Map of life expectancy at birth from Global Education Project.

Wednesday, December 24, 2008

Schtickdreck of the year

I normally avoid writing about the subjects that everybody else is talking about, unless I really have something original to add. This post may not qualify, but I feel the need to say something about Bernie Madoffwiththedough just because I'm as fascinated by the whole thing as you are.

Many people are concerned that the case will encourage antisemitic stereotypes, but I'm not so worried about that. People who already believe in such stereotypes will no doubt see it through that lens, but I don't think it will create antisemitism where it doesn't already exist, for several reasons. First of all, many of the most prominent victims were Jewish charities. It doesn't make a whole lot of sense to say, "Those greedy grasping Jews, serves them right to lose all that money they were planning to give away." Furthermore, people already believe that Wall St. wheeler dealers of every ethnicity are crooks, so the only thing special about Bernie is the scale and brazenness of his deceit.

To the extent that Bernie's Ponzi game preyed on his fellow Jews -- and that was only one of the strategies he used to recruit victims -- it was entirely typical of Ponzi and pyramid schemes. (Actually the Madoff fraud was a little bit of both, of which more below.) The SEC even has a term for this -- affinity fraud:

Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are - or pretend to be - members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme, by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster's ruse. . . .

Many affinity scams involve "Ponzi" or pyramid schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure. In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors - when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors discover that most or all of their money is gone.

So Bernie's game was just the same old tired out story, writ large. So many of the victims were supposedly sophisticated investors and business people -- it just shows that human nature is the same all over, rich or poor. It's in human nature to lie, but lying wouldn't work if it weren't in our nature to trust as well. We tend to trust people who seem familiar, who are part of our own group and who are somehow like us, so Madoff was the perfect con man to prey on wealthy Jews. Sociopaths can show up anywhere, alas, but if we went through life suspecting everybody we meet of being undetectably morally depraved we couldn't function.

The scheme, as I say, was a pyramid scheme on top of a Ponzi scheme. Madoff created a multi-level marketing structure in which lesser investment managers took people's money and passed it on to him, skimming a portion for themselves. In some cases we know that at least a third layer existed, and perhaps there were four or more somewhere. Originally, these also preyed on the original population but as Madoff grew more and more desperate for new investors the pyramid game reached out more broadly, including Europe and WASPy Greenwich.

The only interesting lesson here is that the pyramid game turns out to be, in and of itself, not only legal but perfectly standard Wall Street practice. There is a whole industry of "funds" that will take your money, take a cut, and invest it with yet another manager who will also take a cut and who may actually manage the investment for you or who may just turn around and pass it on to someone else, who will continue the scam. Even the people who do invest the money themselves are merely leeching on you; for every buyer of a stock there is a seller, for every winner there is a loser, so on balance, the industry cannot possibly be providing any benefit to its customers. It's all a scam, every bit of it. These people are purely parasites on society, whether their activities are technically crimes or not, and they get fabulously rich just by sucking blood.

The whole enterprise of financial asset management and trading is nothing but a giant tapeworm in the guts of society. Everyone involved in it, all of them, to a woman and man, are thieves.


robin andrea said...

There's a line in an AlterNet article today that really summed it up for me: Outlaws used to rob banks; now banks rob us.

Madoff is the new poster boy. Many came before him, many will follow. The fascination with money and making it rich and quick will never cease to amaze me.

Ana said...

... "so on balance, the industry cannot possibly be providing any benefit to its customers. It's all a scam, every bit of it."

absolutely correct. plainly stated.