Bernie Madoff

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pages: 598 words: 169,194

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

accounting loophole / creative accounting, airport security, Albert Einstein, banking crisis, Bernie Madoff, break the buck, British Empire, buy and hold, centralized clearinghouse, collapse of Lehman Brothers, computerized trading, corporate raider, diversified portfolio, Donald Trump, dumpster diving, Edward Thorp, financial deregulation, financial thriller, fixed income, forensic accounting, Gordon Gekko, index fund, locking in a profit, mail merge, merger arbitrage, money market fund, plutocrats, Plutocrats, Ponzi scheme, Potemkin village, random walk, Renaissance Technologies, riskless arbitrage, Ronald Reagan, short selling, Small Order Execution System, source of truth, sovereign wealth fund, too big to fail, transaction costs, traveling salesman

The Sins of the Father 15. The Wheels of Justice 16. Hope, Lost and Found Epilogue Notes Acknowledgements Index CAST OF CHARACTERS THE MADOFF FAMILY Bernie Madoff, founder of Bernard L. Madoff Investment Securities Ruth Madoff (née Alpern), his wife Mark Madoff, their elder son, born 1964 Andrew Madoff, their younger son, born 1966 Peter Madoff, Bernie Madoff’s younger brother Shana Madoff, his daughter Roger Madoff, his son Ralph Madoff, Bernie Madoff’s father Sylvia Madoff (née Muntner), Bernie Madoff’s mother AT BERNARD L. MADOFF INVESTMENT SECURITIES Eleanor Squillari, Bernie Madoff’s secretary Irwin Lipkin, Madoff’s first employee Daniel Bonventre, the director of operations Frank DiPascali, the manager on the seventeenth floor Jerome O’Hara, a computer programmer George Perez, his coworker and officemate David Kugel, an arbitrage trader THE ACCOUNTANTS Saul Alpern, Ruth Madoff’s father Frank Avellino, Alpern’s colleague and successor Michael Bienes, Avellino’s longtime partner Jerome Horowitz, an early Alpern partner and Madoff’s accountant David Friehling, Horowitz’s son-in-law and successor Paul Konigsberg, a Manhattan accountant Richard Glantz, a lawyer and the son of an early Alpern associate INDIVIDUAL INVESTORS AND “INTRODUCERS” Martin J.

District Court, Southern District of New York. Each was sentenced to twenty years in prison. The case is number 1:05-cr-01036-CM-1. 148 One of his last calls from his deathbed: Confidential interview with a longtime friend of the Levy family. 148 “Bernie Madoff, trust Bernie Madoff”: Fox Business News interview with Francis Levy, “Bulls and Bears,” January 2009, from a transcript of Money for Breakfast, Jan. 9, 2009, posted on CEOWire and retrieved from BNET. 148 He had named Madoff as the executor: SIPC v. Bernard L. Madoff Investment Securities, Debtor; In re: Bernard L. Madoff, Debtor (hereafter Main Madoff Liquidation), case number 08-01789-BRL in U.S. Bankruptcy Court, Southern District of New York, “Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and Jeanne Levy-Church and Francis N.

He saw a different life for himself: a life married to Ruth and a career working for himself on Wall Street. On November 25, 1959, with him still shy of his university diploma and her enrolled in nearby Queens College, Bernie Madoff and Ruth Alpern were married at the Laurelton Jewish Center. She was eighteen years old. A few days later, according to family lore, he filed the papers to open his own brokerage business, although the official birth date for Bernard L. Madoff Investment Securities in regulatory ledgers is January 19, 1960. He was in his final year of university, just shy of twenty-two. He would later enrol in law school but would drop out after a single year, having spent almost every afternoon trying to drum up business for his newborn brokerage house. By Bernie Madoff’s own account, it was not until late in his university years that he seriously considered a life on Wall Street. But he certainly learned about Wall Street life in these early years—one of his close friends, Michael Lieberbaum, was the son of an early stock market success story.


