Jump to content
Objectivism Online Forum

Bernard L. Madoff

Rate this topic


displayname

Recommended Posts

A lot of the groups who invested in him were acting irresponsibly with their money as well. Had Mort Zuckerman bothered to demand transparency from Ascot before handing over $30 million, he wouldn't be in the situation he's in. Instead of admitting he saw :P $$$$ :P in the huge returns they promised, he's going on all the news shows demanding greater regulation of the economy. He hadn't even heard of Madoff until this happened, so that shows you how little interest he had in where his money was going. "The SEC didn't do enough to protect my money." No, sir, you didn't do enough.

Edited by brian0918
Link to comment
Share on other sites

"The SEC didn't do enough to protect my money." No, sir, you didn't do enough.

While it is true that he did not do enough, there is also some evidence that the SEC knew about this since 2006. If we are to uphold the SEC to performing its legally assigned duties, then it did drop the ball on this one. It really shows how terribly inefficient and corrupt the entire government organization is. Relevant NY Times article here:

The commission said it received credible allegations about the scheme at least nine years ago and will immediately open an internal investigation to examine why it had failed to pursue them aggressively.

“Our initial findings have been deeply troubling,” Christopher Cox, the S.E.C. chairman, said in his statement. The commission received “credible and specific allegations regarding Mr. Madoff’s financial wrongdoing,” but did not respond aggressively, he said.

Moreover, there is evidence of a personal link between Madoff and the SEC:

One of the commission’s investigative teams that had examined the Madoff firm was headed by a lawyer named Eric Swanson, who served for 10 years as a lawyer at the commission and left in 2006 while he was an assistant director of the office of compliance inspections and examinations in Washington.

In 2007, Mr. Swanson married Shana Madoff, a niece of Bernard L. Madoff and daughter of his brother, Peter Madoff, the firm’s chief compliance officer. Ms. Madoff is the firm’s compliance attorney.

This is more evidence for what happens when government gets involved in the economy. Corruption.

When I first began trading in 2006, I heard rumors that the SEC was going to shutdown Madoff. It's been flying around for a while now that he's been under suspicion.

Edited by adrock3215
Link to comment
Share on other sites

I'm fully aware of the evidence the SEC had in its hands. Their excuse is that they have too many groups to regulate and not enough man power. I say they shouldn't exist at all. Their services can be provided by competing private organizations, which investors would scrutinize as much as any other company. Instead we have investors blindly accepting what the government tells them (or doesn't tell them) and hoping that, should something go wrong, the government will come in and save the day. The SEC should not exist.

Link to comment
Share on other sites

The only way this guy was able to rip off so many people was because all these people looked at him like the goose that laid the golden egg's. He, like Francisco had people practically throwing their cash at him, but that is where the similarity stopped. Francisco lost 15 million, this criminal made millions. There was no philosophical lesson being taught, no final result of an twisted ideal being exposed, just one looter ripping off a bunch of moochers.

Link to comment
Share on other sites

What about investigating securities fraud and the like?

Well, they're not doing a very good job of preventing that now, are they? In addition, many of the things they consider fraudulent, simply aren't. (Insider information/trading, for example.)

Individuals can sue or law enforcement can file charges. (It's already illegal to steal and commit fraud.) This is a job for attorneys and the courts, not a big, separate, government agency that simply keeps the honest guys honest and prevents free market solutions. SEC regulations hamper my efforts to best serve our clients, not to mention, make my job miserable sometimes.

As just one example, until very recently, we had to keep a paper copy of each and every incoming and outgoing email from clients. You should see our offsite storage. It's a ridiculous fire hazard. :lol:

Link to comment
Share on other sites

Well, they're not doing a very good job of preventing that now, are they? In addition, many of the things they consider fraudulent, simply aren't. (Insider information/trading, for example.)

