Well, since that post was written, we've found out about a potential $50 billion fraud at Bernard Madoff, a mere $100 million alleged fraud by Marc Dreier, and some dude in Miami who was rewriting the value of mortgages to make the associated securities more valuable. And that's just in 2 weeks with the limited resources that the FBI and SEC have to find this stuff relative to the total scale of what was going on.
Various things went wrong to produce the current financial shambles. But one of them was an "if it feels good, don't stop it" regulatory ethos that came straight from the top of government. That ethos attracts particular kinds of people.
This is convenient, since I was about to write a follow-up post on the same topic. The recession is uncovering a lot of shenanigans, as recessions usually do.
Nonetheless, I beg to differ about his interpretation. First of all, all of these things, while nasty, are sideshows; the economy would have fallen exactly as far and fast without them. P. O'Neill is confusing correlation with causation. The normal amount of fraud that pervades society is easier to uncover when bubbles collapse and con men are left short. The more interesting sort of fraud, which we may or may not find, will come out of the big banks and Frannie Mac.
Second of all, all of the stuff detailed in this post is very, very illegal. It isn't something that regulators nod and wink at. It isn't the kind of thing that Bush directed his SEC to go easy on. No one, at any time, in any regulatory agency, changed their opinion about the virtues of counterfeiting securities and impersonating pension officials.
Well put.
The argument that the author of the email seems to be making is that if doing A is illegal and the government prosecutes those who do A for doing A, it’s the fault of the government for not making doing B illegal.
The normal amount of fraud that pervades society is easier to uncover when bubbles collapse and con men are left short
I'll stipulate that this sounds reasonable. But wouldn't a corollary be that "the amount of fraud that pervades society increases when bubbles rise since it's easier to get away with," as in for instance Ponzoi schemes relying on increasing asset prices? Particularly since the bubble mentality induces some people to look less closely at things that appear too good to be true.
criminals or amoral idiots? Maybe not many criminals but a huge number of amoral idiots.
Bystanders to this financial crime were many
By Nassim Nicholas Taleb and Pablo Triana
Published: December 7 2008 19:18 | Last updated: December 7 2008 19:18
On March 13 1964, Catherine Genovese was murdered in the Queens borough of New York City. She was about to enter her apartment building at about 3am when she was stabbed and later raped by Winston Moseley. Moseley stole $50 from Genovese’s wallet and left her to die in the hallway.
Shocking as these details surely are, the lasting impact of the story may lie elsewhere. For plenty of people reportedly witnessed the attack, yet no one did much about it. Not one of the almost 40 neighbours who were said to have been aware of the incident left their apartments to go to Genovese’s rescue.
Not surprisingly, the Genovese case earned the interest of social psychologists, who developed the theory of the “bystander effect”. This claimed to show how the apathy of the masses can prevent the salvation of a victim. Psychologists concluded that, for a variety of reasons, the larger the number of observing bystanders, the lower the chances that the crime may be averted.
We have just witnessed a similar phenomenon in the financial markets. A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).
Imagine, yesterday you though you were worth 10, 15, 20 million and today you check in and find this....
http://www.madoff.com/
$50 Billion...gone.
From a personal finance perspective, how much money do you need to accumulate before it makes sense to have accounts at more than one brokerage firm?
Eh... you have SIPC, which provides a certain amount of protection for customers of SIPC members. It replaces securities, though...not capital.
www.sipc.org
Doubt Madoff was a member, though, at any rate. If he structured as a limited partnership, SIPC wouldn't apply.
There's also the state insurance commissioners, who can verify reserves, etc., for the insurance companies who market annuities and cash value life insurance contracts.
And then, of course, the well-established legit fund houses and brokerage houses.
Any knucklehead who got wiped out by declining to do business with any of the above in order to write a check to a country club buddy shouldn't be surprised.