pages: 431 words: 132,416

No One Would Listen: A True Financial Thriller by Harry Markopolos

backtesting, barriers to entry, Bernie Madoff, buy and hold, call centre, centralized clearinghouse, correlation coefficient, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, family office, financial thriller, fixed income, forensic accounting, high net worth, index card, Long Term Capital Management, Louis Bachelier, offshore financial centre, Ponzi scheme, price mechanism, quantitative trading / quantitative finance, regulatory arbitrage, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, statistical arbitrage, too big to fail, transaction costs, your tax dollars at work

Adelman, Jim Adelphia case Advisors Act Affinity scheme Alarm systems Arthur Treacher’s Fish and Chips Restaurant Arvedlund, Erin Asian investors Association of Certified Fraud Examiners Audit opinions Avellino & Bienes Bachenheimer, Doria Bank foreclosures Barron, Charles Barron’s Bates, Harry Becker, David Benchmark Plus fund Bergers, David Bernard L. Madoff Investment Securities LLC, Bid/ask spreads Black box strategy Bloomberg terminals Boilermaker’s Union Bounty program Broker-dealer profits Brown, Jerry Broyhill, Paul H. Broyhill All-Weather Fund Bull spreads Burns, Pat Bush administration Call options Capito, Shelly Casey, Frank background of careers at Rampart Chicago Art Museum continued activities of and Dave Fraley discovers Bernie Madoff cash needs discovers fraudulent trades discussion on Bernie Madoff and Harry Markopolos helps Neil Chelo relocate impact of Bernie Madoff case on leaves Benchmark leaves Rampart London based funds of funds avoids Bernie Madoff on Madoff operations meets Mike Ocrant meets Paul H. Broyhill meets Scott Franzblau and mobsters on Ponzi scheme on Ponzi scheme vs. front-running post Bernie Madoff arrest public acknowledgment of role and Rene-Thierry de la Villehuchet on reporting to SEC on reverse engineering role of sailing disaster on SEC failure Wall Street Journal warns individual investors Casey, Judy Cattle trading scam Charles, Prince Chelo, Neil: business education of careers at Rampart continued activities of early career of impact of Bernie Madoff case on information gathering leaves Rampart OPRA tapes on payment for order flow on Ponzi scheme vs. front-running post Bernie Madoff arrest public acknowledgment of role on quants on reporting to SEC reviews strategy analysis role of talks to Amit Vijayvergiya Wall Street Journal warns individual investors Cheung, Meaghan Chicago Art Museum Chicago Board of Options Exchange (CBOE) Chinese vitamin suppliers scandal Citigroup Client redemptions Clinton, Hillary Cohen, Steve Collars Commodities straddle Commodity Futures Trading Commission Congress: Chuck Schumer call to SEC Harry Markopolos testimony investigation by SEC established by SEC in hearings by Congressional Record Contacts and relationships Cook, Boyd Correlation coefficient Corruption: as business as usual drug cartels incompetence vs.

Far better that the SEC is proactive in shutting down a Ponzi Scheme of this size rather than reactive. Who: The politically powerful Madoff family owns and operates a New York City based broker-dealer, ECN, and what is effectively the world’s largest hedge fund. Bernard “Bernie” Madoff, the family patriarch started the firm. According to the www.madoff.com website, “Bernard L. Madoff was one of the five broker-dealers most closely involved in developing the NASDAQ Stock Market. He has been chairman of the board of directors of the NASDAQ Stock Market as well as a member of the board of governors of the NASD and a member of numerous NASD committees. Bernard Madoff was also a founding member of the International Securities Clearing Corporation in London. His brother, Peter B. Madoff has served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region.