Individuals can sue or law enforcement can file charges. (It's already illegal to steal and commit fraud.) This is a job for attorneys and the courts, not a big, separate, government agency that simply keeps the honest guys honest and prevents free market solutions. SEC regulations hamper my efforts to best serve our clients, not to mention, make my job miserable sometimes.

As just one example, until very recently, we had to keep a paper copy of each and every incoming and outgoing email from clients. You should see our offsite storage. It's a ridiculous fire hazard. :confused:

First, I'm not an objectivist, but i enjoy reading material related to objectivism.

i understand the view of eliminating government involvement as much as possible. My question to you is that on an "individual" basis and small population base it makes a lot of sense, however, when an organization or chain of organizations that you research do not disclose information that puts financial health at risk, how is the industry going to ensure that a set of standards are adhered to. In the current society (america), we don't have the knowledge, time, education to understand and properly investigate the intricacies of what is known as the capitalist system on which much of the economy in the real world exists. Plus, the economy is global, with foreign countries using the imperfect capitalist US system. I can only assume that decisions are made to invest with some trust that a system is safe, otherwise wealth creation would be stifled on the open market.

I understand the philosophy that is espoused, i also understand the world as it exists in reality, with an eclectic group of people with a wide range of people with a range of intellect, financial understanding, emotions, cultural biases, religious influences and education. It is this melting pot of people where we live and must interact, do business with, and prosper. Since, in the real world, people are not homogeneous, what system can be implemented to ensure standards of practice are implemented to ensure a Ponzi scheme such as Madoff doesn't happen again. Sure, it sounds like the SEC was asleep at the switch, but the SEC has also caught and prevented widespread loss hurting unsuspecting crime victims.

Whatever the answer is, and I'm sure the responses I'll see will have absolutely nothing to do with a "government" organization, but perhaps one answer is an industry self-overseeing system. Because, as I see it, individuals acting in a criminal matter, not in the best interest of their customers, should be stopped much sooner rather than later, and one of the ways to ensure business is monitored by regular audits by some industry respected and industry accepted group that has power to implement judicial power and authority if laws are broken. An example of this may be something like the American Medical Association that governs doctors ability to practice and responds to complaints submitted by individuals, hospitals, etc. Concurrently, if the charges are brought up, and it is apparent that a criminal act has occurred, the judicial system is also notified (or the other way).

To discuss a complete overhaul of the american capital system is really not an answer to this. We exist in reality, in the present day, laws currently in place, regulatory bodies overseeing business sectors, etc.

What is the best way to ensure something like this is caught early enough to not cause as much global impact as it has? Please try and account for the "global economy", economies of scale, capitalism, and the behavior of both the customer, and the company. Abstract answers neither give solutions, nor do answers that belittle my limited understanding of objectivism.

Link to comment
Share on other sites

What is the best way to ensure something like this is caught early enough to not cause as much global impact as it has?
The solution to the Madoff type of scandal was solved centuries ago.

First, there is a general abstract principle: trust but verify. I like to use the example to Warren Buffett here. He is famous for doing some multi-million dollar deals with a nod. However, while the deal is done that way in principle, what is never mentioned is that a bunch of others (accountants and lawyers) will always check things out, and insert protective terms, before the deal is actually signed. One has to keep in mind the scale of a transaction, and ensure that verification matches the scale, and risk of failure/

Second, is the general practice of using structure as a means of limiting fraud. A hundred years ago, largish companies would have a cashier who only received cash, and a separate one who disbursed it. These two would interact via a back-office person. The simple system was not fool-proof, but it made it a little more difficult for a single person to cover up a fraud. Another example: when you want to buy a house, do not let the broker recommend a house-inspector; he who pays the piper names the tune. There are countless other examples of this.

I suspect that many people who gave Madoff money assumed that "the system" contained the required checks. Many of them trusted Madoff more than they would trust many others. However, they also trusted "the system". Aftre this, intelligent people will be more cautious. For instance, they might insist on getting a report from some type of independent custodian, verifying the value of their account, even if the details of the trades are secret. They might insist that this custodian me some large organization (say a J.P.Morgan), to assure themselves that the custodian is not perhaps a relative of the investment manager.I wouldn;t be surprised if people are already asking their hedge-fund managers for such controls and reassurances.

