sometimes reporting hundreds of individual stock trades per month. Investors who asked for their money back could have it returned within days. And while typical Ponzi schemes promise very high returns, Mr. Madoff’s promised returns were relatively realistic — about 10 percent a year — though they were unrealistically steady.

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist.

But because he had his own securities firm, Mr. Madoff kept custody over his clients’ accounts and processed all their stock trades himself. His only check appears to have been Friehling & Horowitz, a tiny auditing firm based in New City, N.Y. Wealthy individuals and other money managers entrusted billions of dollars to funds that in turn invested in his firm, based on his reputation and reported returns.

Victims of the scam included gray-haired grandmothers in Florida, investment companies in London, and charities and universities across the United States. The Wilpon family, the main owners of the New York Mets, and Yeshiva University both confirmed that they had invested with Mr. Madoff, and a Jewish charity in Massachusetts said it would lay off its five employees and close after losing nearly all of its $7 million endowment. Other investors included prominent Jewish families in New York and Florida.

On Friday afternoon, investors and lawyers for investors with Mr. Madoff packed Judge Louis L. Stanton’s courtroom at federal court in Manhattan, hoping to question lawyers for Mr. Madoff and the S.E.C. But a deputy for Judge Stanton canceled the hearing, leaving investors with few answers. Several investors said they were planning to file lawsuits against the firm in the hope of recovering some money.

Based on the vagueness of the complaints against Mr. Madoff, his confession, as detailed in court filings, seems to have taken the F.B.I. and S.E.C. by surprise. Investigators have not explained when they believe the fraud began, how much money was ultimately lost and whether Mr. Madoff lost investors’ money in the markets, spent it, or both. It is not even clear whether Mr. Madoff actually made any of the trades he reported to investors.

The F.B.I. and S.E.C. have also not said whether they believe Mr. Madoff acted alone. According to the authorities, Mr. Madoff told F.B.I. agents that the scheme was his alone. He worked closely with his brother, sons and other family members, many of whom have retained lawyers.

Also likely to face very difficult questions are the hedge funds, investment advisers and banks that raised money for Mr. Madoff. At least some big investment advisers steered clients away from putting money with Mr. Madoff, believing the returns could not be real.

Robert Rosenkranz, principal of Acorn Partners, which helps wealthy clients choose money managers, said the steadiness of the returns that Mr. Madoff reported did not make sense, and the size of his auditor raised further concerns.

“Our due diligence, which got into both account statements of his customers, and the audited statements of Madoff Securities, which he filed with the S.E.C., made it seem highly likely that the account statements themselves were just pieces of paper that were generated in connection with some sort of fraudulent activity,” Mr. Rosenkranz said.

Simon Fludgate, head of operational due diligence for Aksia, another advisory firm that told clients not to invest with Mr. Madoff, said the secrecy of his strategy also raised red flags. And Mr. Madoff’s stock holdings, which he disclosed each quarter with the Securities and Exchange Commission, appeared to be too small to support the size of the fund he claimed. Mr. Madoff’s promoters sometimes tried to explain the discrepancy by explaining that he sold all his shares at the end of each quarter and put his holdings in cash.

“There were no smoking guns, but too many things that didn’t add up,” Mr. Fludgate said.

However, the S.E.C. had already investigated Mr. Madoff and two accountants who raised money for him in 1992, believing they might have found a Ponzi scheme. “We went into this thing just thinking it might be a huge catastrophe,” an S.E.C. official told The Wall Street Journal in December 1992.

Instead, Mr. Madoff turned out to have delivered the returns that the investment advisers had promised their clients. It is not clear whether the results of the 1992 inquiry discouraged the S.E.C. from examining Mr. Madoff again, even when new red flags surfaced. Lawyers at the S.E.C. did not return calls.

Meanwhile, Fairfield Greenwich Group, whose clients have $7.5 billion invested with the Madoff firm, said it was “shocked and appalled by this news.”

“We had no indication that we and many other firms and private investors were the victims of such a highly sophisticated, massive fraudulent scheme.”

At the court hearing, an individual investor, who declined to give his name to avoid embarrassment, expressed a similar sentiment.

“Nobody knows where their money is and whether it is protected,” the investor said.

“The returns were just amazing and we trusted this guy for decades — if you wanted to take money out, you always got your check in a few days. That’s why we were all so stunned.”

Zachery Kouwe and Stephanie Strom contributed reporting.

Wall Street Journal    DECEMBER 16, 2008, 11:46 P.M. ET

How President Grant was taken by the Madoff of his day.
Pyramid Schemes Are as American as Apple Pie

    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.
    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).

The Times    December 16, 2008

Head of IMF fears unrest without action on economy
Gary Duncan, Economics Editor

Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday.

Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.

The broadside from the IMF's managing director came as fears over a protracted global recession, and political fallout, mounted after China said that its factories' output registered the weakest growth in almost a decade last month.

Without swifter and more determined action by governments to boost economies, a world recovery could be delayed until late next year or early in 2010, with grave consequences, Mr Strauss-Kahn said. “A lot remains to be done, and if this work is not done it will be difficult to avoid a long-lasting crisis that everyone wants to avoid.”

The IMF has called for governments in leading economies to spend a combined 2 per cent of global GDP, or $1.2 trillion (£1,075 billion), to try to fend off the danger from global recession.“If we are not able to do that, then social unrest may happen in many countries - including advanced economies,” Mr Strauss-Kahn suggested.

He also claimed that violent protests could break out in countries worldwide if the financial system was not reordered to benefit everyone rather than a small elite.

Reinforcing anxieties over a global recession, the IMF chief said that the fund would probably cut its current 2.2 per cent forecast for world growth next year. He blamed governments' being unwilling or unable to use more public funds to bolster economic activity. At the same time, he also predicted that China's once red-hot pace of economic expansion was now set rapidly to run out of steam.

“We started with China at 11 per cent growth . . . China will probably grow at 5 or 6 per cent [next year],” he said. “The possibility of a global recession is real. We realise something must be done.”

Concern over China was heightened as industrial output growth from the Asian powerhouse slowed to an annual pace of only 5.4 per cent last month. That was sharply from 8.2 per cent in October and the weakest since 1999.

Turning his fire on the European Union, Mr Strauss-Kahn put himself sharply at odds with Jean-Claude Trichet, President of the European Central Bank, who yesterday urged European leaders to stick to their fiscal rule books and keep a lid on state borrowing, even as they deliver packages of economic stimulus measures.

Mr Trichet called for European countries to stick by the EU's controversial Stability and Growth Pact that limits governments' borrowing and total debt. But Mr Strauss-Kahn said that existing rule books should be scrapped, and demanded new rules to match the scale of the economic threat he saw.

“We are facing an unprecedented decline in output and we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures,” he said, “What was decided by Brussels . . . 1.5 per cent of GDP in the form of stimulus, is a bit below what we need.”

His comments come amid continued wrangling and sharp clashes between European leaders over how they should react to the crisis.

Germany has expressed substantial doubts over the wisdom of pumping huge amounts of public money into economies to try to stimulate growth and has resisted pressures to contribute more to a joint EU effort.

Peer Steinbrück, the German Finance Minister last week delivered an outspoken attack on tax and spending-led stimulus measures generally, and Britain's in particular.

“The same people who would never touch deficit spending are now tossing around billions,” he told Newsweek, in an interview. “The switch of supply-side politics all the way to a crass Keynesianism is breathtaking.” Discussing Britain's cut in value-added tax, he added: “All this will do is raise Britain's debt to a level that will take a whole generation to work off.”

Wall Street Journal    DECEMBER 16, 2008, 11:46 P.M. ET

Put Madoff In Charge of Social Security

   Where was the SEC? Such is the plaint lofted in the wake of the Bernie Madoff scandal. Huh?
   When has the Securities and Exchange Commission ever found a fraud except by reading about it in the newspapers? Anyway, who said the agency was supposed to prevent investors from losing money or relieve them of having to perform due diligence?
    Mr. Madoff's many honorable and accomplished clients chose to deal with their man outside the institutional checks that come from, say, a heavily regulated bank or a highly transparent mutual fund, perhaps one whose parent is also publicly traded and doubly subject to the checks of a watchful stock market. That was their choice.
    It is common to wax nostalgic for a time when a man's word was his bond, business was done on a handshake, etc. This is poppycock. It has always been a client's job to sort out the dealer who could be trusted from the one who couldn't. Personal connections may give comfort, but are no substitute for true institutional checks or true experience of a man's character, which many of Mr. Madoff's clients seemed not to have.
    Instead, they went on "reputation," which is to say they acquired their faith in Mr. Madoff more or less the way people acquire their faith in global warming and many other things, from people equally as ignorant as they.
    What makes the Madoff story interesting, though not evidence of systematic failure of the regulatory or legal system, is that Mr. Madoff and some of his clients had dealt on a basis of trust for more than a generation. True Ponzi schemes, in which early investors are paid a "return" out of funds deposited by later investors, tend to falter at the first market downturn. Waning investor enthusiasm dries up new funds required to pay off earlier investors. The scheme collapses.
    In all likelihood, Mr. Madoff was not running a pure Ponzi scheme, but had real assets. He was operating a blind pool, in which investors had no real idea what they owned or how it was performing, relying on Mr. Madoff who reported metronomic returns, brooked no nosiness into his methods, and seemed always willing to pay off investors who wanted to withdraw their money.
    He may have been casual from the start about what money he used to pay withdrawals. It is almost inconceivable, though, that he could have built a true Ponzi scheme to a height of $50 billion, in which there were never any real assets, just his superhuman 40-year juggling act to ensure new investors were recruited as needed to provide funds to meet withdrawal requests from earlier investors.
    If so, he is a genius who should immediately be put in charge of the Social Security and Medicare trust funds.
    It was Mr. Madoff himself who apparently applied the word "Ponzi" to his crime, in his distraught confession to his sons. His "$50 billion" in reputed losses also appear to be little more than hearsay, his own tremulous characterization of the long-running disaster he'd wrought.
    More likely, his firm devolved into a Ponzi scheme only when serious losses hit and he decided not to level with investors but to gamble on a resurrection. The hoped-for rebound, as they frequently do, failed to materialize. His losses grew. Then came a flood of redemption requests amid the current credit crisis. Mr. Madoff's jig was up.
    His decision-making at this crossroads probably wasn't helped by the fact that, in the early 2000s, just as the long bull run was ending, the press began asking questions about the improbable consistency of his reported returns -- making it an awkward moment to stop reporting consistent returns.
    Conscious of his standing in the community and seeing jail beckoning, all he could think to do was double down.
    There are costs and benefits to everything, including the cumbersome apparatus of firms that subject themselves to intrusive monitoring and conform to standards of transparency. Mr. Madoff's clients chose to avoid those costs. For that matter, they chose to forgo lower but safer returns, as many rich people do, by entrusting their fortunes to T-bills.
    The herding automatons of the media can never encounter lawbreaking in the financial markets without concluding that it demonstrates the necessity of more laws against lawbreaking. Congress, now in the process of convincing itself it should run the auto industry, no doubt will see in Mr. Madoff proof that Congress is needed to manage rich people's money and ordinary people's too. Then we'll all be in the same position as Mr. Madoff's clients.

December 18, 2008

On Wall Street, Bonuses, Not Profits, Were Real

“As a result of the extraordinary growth at Merrill during my tenure as C.E.O.,
the board saw fit to increase my compensation each year.”
— E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008

 For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million. The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed.

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.

“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”

Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.

“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.

The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.

For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.

A Bonus Bonanza

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.

While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.

“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s “The industry got a bigger share of the economic pie.”

A Money Machine

Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New York to oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president.

Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism.

After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records.

Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.

Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds.

Yet Mr. Kim was growing restless. That same month, he told E. Stanley O’Neal, Merrill’s chief executive, that he was considering starting his own hedge fund. His traders were stunned. But Mr. O’Neal persuaded Mr. Kim to stay, assuring him that the future was bright for Merrill’s mortgage business, and, by extension, for Mr. Kim.

Mr. Kim stepped to the lectern on the bond trading floor and told his anxious traders that he was not going anywhere, and that business was looking up, according to four former employees who were there. The traders erupted in applause.

“No one wanted to stop this thing,” said former mortgage analyst at Merrill. “It was a machine, and we all knew it was going to be a very, very good year.”

Merrill Lynch celebrated its success even before the year was over. In November, the company hosted a three-day golf tournament at Pebble Beach, Calif.

Mr. Kim, an avid golfer, played alongside William H. Gross, a founder of Pimco, the big bond house; and Ralph R. Cioffi, who oversaw two Bear Stearns hedge funds whose subsequent collapse in 2007 would send shock waves through the financial world.

“There didn’t seem to be an end in sight,” said a person who attended the tournament.

Back in New York, Mr. Kim’s team was eagerly bundling risky home mortgages into bonds. One of the last deals they put together that year was called “Costa Bella,” or beautiful coast — a name that recalls Pebble Beach. The $500 million bundle of loans, a type of investment known as a collateralized debt obligation, was managed by Mr. Gross’s Pimco.

Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.

But Costa Bella, like so many other C.D.O.’s, was filled with loans that borrowers could not repay. Initially part of it was rated AAA, but Costa Bella is now deeply troubled. The losses on the investment far exceed the money Merrill collected for putting the deal together.

So Much for So Few

By the time Costa Bella ran into trouble, the Merrill bankers who had devised it had collected their bonuses for 2006. Mr. Kim’s fixed-income unit generated more than half of Merrill’s revenue that year, according to people with direct knowledge of the matter. As a reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to $6 billion bonus pool to the 2,000 professionals in the division.

Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar.

Mr. Kim and his deputies were given wide discretion about how to dole out their pot of money. Mr. Semerci was among the highest earners in 2006, at more than $20 million. Below him, Mr. Mallach and Mr. Lattanzio each earned more than $10 million. They were among just over 100 people who accounted for some $500 million of the pool, according to people with direct knowledge of the matter.

After that blowout, Merrill pushed even deeper into the mortgage business, despite growing signs that the housing bubble was starting to burst. That decision proved disastrous. As the problems in the subprime mortgage market exploded into a full-blown crisis, the value of Merrill’s investments plummeted. The firm has since written down its investments by more than $54 billion, selling some of them for pennies on the dollar.

Mr. Lin, the former Merrill trader, arrived late to the party. He was one of the last people hired onto Merrill’s mortgage desk, in the summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he joined the firm. Mr. Lin would not disclose his bonus, but such payouts were often in the seven figures.

Mr. Lin said he quickly noticed that traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.

“It’s always human nature,” said Mr. Lin, who lost his job at Merrill last summer and now works at RRMS Advisors, a consulting firm that advises investors in troubled mortgage investments. “You want to pull for the market to do well because you’re vested.”

But critics question why Wall Street embraced the risky deals even as the housing and mortgage markets began to weaken.

“What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group. Some Wall Street executives argue that paying a larger portion of bonuses in the form of stock, rather than in cash, might keep employees from making short-sighted decision. But Mr. Hodgson contended that would not go far enough, in part because the cash rewards alone were so high. Mr. Kim, for example, was paid a total of $116.6 million in cash and stock from 2001 to 2007. Of that, $55 million was in cash, according to Equilar.

Leaving the Scene

As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a hedge fund in London.

All three departed without collecting bonuses in 2007. Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million.

Clawing back the 2006 bonuses at Merrill would not come close to making up for the company’s losses, which exceed all the profits that the firm earned over the previous 20 years. This fall, the once-proud firm was sold to Bank of America, ending its 94-year history as an independent firm.

Mr. Bebchuk of Harvard Law School said investment banks like Merrill were brought to their knees because their employees chased after the rich rewards that executives promised them.

“They were trying to get as much of this or that paper, they were doing it with excitement and vigor, and that was because they knew they would be making huge amounts of money by the end of the year,” he said.

Ben White contributed reporting.

December 19, 2008

The Madoff Economy

The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.

Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.

Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

O.K., maybe my example wasn’t hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way. From Bush administration officials like Christopher Cox, chairman of the Securities and Exchange Commission, who looked the other way as evidence of financial fraud mounted, to Democrats who still haven’t closed the outrageous tax loophole that benefits executives at hedge funds and private equity firms (hello, Senator Schumer), politicians have walked when money talked.

Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.

December 20, 2008

Madoff Scheme Kept Rippling Outward, Across Borders

By the end, the world itself was too small to support the vast Ponzi scheme constructed by Bernard L. Madoff.

Initially, he tapped local money pulled in from country clubs and charity dinners, where investors sought him out to casually plead with him to manage their savings so they could start reaping the steady, solid returns their envied friends were getting.

Then, he and his promoters set sights on Europe, again framing the investments as memberships in a select club. A Swiss hedge fund manager, Michel Dominicé, still remembers the pitch he got a few years ago from a salesman in Geneva. “He told me the fund was closed, that it was something I couldn’t buy,” Mr. Dominicé said. “But he told me he might have a way to get me in. It was weird.”

Mr. Madoff’s agents next cut a cash-gathering swath through the Persian Gulf, then Southeast Asia. Finally, they were hurtling with undignified speed toward China, with invitations to invest that were more desperate, less exclusive. One Beijing businessman who was approached said it seemed the Madoff funds were being pitched “to anyone who would listen.”

The juggernaut began to sputter this fall as investors, rattled by the financial crisis and reaching for cash, started taking money out faster than Mr. Madoff could bring fresh cash in the door. He was arrested on Dec. 11 at his Manhattan apartment and charged with securities fraud, turned in the night before by his sons after he told them his entire business was “a giant Ponzi scheme.”

The case is still viewed more with mystery than clarity, and Mr. Madoff’s version of events can only be drawn from statements attributed to him by federal prosecutors and regulators as he has not commented publicly on the case.

But whatever else Mr. Madoff’s game was, it was certainly this: The first worldwide Ponzi scheme — a fraud that lasted longer, reached wider and cut deeper than any similar scheme in history, entirely eclipsing the puny regional ambitions of Charles Ponzi, the Boston swindler who gave his name to the scheme nearly a century ago.

“Absolutely — there has been nothing like this, nothing that we could call truly global,” said Mitchell Zuckoff, the author of “Ponzi’s Scheme: The True Story of a Financial Legend” and a professor at Boston University. These classic schemes typically prey on local trust, he added. “So this says what we increasingly know to be true about the world: The barriers have come down; money knows no borders, no limits.”

While many of the known victims of Bernard L. Madoff Investment Securities are prominent Jewish executives and organizations — Jeffrey Katzenberg, the Spitzers, Yeshiva University, the Elie Wiesel Foundation and charities set up by the publisher Mortimer B. Zuckerman and the Hollywood director Steven Spielberg — it now appears that anyone with money was a potential target. Indeed, at one point, the Abu Dhabi Investment Authority, a large sovereign wealth fund in the Middle East, had entrusted some $400 million to Mr. Madoff’s firm.

Regulators say Mr. Madoff himself estimated that $50 billion in personal and institutional wealth from around the world was gone. It vanished from the estates of the North Shore of Long Island, from the beachfront suites of Palm Beach, from the exclusive enclaves of Europe. Before it evaporated, it helped finance Mr. Madoff’s coddled lifestyle, with a Manhattan apartment, a beachfront mansion in the Hamptons, a small villa overlooking Cap d’Antibes on the French Riviera, a Mayfair office in London and yachts in New York, Florida and the Mediterranean.

Just as the scheme transcended national borders, it left local regulators far behind. Its lies were translated into a half-dozen languages. Its larceny was denominated in a half-dozen currencies. Its warning signals were missed by enforcement agencies around the globe. And its victims are now scattered from Hollywood to Zurich to Abu Dhabi.

Indeed, while the most visible pain may be local — an important charity forced to close, an esteemed university embarrassed, a fabric of community trust shredded — the clearest lesson is universal: When money goes global, fraud does too.

Bernie Who?

In 1960, as Wall Street was just shaking off its postwar lethargy and starting to buzz again, Bernie Madoff (pronounced MAY-doff) set up his small trading firm. His plan was to make a business out of trading lesser-known over-the-counter stocks on the fringes of the traditional stock market. He was just 22, a graduate of Hofstra University on Long Island.

By 1989, Mr. Madoff ‘s firm was handling more than 5 percent of the trading volume on the august New York Stock Exchange, and Financial World magazine ranked him among the highest-paid people on Wall Street — along with two far more famous financiers, the junk bond king Michael Milken and George Soros, the international investor.

And in 1990, he became the nonexecutive chairman of the Nasdaq market, which at the time was operated as a committee of the National Association of Securities Dealers.

His rise on Wall Street was built on his belief in a visionary notion that seemed bizarre to many at the time: That stocks could be traded by people who never saw each other but were connected only by electronics.

In the mid-1970s, he had spent over $250,000 to upgrade the computer equipment at the Cincinnati Stock Exchange, where he began offering to buy and sell stocks that were listed on the Big Board. The exchange, in effect, was transformed into the first all-electronic computerized stock exchange.

“He was one of the early innovators,” said Michael Ocrant, a journalist who has been a longtime skeptic about Mr. Madoff’s investing success. “He was known to promote the idea that trading would be going electronic — and that turned out to be true.”

He also invested in new electronic trading technology for his firm, making it cheaper for brokerage firms to fill their stock orders. He eventually gained a large amount of business from big firms like A. G. Edwards & Sons, Charles Schwab & Company, Quick & Reilly and Fidelity Brokerage Services. “He was really a low-key guy. No one knew him outside of the sphere of market makers and people in the trading and brokerage business,” said Richard B. Niehoff, who was president of the Cincinnati exchange in the mid-1980s.

Mr. Madoff’s push to modernize trading did not make him popular with the traditional traders on the floor of the New York Exchange, as more of its orders were sent to his firm — partly because he was faster and cheaper, but also because he paid for those orders.

Mr. Madoff pioneered a controversial practice called “payment for order flow.” He would pay big players like Fidelity and Schwab to send their customer orders to his firm instead of to the New York Exchange or other regional exchanges.

The floor traders at those traditional exchanges claimed he was, in essence, paying bribes and that brokers steering business to him were not really getting the best prices for their customers.

Those complaints led to Congressional hearings, but Mr. Madoff made no apologies. He insisted the order-flow payments were necessary to inject greater competition into the marketplace and reduce the near monopoly of the Big Board.

As the debate received more attention, Mr. Madoff became increasingly better known in the financial world. By the end of the technology bubble in 2000, his firm was the largest market maker on the Nasdaq electronic market, and he was a member of the Securities Industry Association, now known as the Securities Industry and Financial Markets Association, Wall Street’s principal lobbying arm.

Still, one Wall Street heavyweight who knew him in those days said he remained “a self-effacing kind of guy,” more likely to spend time on the Riviera than at parties with other traders.

Local Hero

Unlike some prominent Wall Street figures who built their fortunes during the heady 1980s and ’90s, Mr. Madoff never became a household name among American investors. But in the clubby world of Jewish philanthropy in the New York area, his increasing wealth and growing reputation among market insiders added polish to his personal prestige.

He became a generous donor, then a courted board member and, finally, the money manager of choice for many prominent regional charities.

A spokeswoman for the New York Community Trust, Ani Hurwitz, recalled a Long Island couple who asked the trust in 1994 to invest their proposed $20 million fund with Mr. Madoff. “We have an investment committee that oversees all investments, and they couldn’t get anything out of him, no information, nothing,” Ms. Hurwitz said. “So we told the donors we wouldn’t do it.”

But many charities did entrust their money to Mr. Madoff, to their eventual grief. The North Shore-Long Island Jewish Health System, for instance, reported that it had lost $5.7 million on an investment with Mr. Madoff that was made at the donor’s behest. (That donor has pledged to cover the loss for the hospital system, its spokesman said.)

Other groups saw the handsome returns on those initial investments and put more of their money into Mr. Madoff’s firm, their leaders said. “Look, for years we made money,” one said.

Most successful business executives intertwine their personal and professional lives. But those two strands of Mr. Madoff’s life were practically inseparable. He sometimes used his 55-foot fishing boat, Bull, as a floating entertainment center for clients. He used his support of organizations like the Public Theater in Manhattan and the Special Olympics to build a network of trust that began to stretch wider and deeper into the Jewish community.

Through friends, the Madoff network reached well beyond New York. At Oak Ridge Country Club, in suburban Hopkins, Minn., known for a prosperous Jewish membership, many who belonged were introduced to the Madoff firm by one of his friends, Mike Engler.

The quiet message became familiar in similar pockets of Jewish wealth and trust: “I know Bernie. I can get you in.” Mr. Engler died in 1994, but many Oak Ridge members remained clients of Mr. Madoff. One elderly member, who said he was too embarrassed to be named, said he had lost tens of millions of dollars, and had friends who had been “completely wiped out.”