If those people he interviewed responded that they were not aware of the strategy used by Madoff, after explaining the strategy he should ask questions such as: Could $20 billion plus be run by a single hedge fund manager using the strategy I just described without you having heard about it? Could this split-strike option conversion strategy be capable of earning average annual gross returns of 16 percent with only seven monthly losses during the past 14 years? But if this person had heard of Bernie Madoff, among the questions I suggested were: Do you know who Bernie Madoff trades his over-the-counter OEX index options through? Have you ever seen the footprints of Bernie Madoff’s trades in the markets that you trade? How realistic do you consider Bernie Madoff’s performance numbers to be? Have you heard any stories about Bernie Madoff going to cash ahead of major market sell-offs? If so, how do you think he manages to sell ahead of the market? In the world of numbers, it should take only a few pointed questions to figure out what’s real. If Wilke had asked these questions to several people on the list, any doubts he had about our Madoff claims would have been settled right there.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Fraud, Market Manipulation, and Insider Trading 3. Andrew Clark, “Bernard Madoff’s Sons Say: We’re Victims Too,” The Guardian, March 17, 2010, http://www.theguardian.com /business/2010/mar/17/bernard-madoff-usa; Christopher Matthews, “Five Former Employees of Bernie Madoff Found Guilty of Fraud,” Wall Street Journal, March 25, 2014, http://online.wsj.com/news/articles /SB10001424052702304679404579459551977535482. 4. Alison Gendar, “Bernie Madoff Baffled by SEC Blunders: Compares Agency’s Bumbling Actions to Lt. Colombo,” Daily News (New York), October 30, 2009, http://www.nydailynews.com/news/crime/bernie -madoff-baffled-sec-blunders-compares-agency-bumbling-actions-lt -colombo-article-1.382446. 5. Hurtado, “Andrew, Ruth Madoff Say Were Unaware.” 6. Bernard Madoff, “Text of Bernard Madoff’s Court Statement,” National Public Radio, March 12, 2009, http://www.npr.org/templates/story /story.php?

We must keep in mind that these agents of malice are certainly not good for the ethical managers who have their profession tarnished as a result of the immoral behavior. We examine the nefarious as such, fully cognizant that they are not representative of the industry at large but must nonetheless be understood, given how much devastation and disruption they produce. FRAUD Bernie Madoff We begin with fraud, or deliberate and premeditated deception undertaken for gain. Our first story starts in December 2008. It was the time of reckoning that Bernie Madoff, the man who has since become the modern embodiment of financial duplicity, hoped would never come. And yet, by July 2009 he would trade a life replete with Davidoff cigars, Patek Philippe watches, and fashionable digs in the Upper East Side for a prison cell in Butner, North Carolina.1 It was in this Upper East Side penthouse apartment that the conversation catalyzing his end took place the day before his arrest.

Someone somewhere must have an eye on the books, and if it is not a government agency, then there must be robust protocols for proper audits and very stiff penalties for noncompliance. Curiously, many people did notice, and one man in particular was persistent in trying to get the Madoff operation shut down: Harry Markopolos. In fact, it was precisely in trying to emulate what Madoff was doing that Markopolos made his discovery. Markopolos came upon Bernie Madoff as part of an assignment from his employer, Rampart Investment Management, to deconstruct Madoff’s returns.14 The very essence of Bernie Madoff’s fraud was that he contended he used a “split-strike conversion” strategy when in fact he was simply running a Ponzi scheme. Split-strike conversion is a trade where one buys an index (or some subset of it), sells call options, and buys put options. Put options increase in value when the index declines in price, so that serves to protect the portfolio against falling asset values.