Link to comment
Share on other sites

I suspect that many people who gave Madoff money assumed that "the system" contained the required checks.

Yes, the system currently set up leads to a sort of complacency where due dilligence is not performed fully. People assume that the SEC wouldn't possibly let any fraud occur. Similarly, the FDIC leads to extreme complacency on the part of commercial bank depositors.

Self-regulation has worked for a while now in the financial industry. Organizations include NASD, FINRA, the American Arbitration Association, and the National Association of Realtors.

There is a broader point to be made though.

I'm not sure one can answer watson's question, without discussing an overhaul of the American economy. I understand why one would want to do this, because it seems as if there surely some way to accomplish increased stability in our current economy. The truth is that there is no way to fix these issues without totally overhauling the American capitalist system, namely, the Federal Reserve. In the absense of a gold standard, it's the US government who is running the real ponzi scheme. Madoff's 50 billion is pocket change compared to the balance sheet of the Fed. To ask me to not address the system, but to come up with a fix to the system, ties my hands behind my back and ignores the elephant in the room. It amounts to "With the system in place that creates all the current problems in the economy, how would you fix the current problems in the economy (without changing the system)."

Edited by adrock3215
Link to comment
Share on other sites

Yes, the system currently set up leads to a sort of complacency where due dilligence is not performed fully. People assume that the SEC wouldn't possibly let any fraud occur. Similarly, the FDIC leads to extreme complacency on the part of commercial bank depositors.

Self-regulation has worked for a while now in the financial industry. Organizations include NASD, FINRA, the American Arbitration Association, and the National Association of Realtors.

There is a broader point to be made though.

I'm not sure one can answer watson's question, without discussing an overhaul of the American economy. I understand why one would want to do this, because it seems as if there surely some way to accomplish increased stability in our current economy. The truth is that there is no way to fix these issues without totally overhauling the American capitalist system, namely, the Federal Reserve. In the absense of a gold standard, it's the US government who is running the real ponzi scheme. Madoff's 50 billion is pocket change compared to the balance sheet of the Fed. To ask me to not address the system, but to come up with a fix to the system, ties my hands behind my back and ignores the elephant in the room. It amounts to "With the system in place that creates all the current problems in the economy, how would you fix the current problems in the economy (without changing the system)."

There are some cracks in the fed that need to be worked out, rationally and with an open mind to ensure the best protection is in place to ensure an economically sound, globally functional, profitable, and trustworthy system is in place, knowing that bad apples do exist. Again, we don't and can't live in a bubble on the global economic front, so to tell the government, the way it exists today, to stay out of capitalism is not going to happen given the current mess. I insist on remaining in the real world, politely writing political representatives, and making sensible suggestions, again, within the given framework of feasiblility..

However, I don't throw paranoia that the gov't is running a "ponzi" scheme. We will, hopefully, learn from this, and reform (better than the ridiculous bail-outs) in the economy is inevitable. The fed seems to be acting with wanton disregard for a reasonable approach for what they started. We're up the creek without a paddle now, and have to figure out how to get to shore. We can discuss appropriate reform as we use our hands to paddle upstream toward the shore, but don't forget, we are where we are and have to get somewhere else to build new paddles with the resources on the shoreline.

So, i extend my last questions (which the answers have some merit, yet, as no system is perfect, lack some tangible answers) to include, how would you, as an objectivist get us to shore, given that we are up the creek, so to speak? Again, stick to point, tangible answers, and can you please stick within the framework of the current "american" system or "reasonably modified system" that you think could be swallowed by say even 30% of the nation. Once, we are ashore, the discussions for how to ensure things like Madoff don't happen again can be debated, and I understand, respect, and appreciate the position of both the objectivist viewpoint - no government, as well as the viewpoint that the SEC, or other government arm, can function.