Dozens of now-outraged Madoff investors recall that special lure — the sense that they were being allowed into an inner circle, one that was not available to just anyone. A lawyer would call a client, saying: “I’m setting up a fund for Bernie Madoff. Do you want in?” Or an accountant at a golf club might tell his partner for the day: “I can make an introduction. Let me know.” Deals were struck in steakhouses and at charity events, sometimes by Mr. Madoff himself, but with increasing frequency by friends acting on his behalf.

“In a social setting — that’s where it always happened,” said Jerry Reisman, a lawyer from Garden City, N.Y., who knew Mr. Madoff socially. “Country clubs, golf courses, locker rooms. Recommendations, word of mouth. That’s how it was done.”

At exclusive retreats like the Palm steakhouse in East Hampton, Mr. Madoff would work the tables or receive friends at his own, building a following that came to include lawyers, doctors, real estate developers and accountants. Tomas Romano, a manager at the Palm, recalled that “people always came to talk with him” at the restaurant. “He was very well known.”

At his golf clubs — the Atlantic in Bridgehampton and the Palm Beach Country Club in Florida, for example — he frequently shot in the 80s, but often seemed far more interested in his fellow members, many of whom became investors, than in the game itself.

With his wife, Ruth, a nutritionist and cookbook editor, they were considered affable and charming people. “They stood out,” Mr. Reisman said. “Success, philanthropy, esteem — and, if you were lucky enough to be with him as an investor, money.”

He added: “That was the most important thing; he was looked on as someone who could make you money. Really make you money.”

The Go-Betweens

By the mid-1990s, as Mr. Madoff’s wealth and social standing grew, he had moved far beyond the days when golf-club buddies were setting up side deals to invest with him through their lawyers and accountants. Some of the most prominent Jewish figures in high finance and industry began to court Bernie Madoff — and, through them, he reached a new orbit of wealth.

He could not have had a more effective recruiter than Jacob Ezra Merkin, a lion of Wall Street who would be president of the Fifth Avenue Synagogue. Mr. Merkin’s father, Hermann, was the founding president of the synagogue and Herman Wouk, the author, wrote its constitution.

As a direct descendant of the founder of modern Orthodox Judaism and a graduate of Columbia’s English department and Harvard’s law school, Mr. Merkin easily held his own in a congregation that included such luminaries as the author Elie Wiesel, the deal maker Ronald O. Perelman and Ira Rennert, a wealthy financier perhaps best known for building one of the biggest houses and compounds in the Hamptons.

Mr. Merkin was fluent in Jewish and secular studies, as comfortable quoting Psalms as William James. In 1985, after a few years of practicing law at a top-tier firm, now known as Milbank, Tweed, Hadley & McCloy, he started the investment firm that would become Gabriel Capital Group. He contributed to a popular textbook on investing, lived in an art-filled Park Avenue apartment and continued his family’s legacy of generosity.

Philanthropies embraced him. He headed the investment committee for the UJA-Federation of New York for 10 years and was on the boards of Yeshiva University, Carnegie Hall and other nonprofit organizations. He became the chairman of GMAC.

Installed in these lofty positions of trust, Ezra Merkin seemed to be a Wall Street wise man who could be trusted completely to manage other people’s money. One vehicle through which he did that was a fund called Ascot Partners.

It was one of an unknown number of deals that prominent financial figures set up in recent years and marketed to investors, who thought they were tapping into the acumen of some Wall Street titan, like Mr. Merkin.

As it turned out, their money wound up in the same place — in Bernie Madoff’s hands.

These conduits began to steer billions of dollars into the Madoff operation. They operated below the financial radar until Mr. Madoff’s scheme collapsed, when investors suddenly got letters from the sponsoring titan disclosing that all or most of their money was probably gone.

Ascot itself attracted $1.8 billion in investments, almost all of which was entrusted to Mr. Madoff. New York Law School put $3 million into Ascot two years ago, and has now initiated a lawsuit in federal court that accuses Mr. Merkin of abdicating his duties to the partnership.

Mortimer Zuckerman, the billionaire owner of The Daily News, rebuked Ascot in a televised interview, saying he had been misled about what Mr. Merkin had done with some $30 million from Mr. Zuckerman’s charitable foundation.

Behind a wall of lawyers, Mr. Merkin did not take calls this week. In the “Dear Limited Partner” letter he sent on Dec. 11, he noted that he, too, was one of Mr. Madoff’s victims and suffered big losses alongside his investors. He has taken steps to wind down his Ascot, Gabriel and Ariel funds.

Still, some of his clients are stunned, and angry, to learn what Mr. Merkin did with their millions, while collecting an annual management fee of 1.5 percent of the assets for his services.

But before the losses and the outraged cries of betrayal, this was a heady way to steer money into an operation that has now been branded, by its own architect, as a Ponzi scheme. And nothing illustrates what a quantum leap it was for Mr. Madoff than the connections that led Tufts University to entrust him with $20 million in 2005.

Tufts did not actually send a check to Bernard L. Madoff Investment Securities. Rather, it invested in Ascot Partners, Mr. Merkin’s partnership. Mr. Merkin had been a major investor in a company whose board included James A. Stern, the chairman of the Tufts investment committee and a principal in a major private investment firm in New York called the Cypress Group.

Behind these veils of paperwork and partnerships, Mr. Madoff’s reach now extended into the top tiers of Jewish finance and philanthropy, where he rubbed shoulders with corporate directors and prominent hedge fund managers. But there were wider worlds to conquer.

The Circle Grows

Walter M. Noel was the courtly public face of the Fairfield Greenwich Group, the investment firm he started in 1983. A native of Tennessee, Mr. Noel had spent time at larger firms, notably at Chemical Bank, where he headed its international private banking practice, before setting out on his own.

From the beginning, the Noel family was built on access to prestigious social circles. Mr. Noel’s wife, Monica, was part of the prominent Haegler family of Rio de Janeiro and Zurich, and their daughters would marry into international families that provided additional connections for the firm.

In 1989, Mr. Noel merged his business with a small brokerage firm whose general partner was Jeffrey Tucker, a longtime New Yorker who had a law degree from Brooklyn Law School and a résumé that included eight years with the enforcement division of the Securities and Exchange Commission.

Again and again, this pedigreed experience was emphasized by Fairfield as it built itself into a fund of funds, investing in other hedge funds. It boasted to its prospects that its investigation of investment options was “deeper and broader” than those of most firms because of Mr. Tucker’s experience in the regulatory ranks.

Though he is not nearly as prominent as the Noels, who move in the forefront of Connecticut society, Mr. Tucker benefited just as much from Fairfield’s success. Indeed, last year he led a coalition of thoroughbred racing interests that sought to bid for New York State’s horse-racing franchise.

But it was Mr. Tucker who introduced Fairfield to Mr. Madoff. In the early 1990s, Fairfield began placing money with him, according to George L. Ball, the former president of E. F. Hutton and Prudential-Bache chief executive who knows Mr. Noel socially.

That began a long partnership that helped the Fairfield firm earn enviably steady returns, even in down markets — and that lifted Mr. Madoff into a global orbit, one that soon extended his reach into some of the most fabled banking centers of Europe.

If the wealthy Jewish world he occupied was his launch pad, the wealthy promoters he cultivated at Fairfield Greenwich were his booster rocket.

The Fairfield Sentry fund was one of several so-called feeder funds that became portals through which money from wealthy foreign investors would could capitalize on Mr. Madoff’s investment prowess — collecting those exclusive, steady returns that had made him the toast of Palm Beach and the North Shore so many years ago.

The Sentry fund quickly became Fairfield’s signature product, and it boasted of stellar returns. In marketing materials, Fairfield trumpeted Sentry’s 11 percent annual return over the last 15 years, with only 13 losing months. It was a track record that grew increasingly attractive as markets grew more volatile in recent years.

Though Fairfield Greenwich has its headquarters in New York City and its founder, Mr. Noel, operated from his hometown, Greenwich, Conn., a recent report showed that foreign investors provided 95 percent of its managed assets — with 68 percent in Europe, 6 percent in Asia, and 4 percent in the Middle East.

Friends and associates say that Mr. Noel’s sons-in-law spent much of their time marketing the firm’s funds in either their home countries or regions where they had their own family connections.

One of his most visible representatives was Andrés Piedrahita, a Colombian who had married Mr. Noel’s eldest daughter, Corina, and was eventually named a Fairfield founding partner. Based in Madrid and London, Mr. Piedrahita became one of the firm’s most visible representatives in the world of European banking and investment. But his brothers-in-law also had international roots. Yanko Della Schiava, who married Lisina Noel, was the son of the editor of Cosmopolitan in Italy and of the editor of Harper’s Bazaar in Italy and France. Philip J. Toub, who married Alix Noel, is the son of a director of the Saronic Shipping Company, in Lausanne, Switzerland.

Matthew Brown, who married Marisa Noel, is the son of a former mayor of San Marino, Calif. All three joined Fairfield, eventually becoming partners in marketing.

Thanks to the efforts of Mr. Piedrahita, Mr. Della Schiava and others, Fairfield reaped many millions of dollars in investor capital from Europe. The firm set up feeder programs with institutions like Banco Santander, Swedish Bank Nordea and Banque Benedict Hentsch. All became conduits that carried fresh money to Mr. Madoff.

Among his new investors were the Mugrabis, extremely wealthy art collectors from Colombia who have lived in New York for more 20 years. It was their longtime friendship with Mr. Piedrahita that led them to invest in the Sentry fund.

“We had very little money with the fund — just under a million dollars — so I am not that upset personally,” said Alberto Mugrabi, a son of the family patriarch. “It was a very informal thing. We know Andrés since forever, from Bogotá, he’s a great guy, and he says to us, ‘This is the Madoff thing, he’s the master.’”

He added: “I trusted Andrés. I still trust him.”

The World

Mr. Madoff’s higher profile in the highly competitive world of hedge fund management intensified the skepticism about his remarkably consistent returns. Rival money managers complained that when they sought to replicate his trading strategy based on the statements the Madoff firm sent its clients, they found it wasn’t possible.

There was a scattering of inconclusive regulatory investigations — efforts so unavailing that the chairman of the S.E.C. in Washington has ordered an internal investigation to determine how the agency could have missed so many red flags and ignored so many credible complaints over the years.

But foreign regulators were not any quicker to notice Mr. Madoff’s oddities — or the rapidly expanding pool of money entrusted to the various feeder funds he serviced.

There was the small Austrian merchant bank, Bank Medici, which had $2.1 billion invested in funds that ultimately wound up under Mr. Madoff’s control. It collected those investments through two main funds, the Herald USA Fund and the smaller Herald Luxemburg Fund, sold to banks, insurance companies and pension funds since 2004.

The funds, which were closed for private investors, were incredibly popular among investors and no questions were ever asked about its constant returns of about 7 percent, said a former employee at the bank who declined to be identified because he is not authorized to talk to the news media.

Bank Medici sold the funds to investors around the world from its offices in New York, Vienna, Gibraltar, Zurich and Milan. About 93 percent of the funds’ investors are outside Austria. Just last month, the Herald USA fund won Germany’s annual Hedge Fund Awards for “proving consistency in turbulent times.“

Peter Scheithauer, chief executive of Bank Medici since September, accepted the award, saying Bank Medici’s products “should represent mainly one thing: security and returns in good as well as bad times.“

But as he prepared to brief his management board on potential losses connected to the Madoff investments on Friday, he sounded downbeat. “It’s a real tragedy,” Mr. Scheithauer said. “It’s not just us, it’s so many other people as well. If only we knew, but he was paying out fine until just recently.”

Bank Austria, which is now owned by UniCredit of Italy, owns a stake in Bank Medici and also wound up investing with Mr. Madoff through a range of different funds offered under the name Primeo by its hedge fund unit, Pioneer Alternative Investments.

Mr. Madoff was not a well-known presence on the social circuit in Switzerland. Instead, Swiss money managers would go to him, visiting his offices in the Lipstick Building in Midtown Manhattan. Seeing Mr. Madoff there was a bit like visiting the Wizard of Oz: despite his unerring success in generating smooth returns, he seemed quite ordinary, lacking the flamboyance of other well-heeled money managers.

“He did not look like a huge spender; seemed like a family man,” said one veteran Geneva banker, whose firm had money with Mr. Madoff but insisted on anonymity because of the likelihood of lawsuits from angry clients. “He talked about the markets.”

The only thing that struck the Swiss banker as odd was the bull memorabilia strewn about his office. “It seemed strange for a guy to have all these bulls, little sculptures, paintings of bulls,” he recalled. “I’ve seen offices with bears. This was bulls.”

But the aura of exclusivity was the constant, he said. “This was the usual spiel: ‘It’s impossible to get in, but we can get you some if you’re nice.’ He made it look difficult to get into.”

New Frontiers

What began as a quietly coveted investment opportunity for the lucky few in the Jewish country clubs on Long Island became, in its final burst of growth, a thoroughly global financial product whose roots were obscured behind legions of well-dressed, multilingual sales representatives in the financial capitals of Europe.

Indeed, often with the assistance of feeder funds, Mr. Madoff was now in a position to seek and procure money from Arab investors, too. The Abu Dhabi Investment Authority, one of the largest of the world’s sovereign wealth funds, with assets estimated earlier this year to be approaching $700 billion, wound up in the same boat as Jewish charities in New York: caught in the collapse of Bernie Madoff.

In early 2005, the investment authority had invested approximately $400 million with Mr. Madoff, by way of the Fairfield Sentry Fund, according to a profile of the firm that it prepared for a prospective buyer in 2007. Fairfield Sentry had more than $7 billion invested with Mr. Madoff and was his largest investor; now, it says, it is his largest victim.

The investment authority, in turn, was one of Fairfield Sentry’s largest investors. Even after the investment authority took two significant redemptions from the fund, in April 2005 and 2006, its stake the following year of $132 million made up 2 percent of the fund’s assets under management.

The 2007 report lists Philip Jamchid Toub, one of Mr. Noel’s sons-in-law, as the firm’s “agent” with the Abu Dhabi investors, presumably meaning the person who manages the relationship with the particular clients. Mr. Toub, a Fairfield Greenwich partner, is married to Alix Noel and is the son of Said Toub, a wealthy shipping executive from Switzerland.

Other investors for whom Mr. Toub is listed as the agent include the Safra National Bank of New York and the National Bank of Kuwait.

And Fairfield was finding new fields for Mr. Madoff to cultivate. In 2004, the firm turned its eyes to Asia, forming a partnership with Lion Capital of Singapore, now Lion Global Investors, to create Lion Fairfield Capital Management, a joint venture meant to introduce Asian investors to the firm.

“Many investors believe that Asia holds the best global opportunities for hedge funds over the next two to five years, as compared to the U.S. and Europe,” Richard Landsberger, a Fairfield partner and director of Lion Fairfield, told HedgeWorld in 2006.

Yet it appears that Sentry remained Fairfield’s chief focus in this new vineyard. Among the institutions that had invested in the fund are Korea Life Insurance, which has about $30 million to $50 million in the fund; a Taiwanese insurer, Cathay Life, with about $12 million; and Samsung Investment and Securities, with about $6.3 million.

As Fairfield moved into Asia, another feeder fund, Stellar US Absolute Return, was incorporated in Singapore in 2006 to funnel investors’ capital into Sentry. According to data from Bloomberg News, Stellar borrowed $3 for every dollar of investor money it received, in an effort to extract higher returns.

Last year, Jeffrey Tucker went to Asia to educate potential investors in Beijing and Thailand about hedge funds, seeking to allay their concerns about previous blow-ups in the industry like Long-Term Capital Management, a Connecticut hedge fund that had been rescued under the supervision of the Federal Reserve Bank of New York when its exotic derivative investments brought it to the brink of a costly collapse.

“China is moving slowly as the reformers become familiar with what we do,” Mr. Tucker told HedgeWorld in November 2007. “It’s the same thing in Thailand. There are misunderstandings about hedge funds.”

The Scheme Collapses

But even with all the money pouring in, it was not enough, not in a year in which financial markets were plunging.

Suddenly, people wanted cash — even the people who had trusted their cash for so long to Mr. Madoff. Time was running out for history’s first worldwide Ponzi scheme.

But he maintained a brave face at the family firm that he had founded before his sons Mark and Andrew were born, and where they now worked, the firm where his brother Peter had labored at his side for decades, the firm that remained a stock-trading powerhouse on Wall Street.

But that trading business lived on the 18th and 19th floors of the Third Avenue tower, called the Lipstick Building, that was home to Bernard L. Madoff Investment Securities. Mr. Madoff operated his vast but largely unseen “asset management” business from the 17th floor, aided by a small staff that had been with him for years and a computer system separate from the trading business.

His family knew Mr. Madoff had an investment management business, but Mr. Madoff had always kept it separate. Moreover, he explained that he placed his trades through “European counterparties” rather than use the trading desks his sons oversaw.

But Mark and Andrew felt their father had been under increasing tension as the markets grew increasingly difficult this fall.

In early December he remarked to one of them that he was struggling to raise $7 billion to cover redemptions. He seemed tired and drawn, but so was just about everyone else during the turbulent weeks of late November and early December.

Then, early on Dec. 10, he shocked his sons by suggesting that the firm pay out several million dollars in bonuses two months ahead of schedule. When pressed by his sons for a reason, he grew agitated and insisted that they all leave the office and continue the conversation at his apartment on East 64th Street.

It was there, at midmorning, that he told his sons that his business was “a big lie” and, “basically, a giant Ponzi scheme.” There was nothing left, he told them — and he fully expected to go to jail.

The questions have piled up since then: Could Mr. Madoff have sustained this worldwide fraud for so long by himself? Why didn’t regulators, in Washington and abroad, catch him sooner? And will anything be recovered for investors, some of whom have lost every penny?

But when the news of his arrest began to spread on Dec. 11, the first thought that struck an old friend who had known him as a pioneer on Wall Street, was, “There must be an error. It must be another Bernie Madoff.” Then he added, “But then, there is no other Bernie Madoff.”

This article was reported by Diana B. Henriques, Alex Berenson, Alison Leigh Cowan, Alan Feuer, Zachery Kouwe, Eric Konigsberg, Nelson D. Schwartz, Michael J. de la Merced, Stephanie Strom, Julia Werdigier and Dirk Johnson.

Washington Post    December 20, 2008

One Name Stands Alone in The Grand Scheme of It All
Madoff? Meh. History Put Its Money on Ponzi.
By David Montgomery

Sorry, Mr. Madoff. Despite your prodigious alleged accomplishments -- $50 billion of investors' money, vaporized! -- you're no Charles Ponzi.

The feds, in their complaint, allege that you, Bernard L. Madoff, admitted to colleagues that you've "been conducting a Ponzi-scheme" through your investment advice business. Some Wall Street experts, struggling to convey the scope, say it's perhaps "the biggest Ponzi scheme in history."

Wow! And there have been so many.

But for all your Palm Beach Country Club connections and your sterling Wall Street résumé, you're still just walking in the shadow of the great Charles Ponzi. Same with all the get-rich-quick guys, the pyramid schemers, land-deal scammers, penny-stock preachers and high-roller hustlers who have risen and fallen over the years.

It's Ponzi's corner everybody's working. He got the patent, so to speak. He put his name on the racket. Everyone else is just a franchisee.

Now, if you, Mr. Madoff -- sounds like "made off" -- were made of a little of Ponzi's stuff, first of all, you wouldn't have allegedly admitted anything to anyone. Show some moxie, man! You'd have kept up appearances for the sake of the game -- as if you really believed in it.

Second, since you're free on $10 million bail -- albeit with a nightly curfew in your Upper East Side apartment -- if you were anything up to Ponzi's standard, you'd go out in public more in your winter of discontent.

As Ponzi's world was collapsing in Boston that wild summer of 1920, his notorious deeds splashed all over the front pages and the authorities hounding him, he would put on a sharp suit and a big smile, grab his fine walking stick and go mingle with the public. Some would jeer -- but others would cheer! A platoon of reporters followed him everywhere. He'd banter with the scribes and give long, good-humored quotes. He'd keep his lunch date at the Kiwanis Club, and at night he and his wife would sit in their box at the movies. The lights would go down and newsreels about him would come on the screen. The audience would cheer some more.

But Mr. Madoff, we see little more of you, sir, than that photo with your cap pulled low after your trip to the courthouse. You had a seasick sort of smile, and no comment.

Someday, someone may memorialize you with a concept called "a Madoff scheme." But we think not.

* * *

From the Oxford English Dictionary:

"Ponzi scheme: A form of fraud in which belief in the success of a fictive enterprise is fostered by payment of quick returns to first investors from money invested by others."

* * *

Like so many great self-made-American stories, Ponzi's began with him landing on these shores with little money in hand -- in his case, in 1903 at age 21, with just $2.50 in his pocket. (The reason he had so little was, he lost a couple of hundred bucks gambling on the voyage from Italy.)

He had been a bit of a screw-up back home, and it looked as though that side of him was going to prevail in the New World. Yet his entrepreneurial spirit, his hunger for riches, his yearning to make a name for himself were powerful and genuine.

He traveled the country, taking odd jobs, trying this and that, dreaming up schemes that didn't pan out. He got in a spot of trouble in Montreal, where he did some prison time for passing a bad check.

But he wasn't a bad guy. In Blocton, Ala., an acquaintance had been badly burned and needed a skin graft. Ponzi donated 120 square inches of skin off his own back and thighs for her recovery. He wooed and married Rose Gnecco, the love of his life, who stood by him through the best and worst of times.

"He was enormously charismatic, he was charming, he was this sort of dapper figure. I call him a banty rooster of a man," says Mitchell Zuckoff, who wrote the 2005 biography "Ponzi's Scheme: The True Story of a Financial Legend."

Ponzi stood 5-2 and weighed 130 -- after a big meal. "A diminutive guy, he had this huge smile," says Zuckoff, a journalism professor at Boston University. "He was kind of like the guy you would automatically put in the front of a parade, and people would follow."

At the same time, "in many ways he was completely self-deluding. His name has become synonymous with fraud, obviously. I am certain he did not set out to be a swindler. He sincerely believed he had found a way to turn lead into gold."

The epiphany came just in time, in late 1919. Ponzi's latest fanciful plan, to found a trade magazine, was imploding. His office furniture was about to be repossessed, and he couldn't pay the rent.

Then a letter from Spain arrived. Inside was a curious document. It resembled currency, but it wasn't money. Ponzi's monumental insight was to realize it could be as good as money.

It was an international reply coupon. It those days, many nations had agreed on a system for prepaying international postage. Sending a reply coupon was like sending a self-addressed stamped envelope. You could buy a coupon in Rome, and it could be redeemed for stamps in Boston.

But the fixed price of the coupons did not reflect the dramatic post-World War I devaluation of some currencies. Thus, $1 worth of lira in Rome could buy enough coupons to redeem $3.30 worth of stamps in Boston, according to Zuckoff's reconstruction of Ponzi's calculations. Ponzi figured he could make a profit of $2.30 for every $1 invested.

He was still puzzled about how to convert the coupons back into cash. He decided to worry about that later.

With zero advertising, the astounding offer spread by word of mouth: Ponzi promised to return a 50 percent profit to investors within 45 days.

The initial tiny pool of investors grew exponentially, rippling out from the Italian immigrant community into Boston society. "The woman cleaning houses on Beacon Hill would mention it to her employers, and soon you had Brahmin matrons and white-shoe bankers lining up next to newsboys and cleaning women," Zuckoff says.

By the spring of 1920, Ponzi was pulling in $30,000 a week (about $319,000 today).

Up to this point, Ponzi's scheme was not a "Ponzi scheme." But he apparently never did figure out how to convert mass quantities of coupons into cash. Before long, he was forced to begin paying off early investors, and for that he used money collected from later investors -- a Ponzi scheme.

But they didn't call it that back then. More commonly it was referred to as robbing Peter to pay Paul.

"Each satisfied customer became a self-appointed salesman," Ponzi wrote in his autobiography, cited by Zuckoff. "I admit that I started a small snowball downhill. But it developed into an avalanche by itself."

Meanwhile, Ponzi invested in banks and other businesses, hoping -- believing -- he'd come up with some other profitable venture to make good on his promises to investors. "I kept up the bluff, hoping that I might eventually hit upon some workable plan to pay all of my creditors," he wrote.