pages: 428 words: 121,717

Warnings by Richard A. Clarke

active measures, Albert Einstein, algorithmic trading, anti-communist, artificial general intelligence, Asilomar, Asilomar Conference on Recombinant DNA, Bernie Madoff, cognitive bias, collateralized debt obligation, complexity theory, corporate governance, cuban missile crisis, data acquisition, discovery of penicillin, double helix, Elon Musk, failed state, financial thriller, fixed income, Flash crash, forensic accounting, friendly AI, Intergovernmental Panel on Climate Change (IPCC), Internet of things, James Watt: steam engine, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge worker, Maui Hawaii, megacity, Mikhail Gorbachev, money market fund, mouse model, Nate Silver, new economy, Nicholas Carr, nuclear winter, pattern recognition, personalized medicine, phenotype, Ponzi scheme, Ray Kurzweil, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Ronald Reagan, Sam Altman, Search for Extraterrestrial Intelligence, self-driving car, Silicon Valley, smart grid, statistical model, Stephen Hawking, Stuxnet, technological singularity, The Future of Employment, the scientific method, The Signal and the Noise by Nate Silver, Tunguska event, uranium enrichment, Vernor Vinge, Watson beat the top human players on Jeopardy!, women in the workforce, Y2K

David Nakamura and Chico Harlan, “Japanese Nuclear Plant’s Evaluators Cast Aside Threat of Tsunami,” Washington Post, Mar. 23, 2011, www.washingtonpost.com/world/japanese-nuclear-plants-evaluators-cast-aside-threat-of-tsunami/2011/03/22/AB7Rf2KB_story.html (accessed Oct. 4, 2016). CHAPTER 6: THE ACCOUNTANT: MADOFF’S PONZI SCHEME 1. Enormous amounts have been written about the Madoff case, but we benefited particularly from Harry Markopolos’s own book, No One Would Listen: A True Financial Thriller (Hoboken, NJ: Wiley, 2010); Erin Arvedlund, Too Good To Be True: The Rise and Fall of Bernie Madoff (New York: Portfolio, 2009); U.S. Security and Exchange Commission Office of Inspector General, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme (Public Version) (2009); and a series of articles by Mark Seal that appeared in Vanity Fair magazine as “The Madoff Chronicles,” in April, June, and September 2009. 2. Gregory Zuckerman and Kara Scannell, “Madoff Misled SEC in 2006, Got Off,” Wall Street Journal, Dec. 18, 2009. 3. Interview with Harry Markopolos, Apr. 13, 2016.

On December 22, he went to his office, wrote notes to his wife, his brother, and his business partner, took sleeping pills, and slit his wrists with a box cutter. In 2009, Bernard Madoff admitted to eleven counts of securities and investment fraud, theft, perjury, and money laundering. Insisting that he was solely responsible for the fraud, he refused to cooperate with prosecutors investigating the possible involvement of his family or employees. He was sentenced to 150 years in a federal prison. Madoff’s sons, Mark and Andy, were never charged with criminal offenses. Bernie was presumably relieved, but not for long. On the second anniversary of his arrest, his older son, Mark, hanged himself in his New York apartment. Four years later, in September 2014, Andy died of mantle cell lymphoma, a cancer that spreads throughout the bloodstream. He was forty-eight. Today Bernie Madoff lives in Butner medium-security penitentiary, in North Carolina, in an eight-by-ten-foot cell.

Federal Court, Southern District of New York, Dec. 11, 2008. 17. Ibid. 18. Arvedlund, Too Good to Be True, 231. 19. Portfolio Staff, “Wiesel Lost ‘Everything’ to Madoff,” Upstart Business Journal, Feb. 26, 2009, http://upstart.bizjournals.com/executives/2009/02/26/Elie-Wiesel-and-Bernard-Madoff.html?page=all. 20. M. J. Lee, “Madoff: Politics, Remorse, Wall Street,” Politico.com, Mar. 20, 2014, www.politico.com/story/2014/03/bernie-madoff-interview-104838 (accessed Nov. 10, 2016). 21. Markopolos, No One Would Listen, 127. 22. Ibid. 23. SEC’s Investigation of Failure report (2009), 37. 24. Ibid., 24. 25. Ibid., 261. 26. SEC’s Investigation of Failure report (2009), 37. 27. Deborah Solomon, “Math Is Hard,” New York Times, Feb. 25, 2010, http://www.nytimes.com/2010/02/28/magazine/28fob-q4-t.html (accessed Oct. 25, 2016). 28.