I'm just finding that the objectivist type approach and philosophy isn't providing me with how to actually function using the philosophy in an eclectic, social, interactive world, where government, and quasi capitalism does exist, mangled within a world full of religion, and individuals acting and impacting those around them. The reason I have an understanding for some government, is that the more energy I can focus on my own ambitions, goals, and selfish pursuits, the less time I would have to manage executing and implementing a philosophical approach to life, again, given the current world in which we live. As a result, I have to outsource services, law making and roles that I feel best under the control of the community leaders with whom I have entrusted with my political vote. The best solution for me is to write my political or other representatives a quick email expressing my disgust, opinions, and believe it or not, sometimes support. For example, this Madoff thing is pushing me to write the fed, member of congress, etc., and brief them why a self-regulated industry would, in the long run, be better, where the "customers" of the self-regulated body has some judicial oversight or power in conjunction within the current or potentially slightly modified system.

Again, remember, the reality we live in has all the things we have discussed, PLUS the political influences that do exist in reality, we can't forget this either.

Link to comment
Share on other sites

I don't think this has been brought up yet, so I thought I would mention it. I read an article from the Mises institute which explained how this would be solved in a SEC-less society.

Has anyone heard of a due-diligence firm? These are firms which analyze things like Madoff's Ponzi scheme and report their findings. They're apparently much more efficient and accurate than the SEC. An example? How about the fact that they've reported Madoff to the SEC, and their warnings were ignored.

Due-diligence firms use the fees collected from their clients to hire professionals to meticulously review hedge firms for signs of deceit. One such firm is Aksia LLC. After painstakingly investigating the operations of Madoff's operation, they found several red flags. A brief summary of some of the red flags uncovered by Aksia can be found here. Shockingly, Aksia even uncovered a letter to the SEC dating from 2005 which claimed that Madoff was running a Ponzi scheme. As a result of its investigation, Aksia advised all of its clients not to invest their money in Madoff's hedge fund.

"Madoff and the Failure of the SEC", Briggs Armstrong.

Edited by Devils_Advocate
Link to comment
Share on other sites

So, i extend my last questions (which the answers have some merit, yet, as no system is perfect, lack some tangible answers) to include, how would you, as an objectivist get us to shore, given that we are up the creek, so to speak? Again, stick to point, tangible answers, and can you please stick within the framework of the current "american" system or "reasonably modified system" that you think could be swallowed by say even 30% of the nation. Once, we are ashore, the discussions for how to ensure things like Madoff don't happen again can be debated, and I understand, respect, and appreciate the position of both the objectivist viewpoint - no government, as well as the viewpoint that the SEC, or other government arm, can function.

Fair enough.

Firstly, one needs to recognize and make efforts to seperate government and economy in the long-term, since that is the shore we are trying to reach. Without that framework at place, we'll just be floating up the creek, down the creek, and every which way along the creek. The first step toward that framework is the recognition that the government IS a ponzi scheme. It issues 10 billion in bonds, sells them to investors all over the world, and when they come due, issues another 10 billion to pay off the principal on the first 10 billion. To pay the interest, government borrows more money. Social Security is quite obviously a ponzi scheme whereby funds from current contributors are used to pay old contributors. Assuming that these facts about the nature of government are recognized, one can begin discussing the short-term.

It is my belief that the government does have a role to play in cleaning up the current mess, since they created it. During the Panic of 1907, we had JP Morgan around to oversee the bankruptcies of numerous financial institutions in an orderly manner. Today, we have no such man, since regulations have, in essence, prevented such a figure from emerging. The government needs to oversee an orderly process of liquidation and begin deleveraging the economy in an effort to work toward a gold standard, abolish the Fed, and ultimately seperate government and economy entirely.