In May 1920, he raked in $440,000 (about $4.7 million today) from 1,525 investors. In June, the take was $2.5 million (about $26.6 million) from 7,800 customers. So much cash was coming in so quickly that his office drawers overflowed and his clerks stored the money in wastepaper baskets.

But newspapers, especially the Boston Post, were becoming skeptical. Reporters began digging, and Ponzi made headlines far beyond Boston. "I shall never make public my methods of doing business," he said in a wire story published in The Washington Post.

He was arrested that August, less than nine months after the scheme began. He had paid out millions to investors, but was about $7 million ($74 million) short. He still owed money to some 20,000 people. They got back less than 40 cents on the dollar.

Ponzi served nearly 11 years in state and federal prisons, then was deported to Italy.

Beyond a nice house, car and clothes, he never kept much for himself. He didn't try to flee with his millions. Until the day he turned himself in, he acted as if he'd work it all out somehow.

Many who lost money were bitter. But many had also made money on Ponzi's venture. And many others agreed with Ponzi's self-serving populist rhetoric that he was being taken down on behalf of the Brahmin bankers who saw him as a threat.

From jail, he sent a Christmas message. According to a Dec. 23, 1920, article in The Washington Post, he "expressed the hope that the mishap to his creditors' investments would not mar the spirit of the Christmas season and asked them to look forward with him to the day when he would step from the jail a free man to aid them in recovering their losses."

Later, the newspaper editorialized: "He is one of the best examples of misdirected energy in the annals of American crime."

* * *

How and why does this keep happening?

Countless Ponzi schemes have been exposed over the years -- involving real estate, oil, stock, old coins, you name it. Why do we keep falling for it?

Part of the seduction is the "pyramid of trust" in successful Ponzi schemes, says Robert Levine, professor of psychology at California State University at Fresno and author of "The Power of Persuasion: How We're Bought and Sold."

The pyramid of trust begins with the first satisfied customer, who spreads the word. Soon, it's not your trust in the perpetrator that lures you in -- it's your trust in the friends of friends of friends of the perpetrator, Levine says.

An aura of exclusivity helps. Ponzi accepted anybody's money, but because there was no advertising, you had to be in the know.

"Exclusivity is designed to make it seem like you're in a club that you're lucky to be invited to," says Barry Minkow, a convicted former scammer who now helps federal investigators unmask Ponzi schemes and other frauds.

"Ponzi and all of his successors tap into a fundamental part of human nature," Zuckoff says. "One part of our brain tells us this is too good to be true. The other side tells us this is too good to miss. The key to any con is getting a mark to tip to the too-good-to-miss side."

* * *

Ponzi died in 1949, at 66, almost penniless and alone in a charity hospital in Rio de Janeiro. Months earlier, he gave an interview to the Associated Press from his hospital bed. There's a roguish twinkle to his remarks, which were published in The Post:

"Those were confused, money-mad days. Everybody wanted to make a killing. I was in it plenty deep, rolling in other people's money. . . . My business was simple. It was the old game of robbing Peter to pay Paul."

In that moment, he didn't label his game a Ponzi scheme. He died not knowing that his name, on so many lips this week, would go down in history that way.

Exactly when the phrase "Ponzi scheme" was coined is a mystery, but by the 1930s, it was being used in newspapers. By 1957, it had gained entry to the Encyclopaedia Britannica, according to the Oxford English Dictionary. Now the term yields 807,000 hits on Google.

"The combination of Ponzi's huge personality and the enormous if brief success of his scheme, combined with the tremendous publicity which surrounded it, is ultimately what attached his name to it," Zuckoff says.

In his autobiography, Ponzi thought about what his legacy might be. Of his investors, he wrote: "Even if they never got anything for it, it was cheap at that price. Without malice aforethought I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! I had given them the most brazen exhibition of sheer nerve that had ever been witnessed in the world of finance! . . . It was easily worth fifteen million bucks to watch me put the thing over!"

International Herald Tribune    December 24, 2008

Madoff dealings tarnish a private Swiss bank
By Nelson D. Schwartz

PARIS: For generations, the calling card of Swiss private bankers has been the promise of prudence and discretion.

Now, as the links between Bernard Madoff and elite private banks like Geneva-based Union Bancaire Privée emerge, this well-polished reputation has been tarnished by the $50 billion Ponzi scheme that Madoff has been arrested for and accused of running.

L'Affaire Madoff, as it has become known here and in Geneva, has cast an unwanted spotlight onto the normally shadowy world of private bankers in Switzerland and other cozy hiding places of offshore wealth, like the Cayman Islands and Luxembourg.

And while there are many Swiss victims in terms of total exposure, UBP is the best-known private bank to get hit, with $700 million of its clients' money invested with Madoff.

Founded in 1969 by Edgar de Picciotto, UBP quickly became a giant in the conservative world of Swiss banking, where partnerships like Pictet and Lombard Odier stretch back more than 200 years.

With assets of $125 billion and a client base of wealthy individuals, families and institutions that reach from Qatar to Uruguay to Russia and throughout Europe, it is one of Switzerland's biggest pipelines for channeling client money into hedge funds worldwide.

About six years ago, that business, known as a fund of funds, began to rake in larger fees when it decided to set up a vehicle called M-Invest Ltd to funnel cash to Madoff's firm.

Through this relationship, UBP claimed it was able to gain close insight into Madoff's investment operations, through copies of trade tickets and an unusual degree of access granted by Madoff himself to UBP's representatives, according to a confidential internal letter sent to investors on Dec. 17, obtained  by The New York Times.

The memorandum, while seeking to reassure investors, could raise questions about why UBP, unlike others who claimed to have seen red flags, did not use its access to delve more deeply into the unusually consistent annual returns that Madoff's funds were reporting.

According to the memo, "We have met with Bernard Madoff and various principals several times at Madoff's office, twice within the last year, and have had numerous conversations in between." The letter stated that several of UBP's senior investment professionals met with Madoff in 2004 and 2007, and  that UBP's structured risk analysis unit "had a full review in 2006 and recently in 2008 with Madoff himself."

The UBP letter acknowledges some concerns over how Madoff's firm combined investment management and brokerage services. But the Geneva bank said it "found comfort" in the fact that the firm was subject to "routine" audits by the Securities and Exchange Commission and Finra, another securities  regulator, as well as "Madoff's longstanding reputation in building Wall Street's markets infrastructure." M-Invest was regulated by the Cayman Islands Monetary Authority, where it was incorporated.

UBP was also closely tied to Fairfield Greenwich Group, the New York investment company that was the single biggest gatherer of money for Madoff, sending $7.3 billion his way and collecting more than $500 million in fees as a result.

Michael de Picciotto, a nephew of the founder and a top executive of UBP, is a close friend of Andrés Piedrahita, a son-in-law of Walter Noel, the founder of Fairfield Greenwich. Piedrahita played a key role in raising much of the money from Europe and South America that ended up with Madoff.

UBP was the also main investment adviser, custodian and leverage provider to Fairfield's huge fund of funds business and De Picciotto in turn was a key adviser to Fairfield, according to an internal document prepared by Fairfield last year for a potential buyer of the firm. In addition, UBP is listed as the  sixth-largest investor in Fairfield's funds, for which the bank provided "qualitative and quantitative research and operational due diligence," according to the letter.

At one point, the letter boasted that De Picciotto could provide insight into UBP's investment and asset allocation strategy. Through these connections, UBP became entwined with Madoff's investments even as competitors like Société Générale, which turned up a series of red flags during routine due  diligence in 2003 at Madoff's New York headquarters, steered clear.

"Ultimately, these people were blind to what was going on," said Michel Dominicé, a veteran Geneva hedge fund manager with $200 million under management.

He said the links between UBP, Fairfield Greenwich and Madoff, as well as the hundreds of millions in fees the firms earned by steering money to Madoff investments, pointed to conflicts of interests that penalize investors.

Dominicé was himself approached by a salesman for Madoff investments three years ago but declined to invest, saying he could not figure out how Madoff earned such steady returns, month after month. "It just didn't make sense," he said.

As for the fees earned by UBP and Fairfield Greenwich, Dominicé said: "If you're nasty, you call it corruption. If you want to be more polite, you can call it a lack of professional consciousness."

A spokesman for UBP declined to comment. But Christophe Bernard, a top executive responsible for asset management at UBP, told a Swiss newspaper last week: "We did what was necessary."

As recently as Nov. 25, representatives of UBP met with Madoff himself in New York according to the interview, which appeared in Le Temps, a Geneva newspaper. "So how can we be reproached?," Bernard asked. "We are victims of a massive fraud, like several other banks and financial companies  throughout the world."

He went on to defend the bank's financial soundness and said UBP, which did not invest in Madoff's fund on its own behalf, was "not affected and remains top class."

To be sure, $700 million in exposure cited by UBP is only a tiny fraction of the $125 billion under management by the bank. UBP also reported a $331 million gross profit in the first half of 2008, up 5.8 percent from a year ago.

But for UBP, the headlines have cast a shadow on a reputation that seemed to soar as high as the nearby Alps.

For all of its growth - UBP has roughly 1,300 employees worldwide - the bank remains a family affair. Edgar de Picciotto is the chairman and principal shareholder, although he has given day-to-day responsibilities to his son Guy de Picciotto, the chief executive, and several other family members.

On Tuesday, as many Swiss bankers prepared to head for the slopes for vacation until after New Year's, a Christmas tree glimmered beside the gold colored entrance to UBP, where visitors are greeted in a reception area of black marble, red leather benches and a large golden globe.

In the tight-knit world of Swiss wealth management, experts acknowledged it was a public relations disaster for UBP, but defended the bank's decision-making.

"It's not the kind of publicity you seek," said Michel Derobert, secretary general of the Swiss Private Bankers Association. Because it is a private corporation rather than a partnership, Derobert's association does not include UBP, but works with the bank from time to time.

"It's not nice," he said. "But it would be surprising in a city like Geneva, where people take of care of clients who seek low risk and steady returns, not to be affected by this kind of case."

December 27, 2008

Ponzi Schemes: The Haul Gets Bigger, but the Fraud Never Changes

One hears anguished commentary about how Bernard Madoff’s gargantuan fraud epitomizes the self-defeating excess of high-tech finance — his fall the embodiment of the fall of modern capitalism. But while $50 billion is a lot of money to defraud, there’s nothing particularly modern about Mr. Madoff’s ethics or technique.

Ponzi schemes are among the oldest in the books, long preceding the stamp arbitrage scam engineered in the 1920s by Charles Ponzi, who gave the fraud its name. They have been practiced by hundreds of scammers across the world. And they usually end badly.

The oldest documented case dates back to 1719, when John Law, a Scot, offered investors stock in a French company trading up the Mississippi River, promising returns of more than 40 percent a year.

More recently, from Romania to Russia, Ponzi schemes became de rigeur as former Communist countries embraced capitalism. In Albania, half the population invested an amount equivalent to the nation’s entire gross domestic product in an enormous Ponzi scheme before it collapsed.

In April last year, authorities in Wazirabad, Pakistan, arrested a former high school teacher who reportedly took nearly $1 billion from starry-eyed investors. And a few weeks ago, the Colombian government declared a state of emergency because of rioting over some closed Ponzi funds.

Some say that Mr. Madoff’s fraud is a harbinger of the downfall of the 21st-century’s frenetic variant of capitalism. I would suggest that it underscores how stable the strategies and the institutions of finance truly are. What changes are the scale and the technology. The ethical shortcomings remain.

And Mr. Madoff’s strategy doesn’t just recall that of snake-oil peddlers of yore. It is strikingly similar to that of the brokers and the financiers who built lucrative legal businesses convincing investors that something — Internet stocks, American homes, Dutch tulips — would appreciate forever for some superspecial reason.

What’s a Ponzi scheme but an illegal ruse to entice the gullible with the promise of too-good-to-be-true returns in arcane investments using an intimidating cloud of abstruse financial lingo? Ponzi frauds have the defining characteristic that returns to the first batch of innocents are paid from the money invested by the second batch. That sounds a lot like today’s American real estate market.

And Ponzi frauds often have similar ends to our increasingly frequent bubbles. Not only do they both usually collapse, but so many rich and influential French investors were taken by John Law’s fraud in the 18th century that the government felt compelled to bail them out. According to Utpal Bhattacharya, a professor of finance at Indiana University, it exchanged the investors’ worthless stock for bonds secured by Paris’s municipal revenues.

There are, of course, important differences between fraud and standard financial practice. Crucially, bubbles are powered by fools of increasing gullibility, who are willing to pay an even greater price to buy an asset from the fool that bought it in the preceding round. Ponzi schemes only require that their investors be foolish.

Yet these details do not negate the larger paradigm of finance, old or new: getting investors’ money requires a story. It doesn’t have to be true.

December 27, 2008

Stop Being Stupid

I’ve got a new year’s resolution and a new slogan for the country.

The resolution may be difficult, but it’s essential. Americans must resolve to be smarter going forward than we have been for the past several years.

Look around you. We have behaved in ways that were incredibly, astonishingly and embarrassingly stupid for much too long. We’ve wrecked the economy and mortgaged the future of generations yet unborn. We don’t even know if we’ll have an automobile industry in the coming years. It’s time to stop the self-destruction.

The slogan? “Invest in the U.S.” By that I mean we should stop squandering the nation’s wealth on unnecessary warfare overseas and mindless consumption here at home and start making sensible investments in the well-being of the American people and the long-term health of the economy.

The mind-boggling stupidity that we’ve indulged in was hammered home by a comment almost casually delivered by, of all people, Bernie Madoff, the mild-mannered creator of what appears to have been a nuclear-powered Ponzi scheme. Madoff summed up his activities with devastating simplicity. He is said to have told the F.B.I. that he “paid investors with money that wasn’t there.”

Somehow, over the past few decades, that has become the American way: to pay for things — from wars to Wall Street bonuses to flat-screen TVs to video games — with money that wasn’t there.

Something for nothing became the order of the day. You want to invade Iraq? Convince yourself that oil revenues out of Baghdad will pay for it. (Meanwhile, carve out another deficit channel in the federal budget.) You want to pump up profits in the financial sector? End the oversight and let the lunatics in the asylum run wild.

For those who wanted a bigger house in a nicer neighborhood, there were mortgages with absurdly easy terms. Credit-card offers came in the mail like confetti, and we used them like there was no tomorrow. For students stunned by the skyrocketing cost of tuition, there were college loans that could last a lifetime.

Money that wasn’t there.

Plenty of people managed their credit wisely. But much of the country, including many of the top government officials and financial titans who were supposed to be guarding the nation’s wealth, acted as if there would never be a day of reckoning, a day when — inevitably — the soaring markets would crash and the bubbles explode.

We were stupid in so many ways. We shipped American jobs overseas by the millions and came up with the fiction that this was a good deal for just about everybody. We could have and should have taken the time and made the effort to think globalization through, to be smarter about it and craft ways to cushion its more harmful effects and to share its benefits more equitably.

We bought into the dopey idea that you could radically cut taxes and still maintain critical government services — and fight two wars to boot!

We were living in a dream world. The general public, and to a great extent the press, closed its eyes to the increasingly complex and baffling machinations of the financial industry, which kept screaming that oversight would ruin everything.

We should have known better. It didn’t require a genius (or even an economics degree) to understand a crucial point that popped up some years ago in a front-page article in The Wall Street Journal: “Markets are a great way to organize economic activity, but they need adult supervision.”

Did Alan Greenspan not understand that? Bob Rubin? Larry Summers?

Now that the reality of a stunning economic downturn has so roughly intervened, we at least have the option of being smarter going forward. There is broad agreement that we have no choice but to go much more deeply into debt to jump-start the economy. But we have tremendous choices as to how we use that debt.

We should use it to invest in the U.S. — in a world-class infrastructure (in its broadest sense) to serve as the platform for a world-class, 21st-century economy, and in a system of education that actually prepares American youngsters to deal successfully with the real world they will be encountering.

We need to invest in a health care system that improves the quality of American lives, enhances productivity, puts large numbers of additional people to work and eases the competitive burden of U.S. corporations.

We need to care for our environment (if long-term survival means anything to us) and get serious about weaning ourselves from foreign oil.

And, finally, we need to start living within our means and get past the nauseating idea that the essence of our culture and the be-all and end-all of the American economy is the limitless consumption of trashy consumer goods.

It’s time to stop being stupid.

DECEMBER 29, 2008

America 'Disintegrates' in 2010
As if Things Weren't Bad Enough, Russian Professor Predicts End of U.S.
In Moscow, Igor Panarin's Forecasts Are All the Rage

MOSCOW -- For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. -- very seriously. Now he's found an eager audience: Russian state media.

In recent weeks, he's been interviewed as much as twice a day about his predictions. "It's a record," says Prof. Panarin. "But I think the attention is going to grow even stronger."

Prof. Panarin, 50 years old, is not a fringe figure. A former KGB analyst, he is dean of the Russian Foreign Ministry's academy for future diplomats. He is invited to Kremlin receptions, lectures students, publishes books, and appears in the media as an expert on U.S.-Russia relations.

But it's his bleak forecast for the U.S. that is music to the ears of the Kremlin, which in recent years has blamed Washington for everything from instability in the Middle East to the global financial crisis. Mr. Panarin's views also fit neatly with the Kremlin's narrative that Russia is returning to its rightful place on the world stage after the weakness of the 1990s, when many feared that the country would go economically and politically bankrupt and break into separate territories.

A polite and cheerful man with a buzz cut, Mr. Panarin insists he does not dislike Americans. But he warns that the outlook for them is dire.

"There's a 55-45% chance right now that disintegration will occur," he says. "One could rejoice in that process," he adds, poker-faced. "But if we're talking reasonably, it's not the best scenario -- for Russia." Though Russia would become more powerful on the global stage, he says, its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.

Mr. Panarin posits, in brief, that mass immigration, economic decline, and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces -- with Alaska reverting to Russian control.

In addition to increasing coverage in state media, which are tightly controlled by the Kremlin, Mr. Panarin's ideas are now being widely discussed among local experts. He presented his theory at a recent roundtable discussion at the Foreign Ministry. The country's top international relations school has hosted him as a keynote speaker. During an appearance on the state TV channel Rossiya, the station cut between his comments and TV footage of lines at soup kitchens and crowds of homeless people in the U.S. The professor has also been featured on the Kremlin's English-language propaganda channel, Russia Today.

Mr. Panarin's apocalyptic vision "reflects a very pronounced degree of anti-Americanism in Russia today," says Vladimir Pozner, a prominent TV journalist in Russia. "It's much stronger than it was in the Soviet Union."

Mr. Pozner and other Russian commentators and experts on the U.S. dismiss Mr. Panarin's predictions. "Crazy ideas are not usually discussed by serious people," says Sergei Rogov, director of the government-run Institute for U.S. and Canadian Studies, who thinks Mr. Panarin's theories don't hold water.

Mr. Panarin's résumé includes many years in the Soviet KGB, an experience shared by other top Russian officials. His office, in downtown Moscow, shows his national pride, with pennants on the wall bearing the emblem of the FSB, the KGB's successor agency. It is also full of statuettes of eagles; a double-headed eagle was the symbol of czarist Russia.

The professor says he began his career in the KGB in 1976. In post-Soviet Russia, he got a doctorate in political science, studied U.S. economics, and worked for FAPSI, then the Russian equivalent of the U.S. National Security Agency. He says he did strategy forecasts for then-President Boris Yeltsin, adding that the details are "classified."

In September 1998, he attended a conference in Linz, Austria, devoted to information warfare, the use of data to get an edge over a rival. It was there, in front of 400 fellow delegates, that he first presented his theory about the collapse of the U.S. in 2010.

"When I pushed the button on my computer and the map of the United States disintegrated, hundreds of people cried out in surprise," he remembers. He says most in the audience were skeptical. "They didn't believe me."

At the end of the presentation, he says many delegates asked him to autograph copies of the map showing a dismembered U.S.

He based the forecast on classified data supplied to him by FAPSI analysts, he says. He predicts that economic, financial and demographic trends will provoke a political and social crisis in the U.S. When the going gets tough, he says, wealthier states will withhold funds from the federal government and effectively secede from the union. Social unrest up to and including a civil war will follow. The U.S. will then split along ethnic lines, and foreign powers will move in.

California will form the nucleus of what he calls "The Californian Republic," and will be part of China or under Chinese influence. Texas will be the heart of "The Texas Republic," a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an "Atlantic America" that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls "The Central North American Republic." Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.

"It would be reasonable for Russia to lay claim to Alaska; it was part of the Russian Empire for a long time." A framed satellite image of the Bering Strait that separates Alaska from Russia like a thread hangs from his office wall. "It's not there for no reason," he says with a sly grin.

Interest in his forecast revived this fall when he published an article in Izvestia, one of Russia's biggest national dailies. In it, he reiterated his theory, called U.S. foreign debt "a pyramid scheme," and predicted China and Russia would usurp Washington's role as a global financial regulator.

Americans hope President-elect Barack Obama "can work miracles," he wrote. "But when spring comes, it will be clear that there are no miracles."

The article prompted a question about the White House's reaction to Prof. Panarin's forecast at a December news conference. "I'll have to decline to comment," spokeswoman Dana Perino said amid much laughter.

For Prof. Panarin, Ms. Perino's response was significant. "The way the answer was phrased was an indication that my views are being listened to very carefully," he says.

The professor says he's convinced that people are taking his theory more seriously. People like him have forecast similar cataclysms before, he says, and been right. He cites French political scientist Emmanuel Todd. Mr. Todd is famous for having rightly forecast the demise of the Soviet Union -- 15 years beforehand. "When he forecast the collapse of the Soviet Union in 1976, people laughed at him," says Prof. Panarin.
[Igor Panarin]

Write to Andrew Osborn at

DECEMBER 30, 2008

UBP Scrambles to Explain Madoff Ties

LONDON -- As investors around the world size up losses on Bernard Madoff's alleged Ponzi scheme, one purveyor of investment services to the world's wealthy -- Swiss private bank Union Bancaire Privée -- is scrambling to explain its ties to the New York financier.

Half of UBP's 22 funds of funds, which channeled clients' money into other hedge funds, put at least some of that money into Madoff-related investment vehicles, including one run by J. Ezra Merkin, chairman of car-loan company GMAC LLC, according to a recent letter from the bank to investors. At the same time, UBP provided an array of services such as investment advice and loans to a division of Fairfield Greenwich Group, a New York firm that funneled investors' money into Madoff funds. Some outside fund managers also looked to UBP, which said it had about $700 million in Madoff-related investments through its funds of funds and client portfolios, in making their own investments.
[A fund run by J. Ezra Merkin, right, was an intermediary through which UBP funds gained exposure to Bernard Madoff. Mr. Merkin is seen with Ariel Sharon, left, and Ehud Olmert, center, in this 2006 photo in Jerusalem. The Union Bancaire Privée building is pictured in inset.] Associated Press; Reuters (inset)

A fund run by J. Ezra Merkin, right, was an intermediary through which UBP funds gained exposure to Bernard Madoff. Mr. Merkin is seen with Ariel Sharon, left, and Ehud Olmert, center, in this 2006 photo in Jerusalem. The Union Bancaire Privée building is pictured in inset.

The potential losses to clients of the Geneva bank shed a light on the discreet world of Swiss private banking. In return for hefty fees, private banks provided wealthy individuals with what were supposed to be superior investment advice and services. Now, the extent of the banks' investments and involvement with Madoff-related funds is raising questions about the value of those services.

UBP stands out, in part, because it is one of the world's largest managers of funds of funds. As of June, it managed some $124.5 billion.

In a Dec. 17 letter to investors, UBP said that it is a victim of a "massive fraud." In the six-page letter, UBP said it had met with Mr. Madoff and various principals several times at Mr. Madoff's offices, including twice in the past year as part of an ongoing vetting process. The most recent meeting was Nov. 25, according to UBP.

In the letter, UBP said it had reservations about the way Mr. Madoff ran his investment firm, particularly the lack of an outside administrator and custodian, which would have provided an added degree of certainty that the investments Mr. Madoff claimed to have made were real. But UBP said it overcame those concerns because of Mr. Madoff's firm's status as a "reputable" broker-dealer that was registered with the Securities and Exchange Commission, as well as Mr. Madoff's "longstanding reputation in building Wall Street's financial markets infrastructure," in part, as a former chairman of the Nasdaq Stock Market.

UBP's own reputation made it something of a beacon for other money managers, some of whom relied on the bank for custodial services, which entailed the bank holding shares in other funds on their behalf. One UBP custodial client, Roland Priborsky, the chief of Swiss money manager Genium Advisors, said he became comfortable with his investments in Fairfield Sentry Ltd., one of the main channels for investments in Mr. Madoff's funds, in part, because it was included in a list of funds on which UBP said it had done due diligence.