pages: 328 words: 97,711

Talking to Strangers: What We Should Know About the People We Don't Know by Malcolm Gladwell

Berlin Wall, Bernie Madoff, borderless world, crack epidemic, Ferguson, Missouri, financial thriller, light touch regulation, Mahatma Gandhi, Milgram experiment, moral panic, Ponzi scheme, Renaissance Technologies, Snapchat

Chapter Four The Holy Fool 1. In November 2003, Nat Simons, a portfolio manager for the Long Island–based hedge fund Renaissance Technologies, wrote a worried email to several of his colleagues. Through a complicated set of financial arrangements, Renaissance found itself with a stake in a fund run by an investor in New York named Bernard Madoff, and Madoff made Simons uneasy. If you worked in the financial world in New York in the 1990s and early 2000s, chances are you’d heard of Bernard Madoff. He worked out of an elegant office tower in Midtown Manhattan called the Lipstick Building. He served on the boards of a number of important financial-industry associations. He moved between the monied circles of the Hamptons and Palm Beach. He had an imperious manner and a flowing mane of white hair. He was reclusive, secretive.

At Stanford University in northern California, a first-year student named Brock Turner meets a woman at a party, and by the end of the evening he is in police custody. At Pennsylvania State University, the former assistant coach of the school’s football team, Jerry Sandusky, is found guilty of pedophilia, and the president of the school and two of his top aides are found to be complicit in his crimes. You will read about a spy who spent years undetected at the highest levels of the Pentagon, about the man who brought down hedge-fund manager Bernie Madoff, about the false conviction of the American exchange student Amanda Knox, and about the suicide of the poet Sylvia Plath. In all of these cases, the parties involved relied on a set of strategies to translate one another’s words and intentions. And in each case, something went very wrong. In Talking to Strangers, I want to understand those strategies—analyze them, critique them, figure out where they came from, find out how to fix them.

Fidel Castro wasn’t being invited onto CNN to defend himself. But he didn’t need to be. He had a rear admiral making his case. 2. The next three chapters of Talking to Strangers are devoted to the ideas of a psychologist named Tim Levine, who has thought as much about the problem of why we are deceived by strangers as anyone in social science. The second chapter looks at Levine’s theories through the story of Bernie Madoff, the investor who ran the largest Ponzi scheme in history. The third examines the strange case of Jerry Sandusky, the Pennsylvania State University football coach convicted of sexual abuse. And this, the first, is about the fallout from that moment of crisis between the United States and Cuba in 1996. Does anything about Admiral Carroll and the Cuban shoot-downs strike you as odd? There are an awful lot of coincidences here.


pages: 267 words: 71,941

How to Predict the Unpredictable by William Poundstone

accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Brownian motion, business cycle, butter production in bangladesh, buy and hold, buy low sell high, call centre, centre right, Claude Shannon: information theory, computer age, crowdsourcing, Daniel Kahneman / Amos Tversky, Edward Thorp, Firefox, fixed income, forensic accounting, high net worth, index card, index fund, John von Neumann, market bubble, money market fund, pattern recognition, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, Rubik’s Cube, statistical model, Steven Pinker, transaction costs

Mark had become the star of a little drama, and the spotlight is bad for decision making. He vowed to keep buying, if necessary, to prevent the stock from plunging further. He would move the market all by himself. Word got around to Mark’s dad. There was a hush as Bernie shut down his son’s computer. It’s alleged that Mark’s trading had lost Bernard L. Madoff Investment Securities over $4 million. Bernie, white-haired and focused, began asking questions. It was Bernie Madoff’s good name that was at stake, not Mark’s. “Maybe we could use this on the seventeenth floor,” he thought out loud. The seventeenth floor was where Bernie ran the secret project that he didn’t talk about. “Yes, this is actually okay,” Bernie announced. “This could be good — for the seventeenth floor.” Somehow, through Bernie’s wizardry, the $4-million disaster was wished away into that cornfield.

