In more bad economic news, a well-respected financial figure has admitted that his billion-dollar hedge fund business was a colossal fraud:
Prosecutors and regulators accused the 70-year-old former chairman of the Nasdaq Stock Market of masterminding a Ponzi scheme of epic proportions through a hedge fund he ran. Investors entrusted him with billions of dollars.Federal agents arrested Madoff at his apartment on Thursday after prosecutors said he told senior employees that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."
Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management. Many investors may have had indirect exposure by investing through the firm's clients.
The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry Ltd, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management Ltd.
About a dozen angry investors gathered on Friday in the lobby of the Lipstick Building in midtown Manhattan, where the market-making firm and advisory fund are both headquartered, demanding to know the fate of their money.
One woman who declined to give her name said that when she called the firm's offices on Thursday she was told it was "business as usual."
Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right." [...]
U.S. stocks tumbled Friday after talks in Congress on a rescue for the nation's auto industry broke down, but some investors also cited unease about the Madoff collapse.
"It raises the question is this a one-off deal, or in the kind of market environment we have, is the SEC going to uncover more shady investments?" said Fred Dickson, market strategist, director of retail research, D.A. Davidson & Co. in Lake Oswego, Oregon.
While we can blame lots of specific factors for the ability of a scheme like this to fool people for so long, I think sometimes it comes back to (you guessed it) morality:
Greed is not a virtue. No matter how often various groups, a loud sector of the Republican party most notably, perhaps, tries to dress greed up in Sunday clothes and make it resemble Prudence or Justice or even Temperance, Greed isn't even remotely related to any of these virtues, and doesn't look a bit like them.
But our culture promotes and rewards greed. The free market is spoken of sometimes almost reverentially, as if men were not fallen, and did not need someone watching over their shoulders to be sure they would always act honestly and with integrity.
It didn't always work that way. Colonial American law, for instance, fixed food and drink prices at taverns; was this unwarranted government interference in business, or a precaution against price gouging in an era when one could hardly make a phone call to the next nearest public house to see if the rates charged where you were standing were even remotely fair? Colonial Americans took for granted the idea that man was a sinful creature, and that even a virtuous man might be tempted to charge a rich traveler more than a meal was worth on occasion if the law didn't help him stay honest.
Finding the balance between reasonable freedom and profitability, and balanced and sane government oversight, has never been easy. But there have always been people who have seemed to take offense at the notion that the pressures of the free market wouldn't be enough to ensure the highest degree of integrity among businesses.
The Madoff example shows the opposite. In a weakly-regulated climate, in a failing economy, his up to double-digit returns should have seemed, and did seem, too good to be true; but that didn't stop investors from lining up to give him money. If anything, it made people more eager to invest in his funds; so long as there was the expected level of profit, or better, what could possibly be wrong?
What could be wrong is that men are not angels, and that even in the free market a man is still free to choose the good of honesty (even if this means lower profits and even failure) or the evil of greed (so long as he can get away with it).
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"sharon",
no one said that the "blame" is exclusive republican. it however is indisputable that deregulation and deification of market forces were CORNERSTONES of republican ideology for decades.
anyone who has been a consistent republican voter over this time frame got what s/he asked for. therefore, that person may not whine about this at all.
The "best and the brightest" strike again.
BTW, celticdragon, Alan Greenspan sat at the feet of Ayn Rand (literally, it turns out) for many years. Ideas have consequences.
Erin,
I didn't say deregulation had nothing to do with the current collapse. I said it had nothing to do with Madoff's (alleged) fraud. Whether it occurs in Soviet Russia or in...I don't know...name a pure free market that ever existed...fraud is fraud. That's what my post directly addressed.
Since you brought it up, you're right about following the incentives but, if you want to get into the original causes of the current economic crisis, blaming deregulation is a bit like blaming the Chicago Fire on inadequate fire-hose diameters. It completely ignores the densely packed city of wood under windy drought conditions on which the fire fed. That city of wood is/was the monetary and interest-rate environment in which spending and risk-taking exploded and that leads straight back to the Fed and that ass-covering twit, Alan Greenspan. Cheap cash simultaneously created the incentive to spend and removed the incentive to save and correctly price risk because when cash got so cheap, lending institutions were having to compete harder and harder for smaller and smaller margins on loans. Simply put, when Greenspan & Co. lowered interest rates too far for too long, it set the stage for massive risk-taking and overinvestment. In fact, if you accept that interest-rate manipulation is a form of regulation then you must actually conclude that government intervention in the markets was as much to blame for this crisis as the lack of it. (An article by Nick Gillespie linked from this very blog references the case that there has been more regulation of the markets under Bush, not less.) Now, any fraud that occurred - and it clearly did in this and plenty of other cases - should be indicted to the fullest. But, to complete the analogy, if the fireman was negligent in his duties in this case, it wasn't because he wasn't given the proper firefighting equipment. It was because he was too busy soaking Mrs. O'Leary's barn in gasoline.
Erin Manning
So, RNC, a deregulatory environment which permitted hedge fund investors to risk larger and larger sums of money without sufficient oversight had nothing at all to do with our economic collapse?
Technically speaking, not really, at this point.
Further, the push for deregulation (I specifically recall some news and conversations from about two years ago) wasn't at its heart a call to "free" the markets more and more and let investors invest these millions of dollars without having to follow all of the same rules that ordinary investors had to follow?
It is important to remember that a lot of the companies getting hurt actually lobbied to reduce their amount of restrictions, and got special waivers that allowed them to keep leveraging.
And, incidentally, hedge funds are exactly the same way. They're 'special' and have less regulation because...um...investors in them are very smart about money? At least that appears to be the theory. Until, you know, now.
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