Genium doesn't have the capacity to "run around the world" to investigate fund investments, said Mr. Priborsky, who put nearly 6.7% of his €3 million ($4.2 million) fund in Fairfield Sentry. "Genium relied on the due diligence of UBP because UBP is one of the major players in the alternative investment universe and has strong manpower and vast experience in conducting due diligence on hedge funds," he said. A UBP spokesman declined to comment.

UBP had close ties with Fairfield Greenwich, the firm that ran Fairfield Sentry and other funds of funds. According to UBP, it provided advisory services to the management company of Fairfield's fund-of-funds division. UBP lent money to the Fairfield division and provided custodial services. Michael de Picciotto, nephew of UBP's founder and head of UBP's London office, also is a friend of Andres Piedrahita, a top Fairfield fund-raiser in Europe and son-in-law of Fairfield head Walter Noel.

UBP has said it had no management role at Fairfield. Fairfield declined to comment on its relationship with UBP. A UBP spokesman declined to comment on the size of the fees the bank made from the arrangements.

UBP's principal fund, Dinvest Total Return, had about 3% of its more than $1 billion of assets invested in Madoff-related funds, according to the investor letter.

The UBP funds gained exposure to Mr. Madoff through at least four intermediaries, including Fairfield Sentry. The other intermediaries were Ascot Fund Ltd., run by Mr. Merkin of GMAC; and Kingate Global Fund Ltd., run by FIM Advisers LLP of London. UBP also invested through M-Invest Ltd., a Cayman Islands vehicle the bank created. A spokesman for Mr. Merkin declined to comment on Ascot's investors. A Kingate representative couldn't be reached.

Write to Cassell Bryan-Low at and Carrick Mollenkamp at

Die Weltwoche    30.Dezember 2008

Madoff; Der Milliardendieb war auch Kassenwart.
Unser Bundesrat in Brüssel. Werte 2009.
Von Roger Köppel

Anzeige Der Fall des vornehmen Finanzverbrechers Bernard L. Madoff wächst sich zum grössten Anlagebetrug in der Geschichte aus. Der bis zuletzt hochangesehene Milliardengauner zimmerte während zweier Jahrzehnten ein an albanische Geldpyramiden erinnerndes Ponzi-Schneeballschema und vernichtete rund 50 Milliarden Dollar. Die besten Banken der Welt gehörten zu seinen Kunden. Hochdekorierte Vermögensverwalter aus der Schweiz hielten dem Grossbetrüger ahnungslos ihre Millionen zu. Madoff spendete für Hochschulen und wohltätige Zwecke. Zahlreiche Politiker dankten ihm für seine grosszügigen Parteispenden. Zugleich sass der Betrüger in den Aufsichtsgremien, die ihn erfolglos beaufsichtigten. Der Dieb war gleichzeitig Kassenwart.

Der Fall ist ein Romanstoff, aber auch ein Lehrstück. Madoff war der definitive Globalschurke im Tarnkleid des onkelhaften Ehrenmanns. Der deutsche Immobilienhochstapler Jürgen Schneider vertraute nach eigenen Angaben auf perfekte Anzüge, ein Toupet und die stets makellose Ledermappe, um die Investoren zu narren. Madoff täuschte die Stars der Investmentbranche und die amerikanische Börsenaufsicht und die renommiertesten Revisionsgesellschaften, indem er seine Kunden seigneural nur in den besten Klubs und auf Empfehlung rekrutierte.
Man sah es ihm sogar nach, dass er seine Bücher von einer obskuren kleinen Revisionsgesellschaft prüfen liess. Niemand durchschaute die Praktiken des begabten Scharlatans, als er das Vertrauen seiner jüdischen Glaubensgenossen in Stiftungen und Wohltätigkeitsfonds jahrelang aufs Übelste missbrauchte. Den Kontrolleuren fiel nichts auf. Madoffs glanzvolle Scheinkonstrukte seien immer buchstabengetreu überprüft, nach Massgabe der Gesetze überwacht worden.
Hier liegt die eigentliche Pointe des Skandals: Kein Finanzplatz ist stärker reguliert als der amerikanische. Keine andere Wirtschaft unterliegt mehr staatlichen Kontrollen. Dass es trotzdem zum massivsten Finanzverbrechen der neueren Wirtschaftsgeschichte kam, zeigt anschaulich, dass die Hoffnung auf die segensreiche Kraft von immer noch mehr Gesetzen und Reglementierungen trügerisch, ja schädlich ist. Madoffs Fall macht deutlich, dass Betrüger unter Umständen von den Auflagen profitieren, durch die sie eigentlich verhindert werden sollten. Je dichter die Regulierungen, desto kleiner die Schlupflöcher. Das ist die Lehre dieses tragikomischen Jahrhundertfalls: Man sah vor lauter Paragrafen den offensichtlichen Betrug nicht mehr.

Der bundesrätliche Ausflug nach Brüssel zur Schlichtung des Steuerstreits wird allseits als vernünftig gelobt. Die Süddeutsche Zeitung spricht von einem cleveren Schachzug unseres Finanzministers. Der Tages-Anzeiger gibt zu, der Druck aus Brüssel sei zwar nicht gerechtfertigt, aber das Entgegenkommen der Schweiz dennoch richtig. Bundesrat Hans-Rudolf Merz stellte dem EU-Kommissionspräsidenten Barroso offenbar in Aussicht, 10 000 Schweizer Briefkastenfirmen verbieten zu wollen. Der gleiche Magistrat, der noch vor wenigen Jahren unmissverständlich erklärt hatte, es gebe «keine Verhandlungen mit der EU», steigt jetzt nicht nur in Verhandlungen mit Brüssel ein, er bietet darüber hinaus auch von sich aus eine für die Schweiz eher nachteilige Massnahme an, nur um den Druck zu lindern, den sogar der Tages-Anzeiger für nicht gerechtfertigt hält. Merz wackelt. Er hat nicht Wort gehalten.

Natürlich kann man darüber streiten, ob es im Konflikt mit der EU nicht besser ist, manchmal massvoll nachzugeben, statt auf Konfrontation zu setzen. Selbstverständlich hat die Schweiz als kleines Land ein legitimes Interesse daran, seine Nachbarn nicht unnötig zu provozieren. Dennoch ergeben sich mit Blick auf die Merz-Vorlage Fragezeichen. Erstens: Warum wurde der Bundesrat überhaupt von sich aus aktiv? Die rechtliche Grundlage der EU-Kritik am Schweizer Steuersystem gilt parteiübergreifend als dünn bis absurd. Der musterschülerhafte Finanzminister will es Europa mehr als recht machen. Zweitens: Warum sollen bestimmte Firmentypen verboten werden, nur weil es der EU nicht passt, wenn unsere Kantone aufgrund demokratischer Entscheide in- und ausländische Holdinggesellschaften unterschiedlich besteuern? Auf dem Tisch liegt, wenn man schon einknicken will, ein viel besserer Plan. SVP-Nationalrat Spuhler lancierte einen parlamentarischen Vorstoss mit dem Ziel, in- und ausländische Holdings gleich zu besteuern, allerdings auf tiefem Niveau. Damit wäre der EU der Wind aus den Segeln genommen, denn sie stört sich vor allem daran, dass ausländische Holdings in gewissen Kantonen steuerlich bevorteilt werden. Bundesrat Merz spielte mit einer ähnlichen Idee, aber er fürchtete den Druck der kantonalen Finanzdirektoren, die wegen drohender Einnahmeausfälle Alarm schlugen.
Die Beispiele belegen: Das bundesrätliche Einlenken ist weder besonders smart noch besonders mutig. Die Brüssel-Reise unserer Regierung nährt eher den Verdacht, dass es nach aussen wie nach innen an der Kraft fehlt, einem ungerechtfertigten Angriff auf steuerliche Souveränitätsrechte unseres Landes entgegenzutreten. Es zeichnet sich ab, was in diesem Editorial schon vor Monaten als Gefahr geschildert wurde: Finanzminister Merz geht von einer falschen Voraussetzung aus. Wie er in einer seiner Reden im Sommer erklärte, glaubt er nicht mehr daran, dass die Schweiz ihr Steuersystem «ohne internationale Akzeptanz» aufrechterhalten kann. Wenn er die Akzeptanz herstellen will, indem er vorauseilend den schweizerischen Steuerstandort schwächt, begibt er sich auf einen Irrweg.

Die Wirtschaftskrise fördert den staatlichen Aktivismus. Deutschland, Frankreich, England und die USA bauen gewaltige Konjunkturankurbelungsprogramme. Wenn die Leute aus Angst sparen, soll wenigstens der öffentliche Sektor Geld ausgeben. Ist dieser Gedanke, der in zahllosen Tischgesprächen wiederholt wird, richtig? Nein. Auch in Krisenzeiten gelten liberale Einsichten. Wenn es schlecht läuft, müssen die Bürger gestärkt werden, nicht die Staaten. Steuersenkungen sind bessere Konjunkturprogramme als Subventionen. Die Leute haben ein besseres Gespür als staatliche Organe, wann und wie sie ihr Geld investieren sollen. Indem man ihnen mehr übriglässt, entstehen bessere Voraussetzungen für den Aufschwung. Eigenverantwortung und Freiheit bleiben die wichtigsten Grundwerte im nächsten Jahr, gerade weil sie in der Krise nicht beachtet werden.    December 31, 2008

Madoff Hits Feeder Funds, Auditors
by Jane Bryant Quinn

(Corrects name of Madoff firm in 2nd paragraph, location of professor in 9th paragraph, name of accounting group in 15th paragraph.)

Dec. 31 (Bloomberg) -- When you invest in a fund of hedge funds, or a partnership that promises to find top managers for your money, you get an annual Independent Auditor’s Report. But what does that report actually show? Not much, as investors in Ascot Partners, Gabriel Capital, Fairfield Sentry,  Tremont Group Holdings and other Madoff feeder funds learned to their loss.

Major accounting firms such as BDO Seidman, KPMG, McGladrey & Pullen and PricewaterhouseCoopers audited the statements of the various funds that fed money to Bernard L. Madoff Investments. The firms told their investors that everything was A-OK.

Then Madoff was arrested for allegedly running a $50 billion Ponzi scheme, and investors got the devastating phone call: Oops, disregard previous statements. Sorry about that.

The question for investors is, are the auditors legally liable for their mistake?

As a general rule, auditors don’t dig deeply into partnerships that farm out money for others to invest. They look only at the top layer -- that is, the partnership itself. Madoff sent audited reports to Ascot and the other feeder funds, which incorporated them into the statements sent to investors. The  funds’ own auditors checked that the numbers added up. Period. End of story.

To underline the limits of those responsibilities, BDO’s March 17, 2008, audit of Ascot said that it expresses no opinion on the “effectiveness of the partnership’s internal control over financial reporting.” I’ll say.

Auditor Sued

An enraged New York Law School, which allegedly lost $3 million, filed a class action lawsuit against BDO, as well as against Ascot Partners and its general partner, Ezra Merkin, chairman of GMAC LLC. The complaint charges that BDO ignored “red flags” that should have pointed to problems with the  Madoff audit.

BDO responded aggressively, saying that the plaintiffs “seek to blame others for their own investment decisions.” It calls the charges “unfounded” and says that its audits followed “all professional standards.”

Accounting Professor Edward Ketz of Penn State University in State College, Pennsylvania, thinks that including BDO in the lawsuit is a stretch. “Accountants are entitled to rely on the audit reports of others,” he says. He likens it to being in a mutual fund that invests in Microsoft. The auditor checks the  mutual fund’s reports but doesn’t investigate the accuracy of Microsoft’s books.

Question of Qualifications

All that’s true, says Lynn Turner, former chief accountant of the Securities and Exchange Commission, but with a proviso: “You have to assure yourself that the other auditor was qualified.”

That’s a tiny ray of light for the plaintiffs. Should BDO have asked questions about Friehling & Horowitz of New City, New York, the unknown firm that signed off on Madoff’s books? It was a one-accountant shop, with no other known audit clients, keeping track of what was supposedly a complex $17  billion dollar business.

“You have to ask, does the scale or expertise of the auditor call into question whether the audit can be relied on?” says Charles Mulford, accounting professor at the Georgia Institute of Technology in Atlanta. “That’s going to be a question for the courts.”

It’s a question for the accounting profession, too, which has probably been too complacent about third-party audits. Since Enron, federal standards have existed for firms that audit public companies but not for smaller firms. They fall under state jurisdiction.

Plugging the Gap

Until three weeks ago, New York was one of only six states that let auditors practice without undergoing peer review. After Bernie, New York hastily plugged that gap. Peer review is an independent check on an auditor’s quality controls.

Even if New York’s law had been in place, however, it wouldn’t have helped Madoff’s investors. The new law exempts firms with two or fewer accountants, such as Friehling & Horowitz. What’s more, for the past 15 years, David Friehling has claimed not to do audits, on an annual form he’s required to  file by the American Institute of Certified Public Accountants.

Friehling hasn’t been heard from yet. His phones aren’t being answered and his office is reportedly for rent. As Madoff’s auditor, his job was to obtain objective information, through a clearing house or stock-transfer agent, to support the accuracy of the accounts. But Madoff was his own custodian and  cleared his own trades, so all reports led back to Bernie’s now- infamous 17th floor.

Significant Case

For investors, the case against BDO -- as well as future cases against other big-name auditors -- is significant. It either didn’t occur to them to wonder about the Friehling firm or else they checked and Friehling passed. If the court concludes that that satisfied the law, then the law needs to be re- addressed.

After Enron and the failure of its accounting firm, Arthur Andersen LLP, the Public Company Accounting Oversight Board was born. The big firms grumble about the new rules, but they’ve forced a higher standard of care. Turner thinks that auditors for private firms should be brought under mandatory  oversight, too.

There are two takeaways from this sad story:

First, when you put money under management, you should always write the check to a third-party, independent custodian, such as Schwab or TD Ameritrade, not to the manager’s own firm. An independent custodian lets the manager trade but prevents him or her from taking money out of the account.  All withdrawals go to you.

Second, feeder funds are a racket. They collect the money, extract a large fee, and pass it on to another manager who does the work. By the time both levels of fees are paid, your principal probably will decline, even if the fund itself makes gains. The general partners in feeder funds have only one job: to  be rich, mingle with the rich, and make the rich want to surrender their money, at any price. Not bad work, if you can get it.

(Jane Bryant Quinn, a leading personal finance writer and author of “Smart and Simple Financial Strategies for Busy People,” is a Bloomberg News columnist. She is a director of Bloomberg LP, parent of Bloomberg News. The opinions expressed are her own.)

To contact the writer of this column: Jane Bryant Quinn in New York at

Washington Post    January 3, 2009

A Disintegrating U.S.? Critics Come Unglued
Russian's Prediction Spurs Celebrity, Scorn
By Joel Garreau

For seriously predicting that the United States will break into six parts in June or July of 2010, Igor Panarin has suddenly become a Russian state-media celebrity. Hardly a day goes by without another interview or two for the KGB-trained, Kremlin-backed senior analyst. The clamor in Russia for his ideas is growing, he says.

Panarin's disintegration divination comes complete with a map. In it, Alaska goes to Russia. Hawaii goes to Japan or China. "The California Republic" -- the West from Utah and Arizona to the Pacific -- goes to China. "The Texas Republic" -- the South from New Mexico to Florida -- goes to Mexico. "Atlantic America" -- the Northeast from Tennessee and South Carolina up to Maine -- joins the European Union. And "The Central North-American Republic" -- the Plains from Ohio to Montana -- goes to Canada.

Few Americans paid any attention to his novel views until this week, when the Wall Street Journal trumpeted them on Page 1. Within hours, the U.S. media began the counterattack.

This is preposterous, Time magazine said in a blog.

"The man knows nothing at all about American regional differences," wrote Justin Fox, Time's business and economics columnist. South Carolina is like Massachusetts? Tennessee will join with France? Idaho will find something to love about California? Wyoming will snuggle up to Ottawa? Alabama will happily report to Mexico City? "Yeah, right!" Fox wrote. "Has this man ever been to the United States? Has he never even heard of 'The Nine Nations of North America'? Igor, do your homework!"

Ahem, yes, that 1981 "Nine Nations" book I myself wrote. Well, I was young. I needed the money.

The regional bloggers who find it useful to view the continent functioning as if it were nine separate economies or distinct cultures that pay little regard to state or national boundaries have been loudly a-chirp about Panarin for a while.

Their complaints are similar to Time's. They're not so concerned about some Russkie anticipating American disunion, devolution, revolution, fratricide and overthrow of the government. What the hey, we celebrate those every Fourth of July. Never uncommon in North America is the geopolitical urge to take a walk for a pack of cigarettes. At any given time, there are as many as a dozen secession movements ongoing. The one getting the most press currently is the Second Vermont Republic.

Such unhappy places usually want to secede because they are marginal, cheated, powerless, sparsely populated areas neglected by the big urban centers that control powerful states. The reason their secession movements are thoroughly ignored is that they are marginal, cheated, powerless, sparsely populated areas neglected by the big urban centers that control powerful states.

The regionalists' problem with Panarin is that he couldn't be more clueless about where the real fault lines of culture and values are.

Las Vegas beats with the same heart as Portland, Ore.? Detroit is the soul mate of Bozeman, Mont.?

Good Lord, Richmond is the same place as Fairfax?

One possible explanation for how Panarin's hypothesis is being eagerly lapped up in Russia is that the Kremlin is projecting its own insecurities onto the United States.

"What may be clouding Mr. Panarin's crystal ball is the mistaken belief that U.S. citizens view themselves in the same way that residents of the old Soviet Union viewed that state," e-mails Thomas J. Baerwald, an investigator in a project called "Beyond Borders" and past president of the Association of American Geographers.

Just before the breakup of the Soviet Union, four Soviet and five American geographers started "Beyond Borders" to map within the Soviet empire the human values that endure -- those that have taken centuries to produce and are not likely to change precipitously. Their approach was based on the idea that all countries have underlying patterns of pasts, futures, loyalties, industries, climates, resources and politics. These functional cultural regions, in turn, frequently are far more significant than the arbitrary boundaries and surveyors' mistakes that usually make up politically defined borders.

To take one former Soviet example: The European gateway of St. Petersburg, across from Scandinavia, is profoundly different from all those Muslim "-stans" north and east of Iran, from Uzbekistan to Kyrgyzstan, that declared their independence from the Soviet Union the first chance they got.

Those departures still burn some Russians who hate the loss of empire. Perhaps they would like to shed crocodile tears at the idea that history might repeat itself near the U.S.-Mexico border.

When the Soviet Union broke apart, 14 independent countries emerged in addition to Russia. Quite a few of them instantly and desperately turned to Europe for their futures, including Latvia, Lithuania, Estonia, Georgia, Armenia and Ukraine -- not to mention all those Warsaw Pact places from Poland to the late Czechoslovakia. Might it warm a few cockles in Moscow to think that Virginia, Maryland, New Jersey or New Hampshire could go the same way?

Oh, and be still my Kremlin heart: those shooting wars in the Caucuses, in Chechnya and Georgia? If only those would erupt in the Rockies!

"I really see Panarin's argument as Russia looking in the mirror and projecting that onto the United States. 'Here they speak Spanish. Of course this can't hold together. Of course this will fall apart when the economy tanks,' " says Kathleen Braden of Seattle Pacific University, another member of the "Beyond Borders" team.

"The Russian mentality is, 'There are ethnic borders, and they won't go away. The only thing that keeps this melting pot together is money.' There's also a sense of 'Our empire broke up; why shouldn't theirs?' "

"We constantly were corrected when we tried to use the term 'Soviets' as a catch-all phrase for residents of the U.S.S.R.," Baerwald says. "People firmly told us that they were Russians or Lithuanians or Estonians or Ukrainians or other terms that identified a region or subregion that described their own geographical identity. In contrast, if you ask U.S. residents what term describes who they are, an enormous majority will reply 'I am an American.' Even in those places where regional loyalties are especially strong, such as Texas, loyalties to the U.S. are far greater than they are to states or regions.

"I suspect this would be true even had the U.S. not had the powerful reinforcement of national identity that followed in the wake of 9/11. But one can compare the way that U.S. citizens have dealt with the Iraqi war in comparison with the way the nation was torn by an equally unpopular war in Vietnam four decades earlier, and sense that there is a very strong belief among a very large percentage of Americans that while we may have problems and differences, the best way to attain a positive future is to remain solid as a united nation."

We can hope that Igor Panarin is offered the opportunity for a long road trip in these parts, either before or after his 2010 deadline for the end of the federal empire.

Perhaps he would discover what the acutely perceptive Frenchman Alexis de Tocqueville did in the 1830s, as he wrote in "Democracy in America": that we Americans are an extravagantly creative people in how we generate social forms.

"Americans of all ages, all stations of life, and all types of disposition are forever forming associations," he wrote. "In democratic countries, knowledge of how to combine is the mother of all other forms of knowledge; on its progress depends that of all the others."

Indeed, Tocqueville noted, community here was rarely the same thing as formal government.

I have never thought that North America is flying apart, or that it should. But I once talked with someone who did: Archie Green, a University of Texas professor, folklorist and regionalist.

What he liked about the observation that North America was made up of quite real, tangible and long-lived civilizations such as the breadbasket or the Pacific Northwest is that if Washington, D.C., were to slide into the Potomac tomorrow under the weight of its many burdens and crises, the result would be okay. The future would not be chaos; it would be a shift. North America would not suddenly become a strange and alien world. It would be a collection of healthy, powerful constituent parts -- for example, Dixie -- that we've known all our lives.

Green saw this as a resilient response of a tough people reaffirming their self-reliance. It's not that social contracts are dissolving; it's that new ones are being born.

Check it out, Igor. In addition to the Mississippi Delta not being Belarus, you might find these real places nothing like your imagination.

Washington Post    January 6, 2009

Grandiosity: Fraud's Perfect Cloak
By Allan Sloan

Yes, there really are times when life imitates art. A case in point: the Bernie Madoff scandal, in which the disgraced investor bears a startling resemblance to Zero Mostel's sleazy theater promoter in one of my favorite flicks, "The Producers."

What do the real-life Madoff's alleged actions and the scheme of Mostel's fictional Max Bialystock have in common? They used the same principles to pull off a big-time financial fraud. These are: If you're going to steal, steal big. If you're going to cook the books, make up numbers of your own -- don't try  to doctor the real ones. And, finally, if you're going to fleece people, turn down enough potential investors so that those whose money you take feel so honored that they don't do basic homework to find out about you.

No, I'm not making light of what Madoff said he did, which has ruined the lives of people who went to sleep feeling rich and woke up poor, and which has devastated worthy charities.

I'm just trying to show you how the world works, and why we see the same things, year after year, decade after decade, with frauds like Madoff and the Bayou hedge funds and other, less-famous sleazoids.

How could the Securities and Exchange Commission, which admits it had gotten tips about Madoff for years, bring some penny-ante insider-trading claim against Dallas Mavericks owner Mark Cuban while failing to see that Madoff was ripping off billions from the likes of Elie Wiesel's foundation?

Not to prejudge the SEC's investigation of itself, but I'll bet the answer will turn out to be that things have always been this way and probably always will be. If commission enforcers get a bigger budget and are treated with respect rather than being dissed (including, I'll bet, by some of Madoff's victims) as  an obstacle to free markets, things may improve. But don't expect a fraud-free era to ensue.

I'm saying this not out of cynicism but because I know how regulators generally work. I've seen it for years, in fields ranging from department stores to oil-drilling partnerships. You're likely to get caught if you run a few inches outside the baseline, because regulators are set up to catch that. But run so far  out that you're playing on a whole different ballfield? You can get away with that if you're enough of a financiopath, and your luck holds.

Take the mutual fund "market timing" scandal kicked over by Eliot Spitzer back when he was New York's respected attorney general. As you may recall, many foreign stock mutual funds -- which, like all mutual funds, are regulated up the wazoo by the SEC -- were allowing hedge funds to do quick trades  that ripped off the funds' long-term investors by diverting profits from them to the hedgies. (This really should have been called "skimming," but that's another story.)

Spitzer's folks got tipped to this game by an informant -- but it turned out there had been plenty of hints, such as hedge funds telling clients about their "timing" activities. The reason the SEC didn't find this during its routine audits was that it wasn't looking for it. Who'd have thought that funds would be  so stupid as to risk their most valuable asset -- their reputation -- for the relative crumbs the hedge funds threw them?