See notes on this chapter Twelve How to Outguess Ponzi Schemes From the 1970s through 2008, three longtime employees of Bernard L. Madoff Investment Securities—David Kugel, Annette Bongiorno, and Joann Crupi — did the paperwork. “I worked together with them to create the false trades and make them appear on investment advisor client statements and confirmations,” Kugel told a federal judge. The trades were invented to correspond to a return on investment that Madoff himself decreed for each of his clients. It was the Bizarro World version of money management. Instead of calculating the return from the trades, Kugel and company made up trades to match the return. This isn’t the way Bernie Madoff started, assuming he can be believed. “I … was successful at the start but lost my way after a while and refused to admit that I failed.”

Successful hedge funds must constantly invent new strategies as old ones are reverse engineered by competitors and become played out. Were the methods disclosed to investors, the secrets would leak faster. The black-box nature of the business is well illustrated by a mortifying incident. Stony Brook University asked Simons, formerly of its maths faculty, to recommend a good manager for its endowment fund. Simons introduced them to … Bernie Madoff. The university invested with Madoff and lost $5.4 million. Some might have looked at Madoff’s returns and figured they were too good to be true. Simons knew they weren’t. The rule should perhaps be reworded: Never invest more than you can afford to lose in something no outsider understands. Many of Madoff’s victims violated that rule, putting practically all their assets with him. One of the more suspicious things about Madoff was how transparent he was.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

Ten years after I discovered the Madoff fraud, at a hedge fund investing conference sponsored by Barron’s, a weekly publication by The Wall Street Journal presenting financial data and in-depth stories, the headline article was about the investment manager who wasn’t there, the manager with the best record of all—Bernie Madoff. Better yet for investors, he didn’t charge the typical hedge fund fees of 1 percent of assets per year plus 20 percent of any new net gains. Supposedly he made his money from charging small fees on the huge trading volume that was flowing through his brokerage firm from the orders he placed on behalf of his investment clients. Even with the well-publicized doubts expressed in the Barron’s story, and the suspicions of fraud now being voiced by many, the regulators slept on. So did Madoff’s thousands of investors and the fiduciaries they paid to protect them. How did the fraud end? When it became clear that there wouldn’t be enough money to keep paying investors, which is how all Ponzi schemes end, Bernie Madoff (pronounced MADE-off, as in “with your money”) turned himself in on December 11, 2008.

his best investment If Madoff is really gaining 20 percent a year and their best alternatives give, say, 16 percent a year, then they’re only out 4 percent a year. to destroy documents Rothfeld, Michael and Strasburg, Jenny, “SEC Accused of Destroying Files,” Wall Street Journal, August 18, 2011, page C2. the headline article Arvedlund, Erin E., “Don’t Ask, Don’t Tell,” Barron’s, May 7, 2001. in the early 1990s “Bernard Madoff Gets 150 Years in Jail for Epic Fraud (Update 7), Bloomberg.com, June 29, 2009. $65 billion News Release, “Bernard L. Madoff Charged in Eleven-Count Criminal Information,” U.S. Attorney for the Southern District of New York, March 10, 2009. One individual reportedly One Jeffry M. Picower, according to The New York Times, Sunday, July 5, 2009, page B2. According to a later report in The New York Times by Diana B. Henriques, October 2, 2009, page B5, the trustee liquidating the Madoff assets, Irving H.

Taking to heart the lyrics of the song “Enjoy Yourself (It’s Later than You Think),” Vivian and I would make the most of the one thing we could never have enough of—time together. Success on Wall Street was getting the most money. Success for us was having the best life. It was by chance during this time that I discovered the greatest of all financial frauds. On the afternoon of Thursday, December 11, 2008, I got the news I had been expecting for more than seventeen years. Calling from New York, my son, Jeff, told me Bernie Madoff confessed to having defrauded investors of $50 billion in the greatest Ponzi scheme in history. “It’s what you predicted in…1991!” he said. On a balmy Monday morning in the spring of ’91, I arrived at the New York office of a well-known international consulting company. The investment committee hired me as an independent adviser to review their hedge fund investments. I spent a few days examining performance histories, business structures, and backgrounds of managers, as well as making onsite visits.