Short-term capital capital infusions are what is needed to help avoid disaster and begin working toward a future fix. Like I said, there is no JP Morgan available to step up and perform the role from the private sector. I consider it to be reasonable for government to provide capital to banks so that they have freedom to reorganize their balance sheets. As government does this, legislators can decide on a set calander by which all banking regulations are phased out. It could be a 20 year plan for all I care, but several small changes would need to go into effect immediately. For instance, bank capital requirements should cease immediately. In addition, FDIC insurance needs to be phased out. It is currently $250,000. Drop it incrementally to $100,000, $50,000, $10,000, and then none. Secondly, last I read, the entire commercial banking system as a whole was about 50 billion short of holding 100% reserves. Banks have chosen to hold nearly 100% reserves in the current environment, and that should be encouraged. Therefore, the Fed should end its policy of sloshing easy money around the system, hoping it will get lent to consumers and businesses somewhere down the line. It should immediately raise its Fed Funds Rate target, let mortgage rates increase, and let the bottom fall out of the housing market. The market is telling us that homes are too expensive, let the market work. Thirdly, the Fed needs to stop being the market maker of last resort, and fulfill solely its role from the 1913 Federal Reserve Act as lender of last resort. The role of the Fed is not to create a market wherever it feels like it. Bernanke needs to be reigned in. Practically, what this means is that his dual mandate needs to be tossed out, and Congress should give the Fed the same hierarchical mandate that the ECB has.

I'm just finding that the objectivist type approach and philosophy isn't providing me with how to actually function using the philosophy in an eclectic, social, interactive world, where government, and quasi capitalism does exist, mangled within a world full of religion, and individuals acting and impacting those around them.

I understand that. But there is no particular reason why you have to spend your days worrying about what happens in Washington. As far as I know, Objectivist ethics would tell you that you should focus on your self. As of now, you still have freedom of speech, along with the majority of your other fundamental civil liberties. Until those begin to erode, I would concetrate on yourself and not think about politics, unless you really have to.

Edited by adrock3215
Link to comment
Share on other sites

  • 2 weeks later...

Watson,

The SEC is a perfect example of "Regulatory Capture"( http://en.wikipedia.org/wiki/Regulatory_capture ) and is actually worse than not having anything at all, because it provides the appearance that there is an impartial regulatory body when in fact there is nothing of the sort.

People have been reporting Madoff to the SEC since 1999 and nothing happened, because the quickest way to get fired there is to investigate major players. http://www.truthout.org/122208J If you cause trouble for the big guys, you hurt your chances to get hired by a big firm later down the road and move from a high 5/low 6 figure income to a solid 7 figure one. Hence the harassment of Martha Stewart and The folks at National Lampoon instead.

Link to comment
Share on other sites

I'm fully aware of the evidence the SEC had in its hands. Their excuse is that they have too many groups to regulate and not enough man power. I say they shouldn't exist at all. Their services can be provided by competing private organizations, which investors would scrutinize as much as any other company. Instead we have investors blindly accepting what the government tells them (or doesn't tell them) and hoping that, should something go wrong, the government will come in and save the day. The SEC should not exist.

As an interesting side note, the initial reason for the creation of the SEC (well, one of the main ones anyway) were the "infamous" stock pools of the 1920s. These were claimed to have injured small investors. The SEC was supposed to end them and restore "safety" to the financial markets.

But, according to the Senate's own two year long investigation at the time, the effects of these stock pools were largely and grossly exaggerated (if they existed at all). To the extent that they "manipulated" the markets, they did so in a way that would be identical (or very similar) to today's brokerage houses - short term massive buying and selling that had a temporary direct effect on financial markets.

Thus, I think you are right...logically, the SEC should not exist (this is not to detract from the fact that it violates an individual's rights to his life and property).

In the end, Congress at large wanted more control over capital markets. Reason? I think we all know the underlying philosophical reason and the distrust of selfishness, the profit motive, and of course, Capitalism.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...