No one picked up on our fictional friend Max Bialystock because he made up a fraud from whole cloth -- he sold investors way more than 25,000 percent of a ghastly, tasteless musical, "Springtime for Hitler," that was designed to fail and let him keep the money, but became a huge hit.

Like Madoff, Bialystock didn't have enough money to pay off investors who wanted their dough. Both scamsters also generated an aura of exclusivity by not taking money from just anyone. "It's due diligence by crowd, and it doesn't work," says Jim Mintz, whose Mintz Group specializes in background  checks.

There's a big move on for the SEC to regulate hedge funds. It's a worthy idea. But trust me. If a big fund is engaged in a big fraud, the SEC's unlikely to find it without an outside tip. Or maybe even with one. That's how things worked with Madoff. And how they work in the real world. And how they'll  probably always work.

Allan Sloan is Fortune magazine's senior editor at large. His e-mail address is

JANUARY 7, 2009

Mad Men

    Feeder funds appear to explain the Ponzi longevity of money manager Bernie Madoff. To pay off early investors, mostly family and business connections in New York, he stuck his siphon into the moneyed worlds of Western Europe, Palm Beach and Hollywood. The biggest of these feeder funds appears to be the now famous Fairfield Greenwich Group, operated by Walter Noel with help from Colombian toff Andres Piedrahita, who prospected among the watering holes of London and Madrid. Another was Access International, run by an unfortunate Frenchman who killed himself.
    That their proprietors weren't aware they were servicing a Ponzi scheme is plausible -- because they had money invested with Mr. Madoff too. Yet this may be a conclusion too far. A Ponzi scheme can be profitable for its "investors," and having their own money hostage would have been a fitting incentive for the feeder's role of pulling in new funds to keep the scheme going.
    Inasmuch as they were essentially extracting fees simply for placing their clients' money with Mr. Madoff, who extracted no fees, they'd have every reason to puzzle out exactly what it was Mr. Madoff was allowing them to be paid so handsomely to do.
    But here is the most interesting question. Mr. Madoff gained access to billions through the feeder funds, allowing two possibilities: A pile of money exists somewhere, and Mr. Madoff knows where, as do others. His spontaneous confession to his sons, and their prompt move to inform authorities, along with the pretense that Mr. Madoff acted alone, may have been one giant theatrical confection.
    Or -- the other, more likely, possibility -- the many billions raised by feeder funds were paid out as fat profits to investors, such that hundreds of Madoff clients lived very well off the Madoff scam for decades.
    Under the law, you can enter a Ponzi scheme through lack of diligence, but you can't exit through proper diligence. If you leave because you smell a rat, you are complicit. Mr. Madoff may have gone on for 40 years, and one suspects a certain folk knowledge existed among many participants that something was not quite right (which is not the same as deciding not to participate).
    Indeed, a continuum of complicity will likely be found, extending from the truly duped to the not-so-duped. A place to start applying the screws would be Frank Avellino and Michael Bienes, the two accountants hauled before the SEC in 1992 for illegally raising $440 million for Mr. Madoff. In the most eye-popping of its missed opportunities, the agency never ventured to look directly at Mr. Madoff's books after he somehow coughed up cash to pay back Messrs. Avellino and Bienes's clients.
    That said, Mr. Madoff was not running a public company or a Fidelity mutual fund or an FDIC-insured bank. His rarefied customers chose not to afford themselves the checks and balances of institutionalized finance that, while no guarantee against loss or fraud, engage and incentivize many watchful eyes.
    Journalism follows its own well-trod folkways, of course, and some now insist on trying to make Mr. Madoff symbolic of all that's wrong with our financial system. Yes, the SEC could have done a better job, but policing side deals that rich investors make with money managers arguably is not central to its mission of ensuring fair and orderly markets. And the law is already well-equipped to clean up after fraud. Bankruptcy judges are versed in the peculiar justice of "fraudulent conveyance" that allows them to claw back Ponzi profits from some clients for the benefit of others. And tort lawyers and prosecutors will likely find it shooting fish in a barrel to hold various "advisers" liable for steering clients into the Madoff scam.
    In no book of wise investing, however, is it written: "Entrust all your money to a magical figure who claims to produce uncannily consistent profits by means he refuses to explain." Nor is it written: "Pay princely commissions to any perfumed popinjay who can open the door to this mystical kingdom."
Barney Frank didn't help by fibrillating on Monday that investors everywhere would be afraid to invest after Mr. Madoff. Mr. Frank would have done better to emphasize the many ways a recognized mutual fund, and even most hedge funds, are different from a Madoff scam, beginning with an independent custodian of the underlying assets.
    Better yet, Washington might spend its time profitably examining its own role in the recent housing blowout, which has destroyed more wealth than a hundred Madoffs, and about which Mr. Frank himself is an expert.

Financial Times    January 22 2009, 20:06

The right and wrong way to bail out the banking sector
By George Soros

According to reports in Washington, the Obama administration may be close to devoting as much as $100bn of the second tranche of the troubled asset relief programme funds to creating an “aggregator bank” that would remove toxic securities from the balance sheets of banks. The plan would be to leverage this amount up 10-fold, using the Federal Reserve’s balance sheet, so that the banking system could be relieved of up to $1,000bn (€770bn, £726bn) worth of bad assets.

Although the details have not yet been decided, this approach harks back to the approach originally taken – but eventually abandoned – by Hank Paulson, the former US Treasury secretary. The proposal suffers from the same shortcomings: the toxic securities are, by definition, hard to value. The introduction of a significant buyer will result, not in price discovery, but in price distortion.

Moreover, the securities are not homogeneous, which means that even an auction process would leave the aggregator bank with inferior assets through adverse selection. Even with artificially inflated prices, most banks could not afford to mark their remaining portfolios to market so they would have to be given some additional relief. The most likely solution is to “ring-fence” their portfolios, with the Federal Reserve absorbing losses that extend beyond certain limits.

These measures – if enacted – would provide artificial life support for the banks at considerable expense to the taxpayer, but would not put the banks in a position to resume lending at competitive rates. The banks would need fat margins and steep yield curves for a long time to rebuild their equity.

In my view, an equity injection scheme based on realistic valuations, followed by a cut in minimum capital requirements for banks, would be much more effective in restarting the economy. The downside is that it would require significantly more than $1,000bn of new capital. It would involve a good bank/bad bank solution, where appropriate. That would heavily dilute existing shareholders and risk putting the majority of bank equity into government hands.

The hard choice facing the Obama administration is between partially nationalising the banks, or leaving them in private hands but nationalising their toxic assets. Choosing the first course would inflict great pain on a broad segment of the population – not only on bank shareholders but also on the beneficiaries of pension funds. However, it would clear the air and restart the economy.

The latter course would avoid recognising and coming to terms with the painful economic realities, but it would put the banking system into the same quandary that proved the undoing of the government sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac. The public interest would dictate that the banks should resume lending on attractive terms. However, this lending would have to be enforced by government diktat because the self-interest of the banks would lead them to focus on preserving and rebuilding their own equity.

Political realities are pushing the Obama administration towards the latter course. It cannot go to Congress and ask for the authorisation to spend an additional $1,000bn on recapitalising the banks because Mr Paulson has poisoned the well in the way he demanded and then spent the money for Tarp. Even the second tranche of Tarp – the remaining $350bn – could only be pried loose by a congressional manoeuvre. That is what is leading the Obama administration to contemplate reserving up to $100bn of that tranche for the “aggregator bank” solution.

The stock market is pressing for an early decision by putting pressure on financial stocks. But the new team should avoid repeating the mistakes of the previous one and announcing a programme before it has been thoroughly thought out. The choice between the two courses is momentous; once made, it will become irreversible. It should be based on a careful evaluation of the alternatives.

President Barack Obama can fulfil his promise of a bold new approach only by establishing a discontinuity with the previous team. Congress and the public are right in feeling that too much has been done for the banks and not enough for beleaguered householders. The government ought to take the GSEs out of limbo and use them more actively to stabilise the housing market. Having done so, it could go back to Congress for authorisation to recapitalise the banking system the right way.

The writer is chairman of Soros Fund Management

Financial Times    January 25 2009, 18:34

Time to herald the Age of Responsibility
By Robert Zoellick

Historians have divided western history into epochs that represent the cultural, economic and political values of the time. Thus we have the Dark Ages, the Renaissance, the Reformation and the Age of Reason. How will the first half of the 21st century be defined? Will it be an Age of Reversal, as countries retreat into national solutions behind national borders, taking their memories of prosperity with them? Will it be an Age of Intolerance as immigrants and foreigners are blamed for rising unemployment? Or will it be simply The Decline, as stark as it is terse? It could and should be the Age of Responsibility, as President Barack Obama rightly identified. To make it so will require changed attitudes and co-operative policies in the US and around the world.

What might an Age of Responsibility look like? First, it would be an era of responsible globalisation, where inclusivity and sustainability take precedence over the enrichment of a few. That means a focus on creating growth that includes opportunities for the poor, technological development, microfinance and lending to small entrepreneurs, trade accords that benefit both sides and aid levels that are sufficient to meet the Millennium Development Goals. The first steps are completion of the Doha trade round and a renewed commitment to providing the aid that has been promised.

Second, it should be an era of responsible stewardship of the global environment. A climate change agreement at Copenhagen in December that cuts carbon emissions by using new technologies could pave the way.

Third, it would be an era of financial responsibility, both at the personal and systemic levels. This should begin with an agreement at the G20 summit of leading economies in London for governments to co-operate on fiscal expansion within a framework of budget discipline. They should also agree a plan that reopens credit markets, addresses bad loans so that banks can be recapitalised and shuns protectionism.

Fourth, it would be an era of responsible multilateralism where countries and institutions seek practical solutions to interdependent problems. Some examples would be an effort to strike agreements on humanitarian food supplies, energy prices or taxes that encourage investment in cleaner sources and conservation of energy.

Fifth, it would be an age of responsible stakeholders where participation in the international economy brings responsibilities as well as benefits. It would see the old G-clubs giving way to an expanded steering group grounded in the current economic realities. This group would be challenged to act together as well as talk together. Our Age of Responsibility must be a global not just a western one.

How we respond to the crisis over the next few months will set the course. As a first step, developed countries should agree to devote 0.7 per cent of their stimulus packages to a vulnerability fund to support the most needy in developing countries. The World Bank could manage the distribution of the cash with the United Nations and the regional development banks. We could use existing mechanisms to deliver the funds fast and flexibly, backed by monitoring and safeguards so the money is well spent.

Following last year’s food and fuel price shock, the financial crisis increases dangers for the poorest countries and people. Tight credit and a global recession are eroding government revenues and cutting their ability to meet education, health and gender goals. Remittances are slowing. Foreign and domestic investment is frozen. Trade is falling. Social unrest is rising. Estimates suggest a 1 per cent drop in developing country growth rates traps 20m more people in poverty. Already 100m have been driven into poverty as a result of last year’s dislocations.

Poor countries need three interventions: safety net programmes to help cushion the impact of the downturn on the poor; investment in infrastructure to build a foundation for productivity and growth while putting people to work; and finance for small and medium-sized enterprises to create jobs. Donors could customise contributions to the vulnerability fund to match their interests. This approach has worked well with recent Japanese and German support for the World Bank’s recapitalisation of banks in poor countries and the decision to provide interim financing for viable infrastructure projects that recently lost access to funding.

This plan is achievable. The UN target for aid is 0.7 per cent of an economy. A target of providing 0.7 per cent of each developed country’s stimulus package represents only a tiny fraction of the hundreds of billions devoted to bank bail-outs, yet it could make a significant difference to the hundreds of millions who are victims of a crisis not of their making. Most important, it would signal a commitment that the world is choosing to define, rather than be defined by, the crisis. International action or beggar-thy-neighbour policies? Age of Responsibility or Age of Reversal? The choice is clear.

The writer is president of the World Bank Group

Financial Times    January 26 2009, 19:46

To save the banks we must stand up to the bankers
By Peter Boone and Simon Johnson

If you hid the name of the country and just showed them the numbers, there is no doubt what old International Monetary Fund hands would say when confronted by the current situation of the US: nationalise the banking system. The government has already essentially guaranteed the system’s liabilities , bank assets at market value must be massively lower than liabilities and a severe global recession may yet turn into the Greatest Depression.

Nationalisation would simplify the job of cleaning up bank balance sheets, without which no amount of recapitalisation can make sense. An asset management company would be constructed for each nationalised bank, and loans and securities could be clearly divided into “definitely good” and “everything else”.

Good loans would go into a recapitalised bank, where the taxpayer would not only hold all the risk (as now) but also get all the upside. Careful disposal of bad assets would yield lower losses than feared, although the final net addition to government debt would no doubt be in the standard range for banking fiascos: between 10 and 20 per cent of gross domestic product.

As soon as you reveal that the country in question is the US, the advice has to change. First, nationalisation is an anathema in the US. Second, the government has no record of running successful business enterprises. Third, think about what would happen if the American political system got the bit of state-directed credit between its teeth, with all the lobbying that would entail. If you want to end up with the economy of Pakistan, the politics of Ukraine and the inflation rate of Zimbabwe, bank nationalisation is the way to go.

Yet no one other than the government is available to recapitalise the banking system. Without sufficient capital, lending cannot be stabilised and any incipient recovery will be strangled at birth. The problem is the scale of the recapitalisation needed to cover the real losses faced by banks. Additional capital is also needed to support the banks’ (and everyone else’s) desire for higher capitalisation in the future. With the world economy still deteriorating, we need even more capital as a cushion against the worst-case recession scenario. These are just the direct recapitalisation components. Asset management companies would have to pay cash for the distressed assets. Buying at current market prices should protect most of the taxpayer investment and is the only approach that will find political support.

The total of these figures suggests the government will need to come up with working capital in the region of $3,000bn-$4,000bn. If things go well, the losses to the taxpayer should be quite limited, with the final cost closer to $1,000bn (€766bn, £723bn). But this requires that the taxpayer gets enough upside participation. How is this possible without receiving common equity which, at today’s prices, would imply controlling stakes in the banks – that is, nationalisation? We could receive a large amount of non-voting stock, but a silent majority shareholder is an oxymoron who distorts the incentives of managers towards further bad behaviour.

The most politically robust solution is for the government to acquire not voting stock but warrants – the option to buy such stock. These warrants would convert to common stock when sold, and a Resolution Trust Corporation-type structure could manage the disposal of these controlling stakes into the hands of private equity investors. New owners would restructure bank operations, fire executives and break up the banks (particularly if some anti-trust provisions were added).

The sticking point will be banks refusing to sell assets at market value. The regulators need to apply without forbearance their existing rules and principles for the marking to market of all illiquid assets.

The law must be used against accountants and bank executives who deviate from the rules on capital requirements. This will concentrate the minds of our financial elite. Either they will raise capital privately or the government will provide, but this time on terms favourable to the taxpayer. The bankers’ lobby, of course, will protest loudly. Good thing we now have a US president who can stand up to it.

Peter Boone is chairman of Effective Intervention, a UK-based charity, and a research associate at The Centre for Economic Performance, London School of Economics. Simon Johnson, a former IMF chief economist, is a professor at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. They run

January 27, 2009

Money for Nothing

MERRILL LYNCH lost $27 billion last year, and yet still managed to rush through $4 billion worth of year-end bonuses in the days before it was taken over by Bank of America.

Because both companies have been the beneficiaries of the Treasury’s Troubled Asset Relief Program, news of these bonuses was met with predictable uproar: Attorney General Andrew Cuomo of New York threatened to investigate; any elected official with access to a microphone joined in a chorus of “shame on you”; and around every water cooler and on every cable channel, pundits offered up scathing commentaries of Wall Street greed.

Merrill Lynch is not the only irresponsible institution out there. Despite a year of record losses, despite all the taxpayer money being injected into our financial institutions, bonuses for 2008 were, in some cases, down less than 50 percent from those the previous year.

This is shocking, of course, but what’s been missed in these discussions is how completely the culture of executive compensation has permeated the financial industry. One need not even be an executive to receive a bonus far in excess of the yearly salary of people in most other professions.

Bonuses, which typically consist of some multiple of an employee’s base salary, are doled out to everyone from the 22-year-olds just out of college (these are called analysts) to managing directors (banker parlance for the most senior rank attainable).

I spent much of my early career at Merrill Lynch, and I can still remember how I yearned for the holiday season, because it signified bonus time. And by “bonus time,” I mean that brilliant 10-minute conversation during which you learned how many zeros would be on that year’s check.

The euphoria that followed justified the days on end of working into the wee hours, the months on end without a single day off, the never-ending “fire drills” — when a client wanted something and wanted it now, whether it was 7 p.m. or 7 a.m. — that kept the stress and adrenaline levels high.

For some, euphoria quickly gave way to anger and envy upon hearing what their colleagues got paid. Luckily for management and shareholders, that anger twisted itself into motivation to work even harder, get even less sleep and put up with even more in order to get a better bonus next year. For others, the days after bonus distribution were the perfect time to jump to another firm for more responsibility, authority and, no surprise, more money.

That’s not to say that bonuses are always bad. When I graduated from business school in early 2000 and returned to Wall Street, there was a war for talent raging. Without those bonuses, firms simply couldn’t attract the best and brightest and certainly couldn’t get 100-hour work weeks out of them. And when profit is created through ingenuity and hard work, it deserves to be rewarded handsomely — that is the American way.

But we’ve come to the end of outsized paper profits generated from proprietary trading operations and 30-to-1 leverage. So too has the war for talent waned. Firms are disappearing or laying off thousands. In this environment of bleak job prospects, investment bankers who got a smaller bonus in 2008 than they did in 2007 won’t be running for the exits and the greener pastures of Lehman or Bear Stearns.

Yet some institutions that begged for taxpayer aid to stave off bankruptcy — simply to stay alive — made 2008 compensation packages their first order of business after receiving their bailouts. This speaks to how completely foolhardy behavior has overtaken our industry. It certainly defies logic and sensible business practice. After all, it’s one thing to reap great rewards when creditors are being repaid and shareholders are earning a return; it’s quite another to reward failure almost as well.

Year-end bonuses also undermine the efforts of the troubled assets program. The whole point of the program was to bolster the equity capital bases of recipients. But any bonuses paid just reduce the earnings or increase the losses sustained by the firms paying them, which in turn decreases the equity capital base of those firms. Shareholders are justifiably angry and have plenty to sue about; the case could certainly be made that management and compensation committees ignored their fiduciary duty when 2008 bonuses were scheduled and paid.

Honestly, I’m not sure if I should be more offended as a taxpayer or as a shareholder of Merrill Lynch. I suppose there’s no difference nowadays, because we taxpayers are among the largest shareholders of many American financial institutions.

Regardless, financial institutions clearly relied on Uncle Sam’s largess when they agreed to authorize 2008 incentive compensation packages. Politicians will continue to wag their fingers at the greedy executives, but Washington’s actions enabled these bonuses to occur.

Without the United States government’s open wallet, after all, these teetering companies would have had to decide between offering healthy bonuses and complete insolvency.

Luckily for them — and most unhappily for us — it was a choice they never had to make.

Dave Krasne is a partner at a private equity firm.

January 28, 2009

Troubled Times Bring Mini-Madoffs to Light

Their names lack the Dickensian flair of Bernie Madoff, and the money they apparently stole from investors was a small fraction of the $50 billion that Mr. Madoff allegedly lost of his clients’ savings.

But the number of other people who have been caught running Ponzi schemes in recent weeks is adding up quickly, so much so that they have earned themselves a nickname: mini-Madoffs.

Some of these schemes have been operating for years, and others are of more recent vintage. But what is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about Mr. Madoff. That can scare off new clients and cause longtime investors to demand their money back, which brings the charade tumbling down.

“There is no way for a Ponzi to survive given the large number of redemptions and a lack of new investors,” said Stephen J. Obie, the head of enforcement at the Commodity Futures Trading Commission. The agency has experienced a doubling of reported leads to possible Ponzi schemes in the last year, and its enforcement caseload has risen this year.

On Monday, at a suburban New York train station, Nicholas Cosmo surrendered to federal authorities in connection with a suspected $380 million Ponzi scheme, in which investors paid a minimum of $20,000 for high-yield “private bridge” loans that he had arranged.

Mr. Cosmo promised returns of 48 percent to 80 percent a year, and none of his investors apparently minded — or knew — that Mr. Cosmo had already been imprisoned for securities fraud. In the end, 1,500 people gave him their money, often through brokers who worked on his behalf.

And in Florida, not far from the Palm Beach clubs where Mr. Madoff wooed some of his investors, George L. Theodule, a Haitian immigrant and professed “man of God,” promised churchgoers in a Haitian-American community that he could double their money within 90 days.

He accepted only cash, and despite the too-good-to-be-true sales pitch, he found plenty of investors willing to turn over tens of thousands of dollars.

“The offices were beautiful, and I was told it was a limited liability corporation,” said Reggie Roseme, a deliveryman in Wellington, Fla., who lost his entire savings of $35,000 and now faces foreclosure on his home.

According to federal regulators who have accused him of operating a Ponzi scheme, Mr. Theodule bilked thousands of investors of modest means, like Mr. Roseme, out of $23 million in all, and put $4 million in his own pocket. This money helped pay for two luxury vehicles for Mr. Theodule, a wedding, a lavish house in Georgia and a recent trip to Zurich that federal authorities are now investigating. The fate of the other $19 million is still unknown.

Investors in Idaho say they lost $100 million in a scheme that promised 25 percent to 40 percent annual returns. In Philadelphia, a failed computer salesman tried his hand at trading nonexistent futures contracts for 80 investors and surrendered to federal authorities this month after losing $50 million.

A Ponzi scheme in Atlanta that promised investor returns of 20 percent every month through something called “30-day currency trading contracts” was shut down this month after losing $25 million. And Tuesday, Arthur Nadel, a prominent money manager in Sarasota, Fla., and philanthropist turned himself in to the authorities. He had disappeared this month, just days before the Securities and Exchange Commission charged him in a $300 million investment fraud that may be a Ponzi scheme.

Investors in many of the schemes were told that their money would go into stocks, foreign currencies and other investments and earn above-average returns — a deception backed up with what appeared to be legitimate monthly statements and fancy offices. Now, Ponzi-related losses are adding up to hundreds of millions of dollars.

The S.E.C. does not keep statistics on Ponzi fraud, but it has brought cases involving losses of over $200 million since the beginning of October last year, including one against the disgraced Democratic donor Norman Hsu. Mr. Hsu was accused of using money from a $60 million Ponzi scheme to make campaign donations to leading candidates, including President Obama and Secretary of State Hillary Clinton. (Mr. Obama and Mrs. Clinton later donated the money to charities.)

Regulators, chastened by failing to uncover the Madoff scandal, are focusing more on such swindles. The Commodity Futures Trading Commission, for instance, has established a new Forex Enforcement Task Force to prosecute Ponzi cases in which investors were told their money was being invested in foreign currencies. In 2008, the agency prosecuted 15 Ponzi schemes and expects that number to increase this year.

Last Thursday, Senators Charles E. Schumer, Democrat of New York, and Richard Shelby, Republican of Alabama, who are both influential members of the Senate Banking Committee, introduced legislation to provide $110 million to hire 500 new F.B.I. agents, 50 new assistant United States attorneys and 100 new S.E.C. enforcement officials to crack down on such crimes.

“Ponzi schemes are against the law,” Mr. Schumer said in an interview. “But we have not had enough law enforcement officials. Madoff should have been stopped. Our proposal would not just provide more resources, but it would work like a posse to go after this fraud.”

Lawsuits brought by bilked investors and federal regulators are piling up in courts.

One case brought by the federal government against a North Carolina company called Biltmore Financial describes an apparent $25 million fraud going back for 17 years that drew in more than 500 investors, many of whom were members of a Lutheran community in that state.

For an investment of as little as $1,000, investors were told they were buying packages of mortgages with 10 to 20 percent annual returns. In reality, the money went to buy an Aston Martin convertible, a $1 million recreational vehicle and vacation and rental properties for the head of the company, J. V. Huffman, who was charged by the S.E.C. last November.

Last week, the S.E.C. charged James G. Ossie of Atlanta with taking $25 million from 120 investors — who had to invest a minimum of $100,000 with him. Mr. Ossie even held periodic conference calls describing his trading strategy, which promised 10 percent monthly returns.

In the South Florida Haitian-American community, Mr. Theodule turned to churches. But his scheme fell apart in November when 40 investors showed up at Mr. Theodule’s office to try to get their money back.