When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, information asymmetry, invisible hand, Isaac Newton, iterative process, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, risk tolerance, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

E1FPREF 06/16/2010 11:31:43 Page 21 Preface n xxi While the pursuit of self-interest may be the driving force that makes markets work, it did nothing to prevent homebuyers from applying for mortgages they patently could not afford, investment bankers from churning out billions of dollars’ worth of instruments based on shaky sub-prime mortgages, rating agencies from diluting the meaning of AAA, or Bernie Madoff from stealing money on the order of a small country’s gross domestic product. Self-interest can drive markets, but selfish interest can drive irresponsibility, inordinate risk-taking, short-termism, and outright fraud. If you believe in free markets, you believe that they should be efficient and fair. You believe that they should be regulated. January 2010 New York E1FPREF 06/16/2010 11:31:43 Page 22 E1FINTRO 06/16/2010 11:30:45 Page 23 Introduction: Why Regulatory Reform Matters to You A DISHONEST MORTGAGE BROKER persuades an unwitting homeowner to sign paperwork transferring ownership in her house to him. A high school senior learns that he has no money for college because the trust fund established by his grandparents invested with Bernie Madoff. The Secretary of the Treasury calls the heads of the largest financial institutions into an emergency meeting to tell them that the government is going to take an ownership stake in their firms in order to save the world’s largest economy, whether they like it or not.

Complaints made in writing to customers are therefore logged, investigated, and tracked so that managers and regulators can identify in each case how the complaint was handled, what the outcome of the investigation was, and how it was finally resolved. In this sense it must be said that the regulated firms were by necessity performing the tasks that the SEC’s Inspector General found were not performed during the period in which Bernard Madoff was operating his Ponzi scheme.3 3 ‘‘Review and Analysis of Examinations of Bernard L. Madoff Investment Securities, LLC,’’ U.S. Securities and Exchange Commission Office of the Inspector General, pp. 3–4. C12 06/16/2010 11:24:24 Page 117 Compliance Departments & 117 Examinations and Reporting Some firms, particularly those that engage in many different sectors of the financial industry, are subject to regulation and examination by so many different regulatory agencies that being examined is a full-time job.

Similarly, Jerome Fons, another former Moody’s colleague (and also well respected), gave xi E1FACK 06/16/2010 xii 11:30:0 n Page 12 Acknowledgments me valuable insight into the challenges of regulating the rating agencies in the course of several discussions and professional interactions. Genevievette Walker-Lightfoot, a former SEC attorney and one of the very few who raised concerns about Bernie Madoff, walked me through the SEC examination and investigation process to provide the kind of insight that comes only from experience. Additionally, each of these three, in their own capacities, raised alarms about practices and abuses that lie at the center of the financial crisis and its aftermath. We all owe them a debt of gratitude for that service as well. They are not alone, and I hope the historians who will write the story of the crisis recognize that the ranks of financial professionals, regulators, journalists, and academics who worked to prevent or address the crisis far outnumbered the greedy and incompetent few who caused it.


pages: 356 words: 105,533

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson

algorithmic trading, automated trading system, banking crisis, bash_history, Bernie Madoff, butterfly effect, buttonwood tree, buy and hold, Chuck Templeton: OpenTable:, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, fixed income, Flash crash, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, Joseph Schumpeter, latency arbitrage, Long Term Capital Management, Mark Zuckerberg, market design, market microstructure, pattern recognition, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, transaction costs, Watson beat the top human players on Jeopardy!, zero-sum game

Lots of brokers had NYSE-listed stocks on hand that they would have liked to buy or sell directly to one another, or to investors, in order to avoid the high fees charged by the NYSE middlemen. But it was difficult to get around the fact that the NYSE was the dominant meeting place for NYSE-listed stocks—among the largest public companies in the world. What’s more, the NYSE’s powerful interests erected all kinds of roadblocks, including lawsuits, to keep brokers from trading its stocks with one another. Still, these firms—including Bernie Madoff’s broker dealer, Bernard L. Madoff Investment Securities—kept trying. As such, Instinet had been founded in 1967 as Institutional Network (it was open only to “institutional” firms such as Fidelity and Merrill Lynch) in order to trade NYSE stocks. It had largely failed at its original goal, but it eventually became the largest electronic trading network for over-the-counter stocks (that is, non-NYSE stocks).