“Theodule had been the king and lived in the community, and then one day he vanished,” said Mr. Roseme, the investor who lost $35,000 in savings.

He described Mr. Theodule as “friendly, someone you could trust, a real positive guy.”

Nerline Horace-Manasse, a 31-year-old Haitian immigrant with six children, saw her life’s savings of $25,000 disappear.

Statements showed her money had grown to $90,000, but when Ms. Manasse asked questions of Mr. Theodule, “he advised he could not tell me where he was putting the money because there were a lot of copycats out there and he’d go out of business.”

Now Ms. Manasse and Mr. Roseme are part of a class-action suit against Mr. Theodule.

Mr. Theodule’s attorney, Matthew N. Thibaut, did not return a call for comment. But in court papers, Mr. Theodule said, “Theodule admits he has told persons that he wants to help build wealth in the Haitian community.”

Lynnley Browning contributed reporting.

January 29, 2009

What Red Ink? Wall Street Paid Hefty Bonuses

By almost any measure, 2008 was a complete disaster for Wall Street — except, that is, when the bonuses arrived.

Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year.

That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.

While the payouts paled next to the riches of recent years, Wall Street workers still took home about as much as they did in 2004, when the Dow Jones industrial average was flying above 10,000, on its way to a record high.

Some bankers took home millions last year even as their employers lost billions.

The comptroller’s estimate, a closely watched guidepost of the annual December-January bonus season, is based largely on personal income tax collections. It excludes stock option awards that could push the figures even higher.

The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used taxpayer money for the bonuses, a possibility that strikes corporate governance experts, and indeed many ordinary Americans, as outrageous. He urged the Obama administration to examine the issue closely.

“The issue of transparency is a significant one, and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else,” Mr. DiNapoli said in an interview.

Granted, New York’s bankers and brokers are far poorer than they were in 2006, when record deals, and the record profits they generated, ushered in an era of Wall Street hyperwealth. All told, bonuses fell 44 percent last year, from $32.9 billion in 2007, the largest decline in dollar terms on record.

But the size of that downturn partly reflected the lofty heights to which bonuses had soared during the bull market. At many banks, those payouts were based on profits that turned out to be ephemeral. Throughout the financial industry, years of earnings have vanished in the flames of the credit crisis.

According to Mr. DiNapoli, the brokerage units of New York financial companies lost more than $35 billion in 2008, triple their losses in 2007. The pain is unlikely to end there, and Wall Street is betting that the Obama administration will move swiftly to buy some of banks’ troubled assets to encourage reluctant banks to make loans.

Many corporate governance experts, investors and lawmakers question why financial companies that have accepted taxpayer money paid any bonuses at all. Financial industry executives argue that they need to pay their best workers well in order to keep them, but with many banks cutting jobs, job options are dwindling, even for stars.

Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive compensation, called the 2008 bonus figure “disconcerting.” Bonuses, he said, are meant to reward good performance and retain employees. But Wall Street disbursed billions despite staggering losses and a shrinking job market.

“This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,” Professor Bebchuk said.

Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. “What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,” he said.

Jesse M. Brill, a lawyer and expert on executive compensation, said government bailout programs like the Troubled Asset Relief Program, or TARP, should be made more transparent.

“We are all flying in the dark,” Mr. Brill said. “Companies can simply say they are trying to do their best to comply with compensation limits without providing any of the details that the public is entitled to.”

Bonuses paid by one troubled Wall Street firm, Merrill Lynch, have come under particular scrutiny during the last week.

Andrew M. Cuomo, the New York attorney general, has issued subpoenas to John A. Thain, Merrill’s former chief executive, and to an executive at Bank of America, which recently acquired Merrill, asking for information about Merrill’s decision to pay $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.

A Treasury department official said that in the coming weeks, the department would take action to further ensure taxpayer money is not used to pay bonuses.

Even though Wall Street spent billions on bonuses, New York firms squeezed rank-and-file executives harder than many companies in other fields. Outside the financial industry, many corporate executives received fatter bonuses in 2008, even as the economy lost 2.6 million jobs. According to data from Equilar, a compensation research firm, the average performance-based bonuses for top executives, other than the chief executive, at 132 companies with revenues of more than $1 billion increased by 14 percent, to $265,594, in the 2008 fiscal year.

For New York State and New York City, however, the leaner times on Wall Street will hurt, Mr. DiNapoli said.

Mr. DiNapoli said the average Wall Street bonus declined 36.7 percent, to $112,000. That is smaller than the overall 44 percent decline because the money was spread among a smaller pool following thousands of job losses.

The comptroller said the reduction in bonuses would cost New York State nearly $1 billion in income tax revenue and cost New York City $275 million.

On Wall Street, where money is the ultimate measure, some employees apparently feel slighted by their diminished bonuses. A poll of 900 financial industry employees released on Wednesday by, a job search Web site, found that while nearly eight out of 10 got bonuses, 46 percent thought they deserved more.

Paul J. Sullivan contributed reporting.

January 30, 2009

Obama Calls Wall Street Bonuses ‘Shameful’

WASHINGTON — President Obama branded Wall Street bankers “shameful” on Thursday for giving themselves nearly $20 billion in bonuses as the economy was deteriorating and the government was spending billions to bail out some of the nation’s most prominent financial institutions.

“There will be time for them to make profits, and there will be time for them to get bonuses,” Mr. Obama said during an appearance in the Oval Office with Treasury Secretary Timothy F. Geithner. “Now’s not that time. And that’s a message that I intend to send directly to them, I expect Secretary Geithner to send to them.”

It was a pointed — if calculated — flash of anger from the president, who frequently railed against excesses in executive compensation on the campaign trail. He struck his populist tone as he confronted the possibility of having to ask Congress for additional large sums of money, beyond the $700 billion already authorized, to prop up the financial system, even as he pushes Congress to move quickly on a separate economic stimulus package that could cost taxpayers as much as $900 billion.

This week alone, American companies reported as many as 65,000 job cuts, and public anger is rising over reports of profligate spending by banks and investment firms that are receiving help from the $700 billion bailout fund. About half of that money is still available, but the new administration has yet to announce how it will use it, and many analysts think it will take far more to stabilize the banking system.

Should Mr. Obama have to go to Congress to seek more money for the bailout fund to avert the failure of more banks, he would most likely encounter opposition within both parties and demands for tighter restrictions on pay for executives of institutions that receive government assistance.

Mr. Geithner has already signaled a willingness to impose stricter compensation limits as part of a revamped approach to dealing with the banking crisis, but with his strong words on Thursday, Mr. Obama seemed intent on reassuring Congress and the public that he would step up the pressure on bankers before granting them additional assistance.

Mr. Obama was reacting to a report by the New York State comptroller that found financial executives had received an estimated $18.4 billion in bonuses for 2008, less than for the previous several years but the same level of bonuses as they received in 2004, when times were flush.

“That is the height of irresponsibility,” Mr. Obama said. “It is shameful. And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”

The Obama administration and lawmakers have begun to consider ways to control executive pay; the bailout fund, known as the Troubled Asset Relief Program, or TARP, would be the main vehicle for exerting such control. The administration of former President George W. Bush issued guidelines last October to try to control executive pay at companies receiving government help, but so far they have done little to curb large salaries.

During his confirmation hearings, Mr. Geithner said the administration is preparing rules that would require executives at companies receiving taxpayer money to agree that any compensation above a certain amount — he did not specify how much — be “paid in restricted stock or similar form” that could not be liquidated or sold until the government had been repaid.

Some lawmakers, meanwhile, have said they are considering so-called “clawback” provisions that could be invoked by the government to take back bonuses and executive pay from officials at companies that encountered problems.

In the meantime, public outrage is already forcing some companies to rein in their lavish spending. John A. Thain, the former Merrill Lynch executive who was forced out of Bank of America, said this week he would reimburse Bank of America for an expensive renovation of his office that included an $87,000 area rug and $35,000 commode.

But it took the urging of the Obama administration to force Citigroup, which received an infusion of taxpayer funds last year, to abandon plans to buy a $50 million corporate jet. On Thursday, Mr. Obama made reference to the jet, without singling out Citigroup by name; his remarks came one day after the president met at the White House with business leaders, including Richard D. Parsons, the new chairman of Citigroup.

On Capitol Hill, Senator Christopher J. Dodd of Connecticut, the chairman of the Senate Banking Committee, issued his own warning on Thursday, saying companies would be summoned to testify if taxpayer money was involved.

“Whether it was used directly or indirectly, this infuriates the American people and rightly so,” Mr. Dodd said. “So I say to anyone else who does it, if you do it, I’m going to bring you before the committee.”

There is also political pressure to rein in pay in industries beyond banks and investment firms. The pressure reflects the substantial disparities between pay increases for senior executives, the low rate of wage growth for workers and the frequent disconnect between compensation and the long-term strategic success or failure of corporations.

Mr. Obama’s message on Thursday was reinforced by Vice President Joseph R. Biden Jr., who pledged in an interview with CNBC and The New York Times that the government would spend the remaining $350 billion of the troubled assets money “wisely and prudently and transparently.”

Mr. Biden said that he, like the president, was outraged by reports of large bonuses going to Wall Street executives.

“I’d like to throw these guys in the brig,” he said. “They’re thinking the same old thing that got us here, greed. They’re thinking, ‘Take care of me.’  ”

February 1, 2009

Disgorge, Wall Street Fat Cats

The president’s disgust at Wall Street looters was good. But we need more. We need disgorgement.

Disgorgement is when courts force wrongdoers to repay ill-gotten gains. And I’m ill at the gains gotten by scummy executives acting all Gordon Gekko while they’re getting bailed out by us.

With the equally laconic Tim Geithner beside him, Mr. Obama called it “shameful” and “the height of irresponsibility” for Wall Street bankers to give themselves $18.4 billion worth of bonuses for last year.

They should know better, he coolly chided. But big shots — even Mr. Obama’s — seem impervious to knowing better. (Following fast on Geithner’s tax lacunae, Tom Daschle’s nomination hit a pothole when he had to pay $140,000 in back taxes he owed mostly for three years’ use of a car and a driver provided by a private equity firm.)

At least the old robber barons made great products. When you make money out of money, unmoored from morality and regulators, it must unhinge you. How else to explain corporate welfare queens partridge hunting in England, buying French jets and shopping for Lamborghinis?

Mr. Obama was less bracing than during the campaign, when A.I.G. executives were caught going to posh retreats after taking an $85 billion bailout. He called for them to be fired and to reimburse the federal Treasury. Now that he has the power to act, Mr. Obama spoke, as his spokesman Robert Gibbs put it, “like that disappointed parent that doesn’t embarrass you in the mall, but you feel like you’ve let somebody down.”

That’s not enough, not with the president and Geithner continuing to dole out what may end up being a trillion dollars to these “malefactors of great wealth,” as Teddy Roosevelt put it.

USA Today wrote about “the A.I.G. effect:” executives finding ways to spend more discreetly, choosing lesser-known luxury hotels and $110 pinot noir instead of the $175 variety.

More than a disappointed parent, they need a special prosecutor or three. Spare the rod, spoil the jackal. Anyone who gave bonuses after accepting federal aid should be fired, and that money should be disgorged to the Treasury.

Claire McCaskill popped out a bill to limit the pay of anyone at firms taking federal money to no more than the president makes — $400,000.

“These people are idiots,” she said on the Senate floor. “You can’t use taxpayer money to pay out $18 billion in bonuses. ... Right now they’re on the hook to us. And they owe us something other than a fancy wastebasket and $50 million jet.”

One Obama official said her idea is catchy, but it won’t work “because no one would come to Treasury to participate, and that means our economy would continue to stumble downward.”

Senator Chuck Grassley urged the administration to snatch back the bonuses. “They ought to give ’em back or we should go get ’em,” the Republican told me. “If this were Japan and a corporate executive did what is being done on Wall Street, they’d either go out and commit suicide or go before the board of directors and the country and take a very deep bow and apologize.”

He was shocked to learn that the Office of Management and Budget, insistent on following the Paperwork Reduction Act, was dragging down a special inspector general’s investigation of what banks are doing with taxpayer money. (After complaints, the O.M.B. yielded on Friday.)

“Once in a while, some C.E.O. comes and talks to me and I wonder if they’re laughing under their breath at having to talk to someone who makes 1 percent of what they make,” he said.

Treasury officials and Barney Frank are dubious about recouping bonuses. “Paulson let the cat out of the bag,” Frank said of Henry Paulson, Geithner’s predecessor, “and it can’t be gotten back.”

But aren’t taxpayers shareholders in these corporations now, and can’t shareholders sue or scream “You misspent my money!” like Judy Holliday?

“In ‘The Solid Gold Cadillac,’ ” said Frank, who knows the movie.

“We got some preferred shares,” he mused, “but I don’t think we could sue on that basis.”

Rudy Giuliani resurfaced Friday to defend corporate bonuses, telling CNN that cutting them would mean less spending in restaurants and stores.

Stupid. Even without bonuses, these gazillionaires can still eat out. It’s like Rudy’s trickle-up Make Work Program: Make Leisure.

Some Obama policy makers still buy into the notion that if they’re too strict, these economic royalists, to use F.D.R.’s epithet, might balk at the bailout, preferring perks over the prospect of their banks going belly-up.

The president needs to think like Andrew Cuomo. “ ‘Performance bonus’ for many of the C.E.O.’s is an oxymoron,” he said. “I would tell them, a) you don’t deserve a bonus, b) where are you going to go? and c) if you want to go, go.”

DER STANDARD    2.Februar.2009

Warum im Jahr 2059 nach Asterix niemand über die Befürchtung lacht, die USA könnten Pleite gehen
Majestix und Miraculix auf den Finanzmärkten
Johannes M. Lehner

Majestix aus dem Kult-Comic "Asterix" - er heißt in der amerikanischen Übersetzung sinnigerweise Macroeconomix - hat nur die eine Angst: Der Himmel würde ihm auf den Kopf fallen. Darüber konnten wir noch lachen. Wer aber lacht heute über die Investoren, die sich gegen den Bankrott von  Ländern wie den USA versichern? Sie lachen nicht einmal über sich selbst, obwohl niemand ernsthaft annimmt, dass ein bedeutender Staat wie die USA tatsächlich bankrott gehen und daher die Schulden nicht mehr bezahlen könnte. Dieser Schadensfall ist ungefähr so wahrscheinlich wie die Bedrohung,  vor der sich Majestix fürchtet.

Interessanterweise hat Majestix nie davor Angst, seine Träger würden ihm vom Schild fallen lassen, obwohl genau das in jeder Folge passiert. Und interessanterweise haben die Investoren weniger Angst davor, Firmen wie McDonald's könnten bankrott gehen, als davor, dieses Schicksal würde den Staat  ereilen - von dessen Funktionieren die Firmen aber nicht unwesentlich abhängig sind. Denn wenn die USA Pleite gehen, dann sicher auch McDonald's, Letzteres eher schon vorher. Dennoch sind den Investoren die Versicherungspolizzen gegen eine Pleite McDonald's weniger wert als jene gegen einen  Kreditausfall der USA.

Solches wird gern als eine Verwerfung im Markt bezeichnet. Diese irrationale Bewertung von Versicherungen gegen Staatsbankrott (sogenannte "Credit Default Swaps") zeigt wohl so deutlich wie nie zuvor, wie losgelöst von jeder allgemein akzeptierten Vernunft und Realität die Protagonisten des  Finanzsektors gegenwärtig agieren - und zwar nicht erst seit dem Platzen der Immobilien-Blase. Insofern erscheint es angebracht, diese Realität als ein Spiel zu definieren - als Spiel mit drei Teilnehmern:

Erstens sind da zunächst die Erfinder und Emittenten von Finanzprodukten, die meist von Banken oder anderen sogenannten "intermediären" Institutionen - vulgo Zwischenhändlern - vertrieben werden. Diese verkaufen ein Finanzprodukt, um irgendjemand anderen zu finanzieren: Eine Staatsanleihe  finanziert den Staat, der beispielsweise den Nennwert der Anleihe nach zehn Jahren zurückzahlen soll. Die Bank vertreibt die Staatsanleihe (der Himmel, der herunterfallen könnte). Und weil die Bank mehr Geschäft machen will, lässt sie sich auch gleich eine Versicherung einfallen - eben besagten "Credit  Default Swap", der die Käufer der Anleihe dagegen versichert, dass der Staat den Nennwert nach zehn Jahren nicht zurückzahlen kann. Für einen Anleihebetrag von 10 Millionen Euro ist hier schon mal der Gegenwert eines Oberklassewagens fällig und insgesamt sind nach aktuellen Schätzungen "Credit  Default Swaps" im Wert von 50 Billionen Dollar unterwegs.

Zweitens "raten" Ratingagenturen. "Raten" kann entweder englisch oder deutsch ausgesprochen werden - beides ist in diesem Fall richtig. Aber das "Raten" oder die "Ratings" werden nur wahrgenommen, wenn nicht alles gleich "geratet" wird - daher bekommt der Staat A das Rating AAA und der Staat B  das Rating BBB. Dessen ungeachtet - und auch wenn sich der zweite Staat etwas mehr verschuldet haben mag als der erste - ist das Kreditausfallsrisiko bei beiden praktisch null.

Drittens: Die Investoren nutzen die Ratings, um zusammen mit den Emittenten einen Preis für die Finanzprodukte und deren Versicherungen zu bilden. Staaten mit schlechteren Ratings werden bestraft, indem sie höhere Zinsen für ihre Schulden zahlen müssen. Wie gesagt: Die Strafe wird bei Staaten wie  den USA oder solchen aus dem Euro-Raum "grundlos" verhängt, weil sie praktisch nicht bankrott gehen können. Und die Investoren bestrafen sich selbst, indem sie für die Versicherung gegen ein Risiko, das gar nicht vorhanden ist, umso mehr zahlen, je schlechter das Rating ist.

Sie rechtfertigen ihr Verhalten mit den relativ guten Chancen, dass sich früher oder später weitere Investoren finden werden, welche noch mehr für diese Versicherung zahlen wollen (weitere Majestixe kommen ins Spiel). Womit wir wieder bei einer Form des Pyramidenspiels wären.

Die drei Spieler werden durch Kibitze unterstützt: Medien auf der Suche nach Nachrichten aus der Finanzszene, Analysten, die ihre Gehälter rechtfertigen müssen. Mark C. Taylor betitelte 2004 sein überaus aufschlussreiches Buch über die Beziehungen zwischen Glauben und Finanzmärkten mit  "Confidence Games", was sowohl mit "Schwindel" als auch "Vertrauensspiel" übersetzt werden kann. Beides funktioniert jedenfalls mit drei Spielern am besten: ein Verkäufer eines wertlosen Produktes, ein Käufer, der auf ein Schnäppchen hofft, und ein scheinbar Unparteiischer, der den Wert des  Produktes bestätigt (con-fides bedeutet so viel wie Mit-Glauben).

Druide Obama?

Im "normalen" Leben dauert so etwas nicht lange, weil der Käufer in der Regel den Betrug schnell durchschaut. Im Finanzsektor tauschen aber Käufer und Verkäufer innerhalb von Sekunden und das am Tage tausendmal die Rollen. Und auf diese Art bleibt das Spiel auch im Gange.

Den Rest kennen wir mittlerweile zur Genüge: Zunächst profitieren alle Spielteilnehmer und können viel Geld damit machen. Je mehr Geld allerdings ins Spiel kommt, umso dramatischer ist der unvermeidliche Zusammenbruch der Pyramide - wenn sich Majestix' Schildträger verabschieden. - Im Grunde  also klingt das alles sehr vertraut - die Blasen, die Madoffs, die Crashs. Umso unglaublicher, das Spiel nach dem jüngsten Zusammenbruch nicht nur weitergehen zu sehen, sondern dessen Irrealität nunmehr ganz offen vor Augen geführt zu bekommen.

Bleibt abzuwarten, wie lange der Druide ("Getafix" resp. "Mirakulix") Obama Zaubertränke austeilen kann, um die reale Wirtschaft wieder in Gang zu bringen. Hier nämlich liegt das eigentliche Problem. Denn das irreale Spiel hat sehr reale Konsequenzen für die Liquidität der Betriebe und der Staaten,  indem durch seine anhaltende Prolongation das Geld für sie künstlich verteuert und verknappt wird. Die Banken wären stark genug - ein Zaubertrank hilft hier genau so viel bzw. wenig wie bei Obelix. Aber die anderen Gallier benötigen ihn dringend ...    February 2, 2009

‘Prison for Dummies’ Is a Ponzi Guy’s Must-Read
Commentary by Susan Antilla

Jan. 30 (Bloomberg) -- They haven’t gotten around yet to publishing “Prison for Dummies,” and that’s a regrettable deficiency in the book business considering the mushrooming collection of Ponzi scheme defendants.

Life can be a challenge in the dark days of government investigation and anxiety over whether a court might assign you to one of “those” prisons if you cop a plea or are found guilty of fleecing investors. If your name is Bernie (Madoff), Nicholas (Cosmo), Marcus  (Schrenker) or Arthur (Nadel), though, the accused who preceded you have lots to offer in the way of inspiration for getting through it all.

For starters, there is the choice of a lawyer, and if you aren’t signing up with a former district attorney or one-time Securities and Exchange Commission staffer, it means you haven’t been educated as to the benefits of working within a club where old-pal lawyers do  battle before the judge, then knock back a few brews at a nearby saloon. (You will not be invited to the drinking sessions).

Lawyers can’t work all the magic. An investment pro under the klieg lights should think about hiring an “official media spokesman” to schmooze, evade and intimidate the media. This comes with a welcome bonus because your flack will bring you reports that will cheer  you up in your time of anguish: there will be yarns -- some true, some fabricated -- about how he castigated editors, wrote letters to publishers and otherwise threw his weight around on your behalf.

Milken’s Method

When Michael Milken and his employer, the now-defunct Drexel Burnham Lambert Inc., were under investigation in the late 1980s they turned to PR firm Robinson Lake Lerer & Montgomery, which made serious pests of themselves with Simon & Schuster, which was  publishing the book “The Predators’ Ball,” about the workings of Drexel.

What fun they all must have had calling every book reviewer and reporter on the Drexel beat to repeat their “message” that the work by Connie Bruck was supposedly riddled with inaccuracies -- a tactic Bruck mentioned in a letter to the New York Times at the time.  Isn’t that just the sort of thing to warm the heart of a fellow waiting to find out whether he’ll have to go to prison?

Today, Milken’s guilty plea to six felonies, leading to 22 months in prison, has been all but forgotten. On Jan. 21, in fact, he got his name on a list of 11 “Notable Contributors” who weighed in on the Wall Street Journal’s editorial page as to their “Hopes for the Obama  Presidency.” Play your cards right and you, too, can have a future where the media you loathe today will be the media that makes you a star tomorrow.

Not the Best

Success can take many forms. Barry Minkow spent more than seven years in prison for fraud related to his ZZZZ Best Inc. carpet-cleaning company. Minkow today is senior pastor of Community Bible Church in San Diego and runs the for-profit Fraud Discovery  Institute Inc., which says it smokes out corporate chicanery. He notes on his Web site that he’s been on CNN, Fox and CNBC, and his work has been cited by the Wall Street Journal and Bloomberg News.

For the more enterprising, there is also a life of financial crime from inside the pokey, a line of work that was inexplicably popular in the 1990s. The SEC, which still had a pulse in those days, brought a flurry of cases against felons who added to their crimes while behind  bars. Ronald C. Black, a felon who told me in a 1996 interview that his favorite magazine was the Economist, managed to scam Nomura Securities International Inc. after he set up an account using a cell phone he got from a prison guard at the Arkansas Valley Correctional  Facility, according to SEC documents.

The Writing Life

A less risky way to pass the time in prison is to write a book. Nicholas Leeson, the rogue trader who lost $1.4 billion and brought down London-based Barings Plc in 1995, co-wrote “Back from the Brink: Coping With Stress,” which was published in 2005. Minkow wrote  “Cleaning Up: One Man’s Redemptive Journey Through the Seductive World of Corporate Crime,” and “Clean Sweep: The Inside Story of the ZzzzBest Scam…One of Wall Street’s Biggest Frauds.”

While you’re preparing for the worst, be sure to get a list together of every good deed you’ve done since you were a Boy Scout and every pal you’ve known who owes you a favor. You might need them for the adulatory letters that go to the judge when he or she is  considering your sentence.

Go for the gold and use Milken as your role model: his case generated more than 200 letters, mostly adoring, sent to Judge Kimba M. Wood. Steven Ross, then chairman of Time Warner Inc., called him “a long term thinker, not a quick buck artist.” Game show host  Monty Hall gushed over Milken’s charity work.

While you’re waiting to see how the government’s cases against you pan out, one strategy you Ponzi guys might want to avoid is the faked suicide thing. Everybody is on to that one.

So suck it up, be a man, and think pleasant thoughts about all the opportunities that are ahead if you do some long-term strategic thinking. Before you know it, you will be back in the Rolodexes of reporters clamoring for your views about the next generation of ne’er do  wells.

(Susan Antilla is a Bloomberg News columnist: The opinions expressed are her own.)    February 4, 2009

SEC’s Madoff Miss Fits Pattern Set With Pequot
Commentary by Gary J. Aguirre

Feb. 4 (Bloomberg) -- Shakespeare tells us to “give the devil his due.” So forget for a moment the harm Bernard Madoff caused his victims, and focus on his singular achievement. Measured by the sheer amount of his alleged theft, he could go down, if convicted, as the greatest thief of all time.

In fairness to his competition, one question begs an answer: how skilled and dedicated was Madoff’s adversary? Arthur Conan Doyle pitted Professor Moriarty, the diabolical genius, against Sherlock Holmes, who showed his brilliance by spotting and connecting the subtlest clues.

Errant Wall Street elite, such as Madoff, go up against the U.S. Securities and Exchange Commission. Congress created the SEC in 1934 after Wall Street titans -- the Madoffs of 1929 --took the capital markets over a cliff with the economy in tow. The SEC was supposed to keep a watchful eye on Wall  Street, especially its elite.

So far, the SEC’s six investigations of Madoff read more like Keystone Cops than Sherlock Holmes. The SEC didn’t merely fail to spot and connect the clues. Someone else -- Harry Markopolos, a former money manager -- did that work for it. His November 2005 letter to the SEC made a compelling case  that Madoff was running a Ponzi scheme. Somehow, the SEC managed to bungle the Madoff investigation while holding Markopolos’s blueprint.

So the biggest Ponzi scheme of all time morphs seamlessly into a gripping mystery: What went wrong inside the SEC?

A 2007 report by two Senate committees provides a window into the SEC’s inner workings when Wall Street elite are under scrutiny.

Pequot Investigation

The Senate Judiciary and Finance committees conducted an exhaustive review of my allegations that the SEC mishandled its insider-trading investigation of Pequot Capital Management Inc., a hedge fund. I led that SEC investigation until September 2005, when I was fired, as the Senate report concluded,  for questioning my supervisors’ preferential treatment of John Mack. Mack was chairman of Pequot before taking his current job as chief executive officer of Morgan Stanley.

The SEC closed its Pequot investigation in November 2006 without filing a case against anyone. The SEC ignored the call in February 2007 by Senators Charles Grassley and Arlen Specter to reopen it. The agency reopened the case last month only after receiving compelling new evidence that left it with  no choice.

This new evidence suggests the SEC ignored a road map of possible insider trading by Pequot in Microsoft Corp. options.

In 2005, I uncovered e-mails between Arthur Samberg, Pequot’s chief executive officer, and David Zilkha, a Microsoft employee, shortly before Microsoft announced its third quarter 2001 results. (Zilkha had recently accepted a job offer from Samberg.) Samberg asked Zilkha for “tidbits” on those results.

Possible Tip

I left my supervisors a single-page timeline, in effect a blueprint where to focus the investigation, along with a notebook of backup. It pinpointed April 9, 2001, as the date of a possible tip from Zilkha to Samberg.

The 2007 Senate report suggests the SEC bungled the Microsoft piece of the Pequot investigation, just as it did the Mack piece. It never examined Zilkha or any other Microsoft employee under oath. By all signs, the SEC ignored my blueprint on Pequot’s Microsoft trading, just as it would later ignore the  Markopolos blueprint of Madoff’s theft.

Last November, I received new information on the Microsoft piece, including court records suggesting that Samberg or Pequot had begun paying Zilkha $2.1 million a few months after the SEC closed its investigation.

E-Mail Exchange

I also obtained a copy of a purported e-mail exchange between Zilkha and another Microsoft employee, Mark Spain, relating to Microsoft’s third quarter. Zilkha’s April 7, 2001, e- mail asked in the subject block, “Any visibility on the recent quarter?” and in the body asked, “Hey there. Have you heard  whether we will miss estimates? Any other info?”

The next day, Spain’s e-mail replied in part, “march was the best march of record,” and, “on track for revised forecast.” In May 2007, the Senate released the timeline that I had left with my SEC supervisors in 2005. For April 9, 2005, the timeline reads: “Presumed MNI (material nonpublic information)  Communication.”

I provided this new information to Senate investigators as it became available, then to the Federal Bureau of Investigation, and only then to the SEC, which had shown so little interest or initiative in the case.

In December, Specter wrote then-SEC Chairman Christopher Cox: “(R)ecent events provide the SEC with an opportunity to make good its Pequot investigation, despite having precipitously and unjustifiably closed the case in November 2006.”

The SEC has now reopened its Pequot investigation. Like Specter, I hope the SEC will “make good its Pequot investigation,” but I have my doubts.

Traveling Rolodexes

The SEC’s vigilant eye on Wall Street has gotten clouded with dollar signs. For many SEC attorneys, especially those atop the enforcement division, their time at the agency is a stop on their way to seven-figure jobs representing Wall Street elite. And they take their Rolodexes with them.

I dealt with three ex-SEC enforcement directors and other well-connected attorneys, including a former White House counsel, on the other side of the Pequot case. They had “juice” with the SEC’s hierarchy, according to my supervisor, and they knew how to use it. One of them, Gary Lynch, at Credit Suisse First Boston, would follow Mack to Morgan Stanley in the fall of 2005, where he would start at $13.2 million as its top lawyer, according to SEC filings.

For Congress and the new SEC chairwoman, Mary Schapiro, solving the Madoff mystery may not be such a challenge. It may ultimately boil down to this: Did Madoff and his attorney -- a former head of the SEC’s New York office -- also use their juice?

(Gary J. Aguirre, a lawyer in San Diego, was a senior counsel at the SEC in 2004 and 2005:

Bloomberg    February 4, 2009

Mating Season Is Over for Alpha Males of Banking
Commentary by Matthew Lynn

Feb. 4 (Bloomberg) -- Your portfolio is in tatters. Your job is about as secure as an investment with Bernard Madoff. Now, as if life wasn’t gloomy enough, your girlfriend or wife is about to trade you in for a more lucrative model.

No one ever said a career in financial markets was fun. The hours were backbreaking. The work was dull. The math was often impenetrable. And your colleagues? Well, let’s put it this way: A picnic with a pack of wolves would be more relaxing and there would be less chance of getting your sandwich  stolen.

It still had its benefits. The offices were swank. The bonuses were mind-boggling. You could be confident that even if you hadn’t reached the summit of human evolution, no one could match you for status. At its most basic, it was certain your market value with the opposite sex was high. It didn’t matter  if you looked more like Danny DeVito than Leonardo Di Caprio.

Males didn’t come more alpha than investment bankers. Not anymore.

As the credit crunch rolls into its third year, and as world politicians rush to make bonus payments about as legal as carrying a loaded shotgun onto an airplane, bankers can feel themselves slipping down the league table of desirable careers.

One New York Web log has attracted a lot of publicity for collecting the gripes of girls who date or once dated bankers. Surveys show that the plutocrats are spending less on their mistresses and lovers, which may well lead to many women deciding to do something else with their lives.

Opposite Sex

Naturally, it is hard not to sympathize.

Once you are making mega-bucks, it isn’t difficult to make yourself attractive to the opposite sex. You can tip the maitre d’ enough to make sure you get the best table at the smartest restaurants. You can pour bottles of the best, overpriced wine down the throat of the person sitting opposite you. If all  else fails, you can always pull out a Tiffany & Co. box.

Now, all that has changed. A table for two at Pizza Hut -- with a meal-deal voucher, naturally -- and an hour or two of miserable conversation about how everyone in the office is getting fired, doesn’t quite work the same magic.

The “Dating a Banker Anonymous” blog has attracted a lot of attention since it began. It may be accurate, or it might be a clever publicity stunt. Either way, it has tapped into the zeitgeist. A collection of alarmingly frank money honeys dish the dirt on their financial-world boyfriends, and they come to  the same conclusion: A banker without a bonus is about as useful as a nut without a wrench.

‘No Broke Banker’

“I ain’t saying I’m a gold digger, but I ain’t messin’ with no broke banker,” writes one of its contributors. Cold it might be, but at least it cuts to the chase.

There is already evidence that men in financial markets are cutting back on treats for their lovers.

Russ Prince, president of research firm Prince & Associates Inc. in Redding, Connecticut, carried out a survey of 191 men and women with a net worth of at least $20 million. More than 80 percent of the men said they planned to give lower “allowances” to their mistresses, and almost as many would  offer fewer gifts.

In tough economic times, the incentive to become a kept lover may increase. After all, other ways of making easy money are looking less certain by the day.

“I foresee a growing desire on the part of many people -- male and female -- to be kept,” Prince said in an e-mailed response to questions. “A bad economy like the one we’re experiencing will only make the good life ever more attractive.”

Tumbling Value

Maybe. And yet if the “allowances” and “gifts” that come with the position are tumbling in value, there may well be fewer applicants. The truth is, in different ways, dating a banker is financially a far less attractive option than it used to be. They will have to rely on wit and charm, attributes in which they  sometimes hold a short position.

There is a serious point here. For more than two decades, banking has been the world’s most prestigious career. It paid better than anything else, and it carried more kudos.

Status is measured in many different ways. Money is part of it. Yet it is also quantified in esteem, position and acclaim. One of the reasons so many aggressive, ambitious men flocked to a career in investment banking was because it made them feel like they were running the world. As any sociobiology  major will tell you, attractiveness to the opposite sex may be more important than any other component when choosing a career and lifestyle.

Bankers can no longer lord it over other professions. Finance moguls have gone from alpha to gamma in the space of a few months. Long after the credit crunch is just a footnote in the textbooks, it will have a profound impact on the industry -- and on the private lives of those who used to work in it.

(Matthew Lynn is a Bloomberg News columnist: The opinions expressed are his own.)

FEBRUARY 4, 2009

Wall Street Bonuses Are an Outrage
The public sees a self-serving system for what it is.

Just a mere $18.4 billion in Wall Street bonuses, and suddenly the entire country is like Kansas in the 1890s, raising hell instead of corn, screaming for revenge on money power that has done us so wrong while rewarding itself so generously.

The outburst of populist rage is particularly alarming when we consider how easily such sentiments were managed just a short while ago. Americans have known about mounting inequality and king-sized Wall Street bonuses for years. But we also had an entire genre of journalism dedicated to brushing the problem off.

Recall, for example, the famous essay by David Brooks published in The Atlantic in 2001, in which he declared that, in one representative salt-of-the-earth Republican region, people had "no class resentment or class consciousness"; that complaints about the lopsided distribution of the economy's rewards were something one heard only from people in the wealthy and tasteful reaches of blue America.

Mr. Brooks's argument was powerful not so much because it captured reality, but because, by suggesting that to care about economic inequality was itself an act of snobbery, it ingeniously short-circuited the entire debate. Egalitarianism begins at home, liberal!

Others simply insisted that markets were themselves democracies, that the deeds of business were an expression of the popular will, and that entrepreneurs were leading the only kind of popular uprising that mattered. The rightful home of that uprising was, of course, Wall Street, where rebel bankers were always supposed to be fighting stodgy aristocrat bankers on behalf of the common people.

That's why it once seemed to make so much sense to talk about grandmas in small Illinois towns who were ace stock-pickers, to fantasize about the conflict between man-of-the-people millionaires and horrible, affected Ivy League millionaires, to dream of the day the Dow finally reflected the common people's intelligence and made it to 36,000.

But does it console us any longer to recall that a CEO of Merrill Lynch was once excluded from some mythic Wall Street insiders' club? Can it make any possible difference, in our current predicament, to know that Richard Fuld, who allegedly collected around $480 million from Lehman Brothers in the eight years before its bankruptcy, attended not Harvard but the University of Colorado?

No. We're populists of a more fiery sort now, and the old bromides no longer palliate.

And those who once celebrated the virtues of the common folks want nothing to do with us now. As Mr. Brooks joked in yesterday's New York Times, all the current anger really signifies nothing more than the "resentments" of middle-class Washingtonians who have suddenly found themselves in charge of the world.

Besides, our former friends had their reasons for letting the party go on. If the federal bank bailout were to involve a real crackdown on executive compensation, the Bush administration reportedly feared, it might have driven banks away from taking the deal altogether. Bankers would prefer global disaster to a pay cut, in other words, and this obscene calculation needed to be taken into account. Public outrage was apparently nothing by comparison.

Now the populist shoe is on the other foot, though, and it's the liberals' turn to hail the wisdom of the crowd. Maybe, in its fury at the millions doled out to bankers who drove their institutions into the ground, the public understands something about moral hazard that the Treasury Department doesn't. Maybe, in its rage for fairness, the public is on to something that the banking industry's remaining defenders need to acknowledge.

It is merely this: That Wall Street's compensation system isn't just aesthetically displeasing to liberal snobs. It is the very heart of the problem. According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, "It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe."

At each stage of the disaster, Mr. Black told me -- loan officers, real-estate appraisers, accountants, bond ratings agencies -- it was pay-for-performance systems that "sent them wrong."

The need for new compensation rules is most urgent at failed banks. This is not merely because it would make for good PR, but because lavish executive bonuses sometimes create an incentive to hide losses, to take crazy risks, and even, according to Mr. Black, to "loot the place through seemingly normal corporate mechanisms." This is why, he continues, it is "essential to redesign and limit executive compensation when regulating failed or failing banks."

Our leaders may not know it yet, but this showdown between rival populisms is in fact a battle over political legitimacy. Is Wall Street the rightful master of our economic fate? Or should we choose a broader form of sovereignty?

Let the conservatives' hosannas turn to sneers. The market god has failed.

Write to

18. März 2009

Eine falsch angewendete Formel und ihre Folgen
Unterschätzte Korrelation von Anlagewerten als Auslöser der Finanzkrise?

Der inkorrekte Gebrauch einer vor neun Jahren entwickelten Formel für die Risikoanfälligkeit gebündelter Anlagewerte hat möglicherweise zum Ausbruch der jetzigen Finanzkrise beigetragen. Die Formel wurde weitherum verwendet, obwohl sie in gewissen Situationen versagt.
    gsz. Fachleute suchen immer noch nach Gründen für den jüngsten Zusammenbruch der Finanzmärkte. In der März-Ausgabe des amerikanischen Magazins «Wired» wird die Behauptung aufgestellt, die Wall-Street sei durch eine mathematische Formel zu Fall gebracht worden. Die Formel war von dem aus China stammenden Finanzexperten David X. Li hergeleitet worden und erlaubte es Banken und institutionellen Anlegern, abzuschätzen, wie riskant es ist, in korrelierte Wertpapiere zu investieren. Wegen ihrer einfachen Form wurde sie in der Finanzwelt schnell sehr prominent. Dabei wurde allerdings nicht zur Kenntnis genommen, dass die Formel in extremen Situationen versagt.

Am Anfang standen die Hypotheken
    Die Finanzkrise nahm ihren Lauf, als amerikanische Hauseigentümer, denen ohne eingehende Prüfung ihrer Kreditwürdigkeit Hypotheken gewährt worden waren, vor zwei Jahren reihenweise ihren Zahlungen nicht mehr nachkommen konnten. Zuerst stürzten die Hypothekarbanken zusammen. In der Folge gerieten weitere Finanzinstitute und Versicherungsfirmen in Schwierigkeiten. Die gleichzeitige Zahlungsunfähigkeit so vieler Kreditnehmer und die zwangsläufig folgenden Pleiten waren von Fachleuten nicht richtig vorausgesehen worden.
    Dabei wussten Investoren schon immer, wie gefährlich es ist, gleichzeitig in Papiere zu investieren, deren Wahrscheinlichkeiten, wertlos zu werden, miteinander korrelieren. Um diese Gefahr quantitativ in den Griff zu bekommen, hatte Li im Jahr 2000 im «Journal of Fixed Income» eine sogenannte Copula-Formel hergeleitet. Der aus einem bäuerlichen Gebiet in China stammende Finanzexperte, der in seiner Heimat und in Kanada Wirtschaftswissenschaften, Statistik und Versicherungsmathematik studiert und dann in Kanada und Amerika Karriere gemacht hatte, zog dabei Parallelen zum Vorgehen von Lebensversicherern. Diese berechnen zum Beispiel die Wahrscheinlichkeit, dass zwei Ehepartner im gleichen Jahr ableben. Im gleichen Sinne schätzte Li die Wahrscheinlichkeit ab, dass mehrere Unternehmen – Handelsgesellschaften, Geschäftsbetriebe oder Immobilienfirmen, die im Besitz von gebündelten Hypotheken sind – simultan pleitegehen.

Weit verbreiteter Ansatz
    Die Formel von Li hatte eine denkbar einfache Form und war einfach zu interpretieren. Deshalb wurde sie von mathematisch wenig versierten Finanzmanagern gerne und weitherum benützt. Andrew Lo, Professor für Finanztheorie am Massachusetts Institute of Technology in Cambridge, meint, dass die Copula-Formel in der Gemeinschaft der institutionellen Anleger wahrscheinlich der am weitesten verbreitete Ansatz zur Modellierung der gleichzeitigen Zahlungsunfähigkeit mehrerer Firmen gewesen sei. Aber bei ihrer Verwendung wurde oft eine Schwierigkeit übersehen. In die Formel muss ein Parameter eingesetzt werden, der die Gleichläufigkeit der Risiken verschiedener Anlagewerte misst. Dieser sogenannte Korrelationskoeffizient ist nicht leicht abzuschätzen. Li benützte als Indikator für die Risikobelastung von Unternehmen historische Daten über die Zinsen, die diese für Darlehen zahlen müssen. Die Spanne zwischen den Renditen risikoloser Staatsanleihen und den Zinsen, die von den Unternehmen für verschiedene Laufzeiten verlangt wurden, diente ihm als Kennziffer dafür, wie der Markt ihre Risiken für verschiedene Zeitspannen einschätzt. Mit diesen Daten liess sich dann der für die Copula-Formel benötigte Korrelationskoeffizient berechnen.
    Historische Daten führten in die IrreAber die Verwendung historischer Daten kann in die Irre führen. Insbesondere für den amerikanischen Hypothekarmarkt hatten Daten, die aus einem Jahrzehnt stammten, in dem die Preise für Immobilien in die Höhe schnellten, wenig Bedeutung für die sich anbahnende Krisenzeit. Zum Beispiel ist es in normalen Zeiten höchst unwahrscheinlich, dass eine grosse Zahl von Eigenheimbesitzern gleichzeitig zahlungsunfähig wird. Aber sobald der amerikanische Immobilienboom ein Ende fand und die ersten Hypothekarnehmer in Verzug gerieten, folgte eine Lawine von Zahlungsunfähigkeiten. Die grundlegende Annahme für Lis Formel – dass der Korrelationskoeffizient ein konstanter Parameter ist –, stimmte plötzlich nicht mehr, Bankrott-Wahrscheinlichkeiten begannen mehr zu korrelieren als von der Formel vorhergesagt, und die Risikoanfälligkeit diversifizierter Portefeuilles stieg.
    Der Mathematiker Paul Embrechts von der ETH-Zürich, der schon im Jahre 2001 gewarnt hatte, dass die arglose Verwendung simpler Risikobeurteilungen eine Krise heraufbeschwören und sogar eine Wirtschaft destabilisieren könne, unterstreicht, dass herkömmliche Risikomodelle Ausnahmeerscheinungen nicht korrekt berücksichtigten. Der für Lis Formel benötigte und aufgrund historischer Daten geschätzte Korrelationskoeffizient sei völlig unzulänglich, wenn es darum gehe, das gleichzeitige Eintreten mehrerer Extremereignisse zu modellieren.
    Allerdings ist es müssig, eine Formel für die katastrophalen Folgen ihres inkorrekten Gebrauchs verantwortlich zu machen. Das wäre, als ob man Newtons Bewegungsgesetz die Schuld für tödliche Unfälle zuschreiben würde, sagt Lo. Embrechts unterstreicht, dass Mathematiker immer wieder auf die Annahmen verwiesen hätten, auf denen gewisse Formeln basieren. Es sei nicht die Formel, sondern Habgier gewesen, meint er, die in der jüngsten Krise eine wichtige Rolle gespielt habe.

Vera Kehrli (18. März 2009, 23:11)    jetzt heisst es Verantwortung übernehmen
Wenn ein Banker Millionen verdient, darf man auch erwarten dass er elementare mathematische Fähigkeiten hat. Wenn ein Ingenieur Formeln falsch anwendet, macht er sich haftbar und landet im Extremfall im Gefängnis. Warum gilt das nicht für Banker? Bei diesen Löhnen kann man sogar eine viel grössere Verantwortung erwarten. Das heisst man müsste die Banken jetzt für die Kosten des von Ihnen angezettelten Wirtschaftszusammenbruchs haftbar machen, so wie ein Ingenieur haftbar ist wenn eine Brücke zusammenbricht.

March 19, 2009

The Fed dramatically increased the amount of money it will create out of thin air
to thaw frozen credit markets.
Fed to Buy $1 Trillion in Securities to Aid Economy

WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.

The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.

The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.

Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.

But there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation. Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on Wednesday.

In its announcement, the central bank said that the United States remained in a severe recession and listed its continuing woes, from job losses and lost housing wealth to falling exports as a result of the worldwide economic slowdown.

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,” the central bank said.

As expected, policy makers decided to keep the Fed’s benchmark interest rate on overnight loans in a range between zero and 0.25 percent.

But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.

All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week.

In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Since last September, the Fed’s lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.

Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.

The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise.

Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks about predicting an end to the recession, saying that he hoped to see the start of a recovery later this year but warning that unemployment, a lagging indicator, would probably keep climbing until some time in 2010.

In contrast to several recent Fed decisions, with the presidents of some regional Fed banks dissenting, the decision at Wednesday’s meeting of the 10 members of the Federal Open Market Committee, the central bank’s policy making group, was unanimous.

Jan Hatzius, chief economist at Goldman Sachs, said the Fed had adopted a “kitchen sink” strategy of throwing everything it had to jolt the economy out of its downward spiral.

But while Mr. Hatzius applauded the decision, he cautioned that the central bank could not solve the economy’s problems by expanding cheap money.

“Even if the Fed could make interest rates negative, that wouldn’t necessarily help,” Mr. Hatzius said. “We’re in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more. You can have a zero interest rate, but if you just offer more money on top of the money that is already available, it doesn’t do that much.”

Fed officials have been wrestling for months with the fact that lenders remain unwilling to lend and borrowers are unwilling or unable to borrow. Even though the Fed has been creating money at the fastest rate in its history, much of that money has remained dormant.

The Fed’s action is an expansion of its effort to bypass the private banking system and act as a lender in its own right.

The Fed and the Treasury are starting a joint venture this week called the Consumer and Business Lending Initiative in their latest effort to thaw the still-frozen credit markets. The program will start out with $200 billion in financing for consumer loans, small-business loans and some corporate purposes.

Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.


Dow Jones    March 20, 2009, 1:10 P.M. ET

CTFC Sees 'Rampant Ponzimonium'

The commissioner of the U.S. Commodity Futures Trading Commission said scam artists are being uncovered amid the floundering economy, unearthing "rampant Ponzimonium."

In remarks to a group of law students assembled at the CFTC on Friday, Bart Chilton explained that regulators were seeing more Ponzi  schemes than ever before. The CFTC is in the process of investigating hundreds of individuals and entities, many of which are related to  Ponzi scams, he said.

"The Ponzi scamsters we have caught certainly didn't live low-profile lives," Mr. Chilton said. "They used their stolen money for  everything from expensive cars and boats, to clothes and jewelry, homes and ranches."

The commissioner's comments come in the wake of famous cases such as disgraced financier Bernard Madoff's decades-long Ponzi  scheme that bilked thousands of investors out of tens of billions of dollars and that of Texas financier R. Allen Stanford, who stands  accused of running an $8 billion Ponzi scheme.

Mr. Chilton said these schemes have led many investors to question the safety and soundness of their financial assets and double-check  the legitimacy of their assets.

Earlier this year, Mr. Chilton proposed that the commission should have the power to prosecute wrongdoers, not just bring civil charges  against them. The CFTC and the Securities and Exchange Commission can fine violators, but need the Justice Department to file a  criminal case.

Write to John Kell at

IHT, Reuters    March 20, 2009

U.S. regulator probing "Ponzimonium"
By Jason Szep

Hundreds of people in the United States are under investigation for financial scams, many involving Ponzi schemes, a U.S. regulator said on Friday, calling the phenomenon "rampant Ponzimonium."

While none are as mammoth as disgraced financier Bernard Madoff's $65 billion (45 billion pound) fraud, multimillion-dollar "mini Madoffs" are proliferating from New York to Hawaii, the head of the Commodity Futures Trading Commission said.

So far this year, the agency has uncovered 19 Ponzi schemes, which depend on an influx of new capital instead of investment profits to pay existing investors.
That compares with just 13 for all of 2008.

"Because of the economy, people are seeking redemptions more than they ever have and that's making a lot of these scams go belly up," Bart Chilton, commissioner of the Washington-based Commodity Futures Trading Commission, said in a telephone interview.

In the last month alone, his agency has pursued investment fraud in Pennsylvania, New York, North Carolina, Iowa, Idaho, Texas and Hawaii.

Chilton called the problem "rampant Ponzimonium" and "Ponzipalooza" -- a play on the word "Lollapalooza," an American music festival featuring a long list of acts.

Many of the financial scams are small but grew fast to support lavish lifestyles, like the suspected $40 million, five-year Ponzi scheme that came to light last month when a North Carolina man, Bruce Kramer, committed suicide.

Claiming he was an expert mathematician, Kramer is accused of persuading 79 people to invest in what he said was a foreign currency trading operation, Barki LLC. He promised monthly returns of at least 3 percent to 4 percent, the CFTC said.

Instead, he funneled money into a Maserati sports car, a $1 million horse farm and artwork while holding "extravagant" parties, according to a CFTC complaint released on Wednesday.

As the economy soured, Kramer struggled to find new clients to keep the scheme going. In the days before his suicide, his investors demanded their money back and grew suspicious when they couldn't access their own funds, said Chilton.

The Commodity Futures Trading Commission shares oversight of financial markets with the Securities and Exchange Commission, which also faces a swelling casebook of Ponzi schemes, including charges against Texas billionaire Allen Stanford, who is accused of bilking investors of $8.8 billion.

The SEC has taken emergency action in 24 cases this year "to halt ongoing fraud," said SEC spokesman John Heine.

The FBI is also ramping up probes of financial wrongdoing. The agency has 43 corporate fraud cases under way directly related to the financial crisis, FBI Deputy Director John Pistole told a Congressional panel on Friday.

The CFTC, which set up a task force last year to pursue foreign currency Ponzi schemes and fraud, discovered about $80 million invested in four Ponzi schemes this month. That followed 10 such schemes in February totalling about $1.46 billion, and about $450 million in such scams in January.

Those accused of the scams used the money for cars, boats, clothing, jewellery, homes and ranches, said Chilton. One bought his own island in Belize in Central America, he added.

"Some are easier to catch now because people are more vigilant than they have been," he said.

(Reporting by Jason Szep; Editing by Gary Hill)

March 26, 2009

Geithner to Outline Major Overhaul of Finance Rules

WASHINGTON — The Obama administration will detail on Thursday a wide-ranging plan to overhaul financial regulation by subjecting hedge funds and traders of exotic financial instruments, now among the biggest and most freewheeling players on Wall Street, to potentially strict new government supervision, officials said.

The Treasury secretary, Timothy F. Geithner, will outline the broad revamping of the regulatory system, which goes further than expected, in a hearing on Thursday. He is expected to say that the new rules are necessary to prevent a repeat of the excesses that nearly wrecked the global financial system and plunged the economy into a recession.

The plan, which would require Congressional approval, would give the government vast new powers over “systemically important” banks and other financial institutions that are so big that their collapse would jeopardize the economy as a whole.

The government would have the power to peer into the inner workings of companies that currently escape most federal supervision — insurance companies like the American International Group, multibillion-dollar hedge funds like the Citadel Group and private equity firms like the Carlyle Group or Kohlberg, Kravis & Roberts.

If regulators decided that a company had become “too big to fail,” as was the case with A.I.G. in September, they would subject it to much stricter capital requirements than smaller rivals and much closer scrutiny of its borrowing levels and its trading partners, or counterparties.

But the most striking new proposals, and the ones that may provoke the most heated opposition from the industry, would regulate so-called private pools of capital — hedge funds, private equity funds and venture capital funds — and the gigantic market in financial derivatives, including instruments like credit-default swaps, the insurancelike instruments that allow investors to hedge against bond defaults.

Hedge funds and private equity funds manage money for wealthy individuals and institutions like pension funds. They operate almost entirely outside the regulation of either the Securities and Exchange Commission or the Federal Reserve.

Under the administration proposal, hedge fund, private equity and venture capital fund advisers would for the first time have to register with the S.E.C. They would be required to provide the government — on a confidential basis — information on how much they borrow to leverage their investments as well as information about their investors and trading partners.

The S.E.C. would then share those reports with a new “systemic risk regulator.” At least for the moment, Mr. Geithner is ducking the crucial question of who the powerful risk regulator should be, a contentious issue among Democratic lawmakers.

Hedge funds have generally not been implicated in the financial collapse, which stemmed primarily from reckless mortgage lending and exotic financial instruments tied to subprime mortgages.

But the hedge fund industry for years has fought even minimal federal regulation, like S.E.C. registration. Now, a growing number of lawmakers and policy makers are worried that hedge funds have become too big a part of the financial market to operate without government monitoring.

Administration officials also want to prevent a repeat of the gigantic Ponzi scheme perpetrated by Bernard L. Madoff.

John A. Paulson, a hedge fund manager who made billions by betting against the housing market, said in an interview on Tuesday that the main goal of any regulation of hedge funds should be to protect investors from frauds like that of Mr. Madoff.

“We’re for anything that protects investors,” Mr. Paulson said. While he acknowledged that some hedge funds might have relied too heavily on leverage to improve their returns, he added that “there hasn’t been one problem at all to global systemic risk in the U.S. and abroad from a hedge fund.”

Leon G. Cooperman, a longtime hedge fund manger who runs Omega Advisors, said that new regulations were not needed and that he found the call for new rules to be mere finger-pointing.

“I’m already heavily regulated,” Mr. Cooperman said, saying that his fund was subject to oversight from the S.E.C., the Commodity Futures Trading Commission, the Fed and other organizations.

“The truth of the matter is, most major hedge funds are registered with the S.E.C., they are regulated with the C.F.T.C., and they are subject to Federal Reserve margin requirements,” he said, referring to the Fed’s rules that require all investors to set aside funds when buying securities on credit. “The regulatory system is already in place. Let them enforce what they have.”

There is likely to be an even bigger fight over the proposal to regulate financial derivative products. Some derivatives, like stock options and interest rate futures, are already regulated because they are traded on exchanges like the Chicago Board of Trade.

But the administration would regulate trading in more exotic derivatives that trade privately, like the credit-default swaps that were used both to hedge against and to speculate on high-risk mortgage-backed securities. These more exotic products have been traded almost entirely in the informal, over-the-counter market that lies outside regulatory scrutiny.

The administration would require that all standardized derivatives be traded through a regulated clearinghouse. Traders would be required to provide documentation on their collateral and borrowings. They would also be subject to new eligibility requirements, and their trading and settlement practices would be subject to new standards.

Mr. Geithner is not expected to provide any details on Thursday for how all this will work. But the proposals are all but certain to provoke criticism from all sides — traders who say the rules are too intrusive and policy experts who say the approach is too vague.

Edmund L. Andrews reported from Washington, and Louise Story from New York.

March 27, 2009
"failure of a whole model of banking, of an overgrown financial sector that did more harm than good"
The Market Mystique

On Monday, Lawrence Summers, the head of the National Economic Council, responded to criticisms of the Obama administration’s plan to subsidize private purchases of toxic assets. “I don’t know of any economist,” he declared, “who doesn’t believe that better functioning capital markets in which assets can be traded are a good idea.”

Leave aside for a moment the question of whether a market in which buyers have to be bribed to participate can really be described as “better functioning.” Even so, Mr. Summers needs to get out more. Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis.

But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.

It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.

After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.

And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.

Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption.

Sooner or later, things were bound to go wrong, and eventually they did. Bear Stearns failed; Lehman failed; but most of all, securitization failed.

Which brings us back to the Obama administration’s approach to the financial crisis.

Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

March 30, 2009
Like the Bernie Madoff of economies: America turns out to have been a fraud all along.
America the Tarnished

Ten years ago the cover of Time magazine featured Robert Rubin, then Treasury secretary, Alan Greenspan, then chairman of the Federal Reserve, and Lawrence Summers, then deputy Treasury secretary. Time dubbed the three “the committee to save the world,” crediting them with leading the global financial system through a crisis that seemed terrifying at the time, although it was a small blip compared with what we’re going through now.

All the men on that cover were Americans, but nobody considered that odd. After all, in 1999 the United States was the unquestioned leader of the global crisis response. That leadership role was only partly based on American wealth; it also, to an important degree, reflected America’s stature as a role model. The United States, everyone thought, was the country that knew how to do finance right.

How times have changed.

Never mind the fact that two members of the committee have since succumbed to the magazine cover curse, the plunge in reputation that so often follows lionization in the media. (Mr. Summers, now the head of the National Economic Council, is still going strong.) Far more important is the extent to which our claims of financial soundness — claims often invoked as we lectured other countries on the need to change their ways — have proved hollow.

Indeed, these days America is looking like the Bernie Madoff of economies: for many years it was held in respect, even awe, but it turns out to have been a fraud all along.

It’s painful now to read a lecture that Mr. Summers gave in early 2000, as the economic crisis of the 1990s was winding down. Discussing the causes of that crisis, Mr. Summers pointed to things that the crisis countries lacked — and that, by implication, the United States had. These things included “well-capitalized and supervised banks” and reliable, transparent corporate accounting. Oh well.

One of the analysts Mr. Summers cited in that lecture, by the way, was the economist Simon Johnson. In an article in the current issue of The Atlantic, Mr. Johnson, who served as the chief economist at the I.M.F. and is now a professor at M.I.T., declares that America’s current difficulties are “shockingly reminiscent” of crises in places like Russia and Argentina — including the key role played by crony capitalists.

In America as in the third world, he writes, “elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.”

It’s no wonder, then, that an article in yesterday’s Times about the response President Obama will receive in Europe was titled “English-Speaking Capitalism on Trial.”

Now, in fairness we have to say that the United States was far from being the only nation in which banks ran wild. Many European leaders are still in denial about the continent’s economic and financial troubles, which arguably run as deep as our own — although their nations’ much stronger social safety nets mean that we’re likely to experience far more human suffering. Still, it’s a fact that the crisis has cost America much of its credibility, and with it much of its ability to lead.

And that’s a very bad thing.

Like many other economists, I’ve been revisiting the Great Depression, looking for lessons that might help us avoid a repeat performance. And one thing that stands out from the history of the early 1930s is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate.

The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.”

Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight.

But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.

The financial crisis has had many costs. And one of those costs is the damage to America’s reputation, an asset we’ve lost just when we, and the world, need it most.


April 12, 2009

Mr. Soddy’s Ecological Economy
By ERIC ZENCEY, Montpelier, Vt.

INNOVATIVE and opaque instruments of debt; greedy bankers; lenders’ eagerness to take on risky loans; a lack of regulation; a shortage of bank liquidity: all have been nominated as the underlying cause of the largest economic downturn since the Great Depression. But a more perceptive, and more troubling, diagnosis is suggested by the work of a little-regarded British chemist-turned-economist who wrote before and during the Great Depression.

Frederick Soddy, born in 1877, was an individualist who bowed to few conventions, and who is described by one biographer as a difficult, obstinate man. A 1921 Nobel laureate in chemistry for his work on radioactive decay, he foresaw the energy potential of atomic fission as early as 1909. But his disquiet about that power’s potential wartime use, combined with his revulsion at his discipline’s complicity in the mass deaths of World War I, led him to set aside chemistry for the study of political economy — the world into which scientific progress introduces its gifts. In four books written from 1921 to 1934, Soddy carried on a quixotic campaign for a radical restructuring of global monetary relationships. He was roundly dismissed as a crank.

He offered a perspective on economics rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief of the economy as a perpetual motion machine, capable of generating infinite wealth — a criticism echoed by his intellectual heirs in the now emergent field of ecological economics.

A more apt analogy, said Nicholas Georgescu-Roegen (a Romanian-born economist whose work in the 1970s began to define this new approach), is to model the economy as a living system. Like all life, it draws from its environment valuable (or “low entropy”) matter and energy — for animate life, food; for an economy, energy, ores, the raw materials provided by plants and animals. And like all life, an economy emits a high-entropy wake — it spews degraded matter and energy: waste heat, waste gases, toxic byproducts, apple cores, the molecules of iron lost to rust and abrasion. Low entropy emissions include trash and pollution in all their forms, including yesterday’s newspaper, last year’s sneakers, last decade’s rusted automobile.

Matter taken up into the economy can be recycled, using energy; but energy, used once, is forever unavailable to us at that level again. The law of entropy commands a one-way flow downward from more to less useful forms. An animal can’t live perpetually on its own excreta. Neither can you fill the tank of your car by pushing it backwards. Thus, Georgescu-Roegen, paraphrasing the economist Alfred Marshall, said: “Biology, not mechanics, is our Mecca.”

Following Soddy, Georgescu-Roegen and other ecological economists argue that wealth is real and physical. It’s the stock of cars and computers and clothing, of furniture and French fries, that we buy with our dollars. The dollars aren’t real wealth, but only symbols that represent the bearer’s claim on an economy’s ability to generate wealth. Debt, for its part, is a claim on the economy’s ability to generate wealth in the future. “The ruling passion of the age,” Soddy said, “is to convert wealth into debt” — to exchange a thing with present-day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made. Money facilitates the exchange; it is, he said, “the nothing you get for something before you can get anything.”

Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.

Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.

It’s like musical chairs — in the wake of some shock (say, the run-up of the price of gas to $4 a gallon), holders of abstract debt suddenly want to hold money or real wealth instead. But not all of them can. One person’s loss causes another’s, and the whole system cascades into crisis. Each and every one of the crises that has beset the American economy in recent years has been, at heart, a crisis of debt repudiation. And we are unlikely to avoid more of them until we stop allowing claims on income to grow faster than income.

Soddy would not have been surprised at our current state of affairs. The problem isn’t simply greed, isn’t simply ignorance, isn’t a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernard Madoff or a subprime mortgage repackager willing to set us up for catastrophe. To stop them, we must balance claims on future wealth with the economy’s power to produce that wealth. How can that be done?

Soddy distilled his eccentric vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable: The first four were to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort. All of these are now conventional practice.

Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing. Banks do this by lending out most of their depositors’ money at interest — making loans that the borrower soon puts in a demand deposit (checking) account, where it will soon be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.

One way to stop this cycle, suggests Herman Daly, an ecological economist, would be to gradually institute a 100-percent reserve requirement on demand deposits. This would begin to shrink what Professor Daly calls “the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash.”

Banks would support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They would still make loans and still be able to lend at interest “the real money of real depositors,” in Professor Daly’s phrase, people who forgo consumption today by taking money out of their checking accounts and putting it in time deposits — CDs, passbook savings, 401(k)’s. In return, these savers receive a slightly larger claim on the real wealth of the community in the future.

In such a system, every increase in spending by borrowers would have to be matched by an act of saving or abstinence on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. (Of course, it would not solve the problem completely, not unless financial institutions were also forbidden to create subprime mortgage derivatives and other instruments of leveraged debt.)

If such a major structural renovation of our economy sounds hopelessly unrealistic, consider that so too did the abolition of the gold standard and the introduction of floating exchange rates back in the 1920s. If the laws of thermodynamics are sturdy, and if Soddy’s analysis of their relevance to economic life is correct, we’d better expand the realm of what we think is realistic.

Eric Zencey, a professor of historical and political studies at Empire State College, is the author of “Virgin Forest: Meditations on History, Ecology and Culture” and a novel, “Panama.”

NZZ Online    11. März 2011, 07:00

«Die USA stehen schlechter da als Griechenland»
200 Billionen Dollar implizite Schulden durch «Schneeballsysteme» in Altersvorsorge
Von Marco Metzler

Berücksichtigt man zusätzlich zu den Staatsschulden die impliziten Zahlungsversprechen der Sozialsysteme der USA, dann klafft in dem Land eine fiskalische Lücke von rund 200 Billionen Dollar. Im Vergleich zum BIP ist diese grösser als in Griechenland. Laut Ökonomie-Professor Laurence Kotlikoff sind die USA faktisch bankrott.
US-Flagge mit griechischen Farben: Ist die USA das nächste Griechenland? (Bild: Imago)

Der Ökonomie-Professor Laurence Kotlikoff von der Boston University hat an einer von der Privatbank Wegelin organisierten Konferenz darauf hingewiesen, dass in den USA – wenn man die impliziten Zahlungsversprechungen der Renten- und Sozialsystem mit einberechnet – eine grössere fiskalische Lücke klafft als beispielsweise in Griechenland. Seinen bewusst provokativen Vortrag hielt er am selben Tag, an dem der weltgrösste Rentenfonds von Pimco bekannt gegeben hatte, alle US-Staatsanleihen abgestossen zu haben.

Altersvorsorge als Schneeballsystem
Laut Kotlikoff bauen die Industriestaaten mit ihren Pensionssystemen nun schon seit 60 Jahren auf Schneeballsysteme (auf englisch: Ponzi Scheme). Ein Ponzi-Schema bezeichnet ein Geschäftsmodell, das, um die bisherigen Teilnehmer auszubezahlen, eine ständig wachsende Zahl an neuen Teilnehmer benötigt, die Geld in das System investieren. Benannt ist das Schema nach Charles Ponzi, der Anfang der zwanziger Jahre des letzten Jahrhunderts mit einem ebensolchen System zu zweifelhaftem Ruhm gelangte. Ein vergleichbares System hielt beispielsweise auch Ponzis Gesinnungsgenosse Bernard Madoff aufrecht.

Angesichts der demografischen Entwicklung in vielen Industriestaaten, in denen sich immer weniger Junge und immer mehr Alte gegenüberstehen, ist für Kotlikoff die Analogie zu einem Schneeballsystem nicht mehr weit, wie er mit folgender Anleitung ausführt.

Anleitung zum Bau eines Schneeballsystems
mtz. Laut Professor Kotlikoff sind auch Pensionssysteme der Industriestaaten nichts anderes als Schneeballsystem, die früher oder später zusammenbrechen werden. In seinem Vortrag liefert er auch gleich eine Anleitung an Politiker, um ein generationenübergreifendes Ponzi-Schema aufbauen und verschleiern zu können:

1. Man nehme der heutigen Jugend einen Betrag X weg
2. Man gebe den Alten X
3. Man verspreche der heutigen Jugend, dass sie im Alter Y erhalten werden, wobei Y grösser ist als X
4. Man werde gewählt oder gewinne die Wiederwahl
5. Man nehme der Jugend der Zukunft den Betrag Y weg
6. Man gebe Y den Alten der Zukunft
7. Man verspreche der Jugend der Zukunft, dass sie im Alter Z erhalten werden, wobei Z grösser ist als Y
8. Man werde gewählt oder gewinne die Wiederwahl
9. Man wiederhole Schritt 5 bis 8
10. Man wähle ein geeignetes fiskalisches Label, um sicherzustellen, dass die Verbindlichkeiten nicht als offizielle Schuld ausgewiesen werden.

Laut Kotlikoff kann man, um das Schneeballsystem zu verschleiern, beispielsweise die von der Jugend bezahlten Beträge als Steuern ausweisen und gleichzeitig die von den Alten erhaltenen Beträge als Transferzahlungen. Dies erlaube es, keine höhere offizielle Defizite auszuweisen und ein ausgeglichenes Budget zu präsentieren. Dadurch werden die Verbindlichkeiten zu inoffiziellen und impliziten Zahlungsversprechungen. Die fundamentalen Problem blieben aber weiterhin bestehen.

Die fiskalische Lücke eines Landes wird berechnet, indem man – vor einem unendlichen Zeithorizont – den gegenwärtigen Wert aller künftigen Ausgaben von dem gegenwärtigen Wert aller künftigen Steuereinnahmen subtrahiert. Die USA und auch viele EU-Länder bringen es gemäss Kotlikoff nicht fertig, die fiskalische Lücke vor einem unendlichen Zeithorizont auszurechnen und legen auch nicht offen, ob ihre Anlagen die offiziellen und inoffiziellen Verbindlichkeiten der Zukunft zu decken vermögen. «Das ist betrügerische Buchhaltung», sagt Kotlikoff.

Die USA stehen an einem Wendepunkt
Er zieht dabei eine Analogie zu den Betrügern wie Charles Ponzi oder Bernard Madoff, die beide gelogen haben, als es um den wahren Wert ihrer eigenen Anlagen ging. Dasselbe sei bei den generationenübergreifenden Schneeballsystemen der Fall. Ein solches System werde spätestens dann in sich zusammen fallen, wenn die Jungen die versprochenen Zahlungen an die Alten nicht mehr werden leisten können – denn schliesslich können die Jungen nicht mehr Steuern zahlen als sie tatsächlich verdienen.

«Die USA hat diesen Punkt erreicht», warnt Kotlikoff. «In Wirklichkeit sind die Vereinigten Staaten bankrott.» Das Congressional Budget Office habe die fiskalische Lücke zwischen dem gegenwärtigen Wert aller zukünftigen Ausgaben und den künftigen Steuereinnahmen der USA berechnet und komme auf eine Lücke von 202 Bio. Dollar (auf englisch: trillion). Dies stehe im Widerspruch zu den offiziell ausgewiesenen Staatsschulden der Vereinigten Staaten in der Höhe von 9 Bio. Dollar.

Steuererhöhung um 77 Prozent
«Die USA ist in schlechterer fiskalischer Verfassung als Griechenland», sagt Kotlikoff. Im Vergleich mit Europa habe die USA disproportional grosse inoffizielle, zukünftige Zahlungsversprechungen. Die fiskalische Lücke der USA sei 14 Mal grösser als das Bruttoinlandprodukt (BIP) des Landes, während der Faktor in Griechenland nur 11 betrage.

Um die fiskalische Lücke zu schliessen müsste laut Kotlikoff alle in den USA erhobenen Steuern ab sofort und permanent um 77 Prozent erhöht werden. Er glaube, dass weder die Republikaner noch die Demokraten jemals eine solche Steuererhöhung beschliessen werden. Aber allein eine sofortige, radikale Reform des Gesundheitswesens, des Steuersystems, der sozialen Sicherheit und der Staatsfinanzen könne die USA retten. Er rät deshalb auch davon ab, langfristige US-Staatsanleihen zu halten.

Drohende Inflation
Der Kollaps des Ponzi-Schemas in den USA könnte eine noch grössere Finanzkrise nach sich ziehen als die letzte, warnt Kotlikoff. Würde ein Kollaps verschiedener europäischer Staaten zu einem Sturm auf die Bankschalter führen – und sollte dieser Sturm auch auf die USA übergreifen – dann müsste die Notenbank Fed über Nacht im schlimmsten Fall 12 Billionen an neuen Dollars drucken.

Die Geldmenge der USA, die sich laut Kotlikoff schon von 0,84 Bio. Dollar im Jahr 2007 bis ins Jahr 2011 auf 3 Bio. Dollar ausgeweitet hat, würden sich über Nacht auf 15 Bio. Dollar erhöhen. Schon heute sei im Geldmengenwachstum die Basis für eine hohe Inflation angelegt. Sollten nochmals 12 Bio. Dollar dazukommen, dann werde eine Hyperinflation unvermeidlich sein.

Heimliche Enteignung
Selbstverständlich kann man implizite Schulden auch reduzieren, indem man die Zahlungsversprechen für die Jugend von heute reduziert und diese damit heimlich zu enteignen versucht. Aber dann stellt sich eine andere Frage: Wie lange werden die Jungen noch bereit sein, den Konsum der Alten mitzufinanzieren, wenn sie durchschauen, dass die Staaten die Zahlungsversprechen mittelfristig nicht mehr werden einhalten können? Vielleicht werden sich diese dann per Facebook und Twitter organisieren, um gegen die für sie schädlichen Schneeballsysteme zu revoltieren.