An eighteen-wheeler truck equipped with air-conditioning units was called in to funnel a hose into the basement as Island’s tech team scrambled to get the backup system online. Despite what might have been a perfect storm, Island continued to trade smoothly—and users were deeply impressed. They’d watched as nearly every other ECN choked and wheezed through the turmoil, even as Island kept humming like a jet engine. Andy Madoff, Bernie Madoff’s oldest son and an executive at Bernard L. Madoff Investment Securities—a big user of Island—lavished Levine’s system with praise in an April 7, 2000, e-mail. “Every day that goes by without your system going down builds my respect,” he wrote. “REDI, ARCA, B-Trade have all been plagued with almost continuous problems at crunch times during the last 2 weeks.” Island was building a reputation as the most reliable pool in the stock market.

In April 1998, future Nasdaq CEO Robert Greifeld, then chief of financial software giant SunGard Data Systems, started an ECN called BRUT that capitalized on volumes traded through SunGard’s computer system for trading Nasdaq stocks, BRASS (BRUT was short for BRASS Utility). An operation called Strike Technologies leveraged the high-speed trading volumes of Chicago quant-trading behemoth Hull Trading (which had recently employed data-mining expert Haim Bodek). Future Ponzi schemer extraordinaire Bernard Madoff, head of Bernard L. Madoff Investment Securities, helped develop Primex Trading, backed by firms such as Merrill Lynch and Goldman, whose electronic trading tentacles were suddenly everywhere. Bloomberg, the financial-data firm owned by the future New York City mayor Michael Bloomberg, had jumped in with Bloomberg Tradebook, called B-Trade for short. Big money—the biggest money—was rolling into the pools like monster waves on Hawaii’s North Shore.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

Footnotes Chapter 1: The scheme 1 Mary Darby, ‘In Ponzi we trust,’ Smithsonian Magazine, Dec. 1998. 2 ‘The Madoff scam: meet the liquidator,’ CBS News, 60 Minutes, June 20, 2010. Note that there is still some uncertainty about the exact scale of the losses. 3 The Federal Bureau of Prisons is kind enough to make Madoff’s exact projected release date available online. Just go along to their website – www.bop.gov – and pop the name ‘Bernard L. Madoff’ into their Inmate Locator. 4 ‘Bernie Madoff baffled by SEC blunders,’ New York Daily News, Oct. 31, 2009. 5 I haven’t sought to update The Economist’s data. The relatively low number for Manhattan real estate is eye-catching, but you can verify this from the NYC FY12 Tentative Assessment Roll, published Jan. 14, 2011. 6 Graph available direct from the Federal Reserve, www.federalreserve.gov. 7 Data from Reuters, extracted Aug. 19, 2011. 8 All book value ratios extracted from Reuters, Aug. 16–19, 2011.

That question is the one we turn to next. 5 How to win friends and influence people One of the notable features of Ponzi schemes‌—‌the point of them, in fact‌—‌is that they make their promoters very, very rich. Charles Ponzi bought a bank and thought about buying a battleship. (He wanted to turn it into a floating shopping mall.) Bernie Madoff wasn’t daft enough to buy a battleship; he was simply content to live the gilded life of New York’s super-rich, without a care for those whose stolen money he relied upon. If we’re claiming that the US government and (as we’ll come to see) Wall Street are running huge Ponzi schemes, we should expect to find some beneficiaries: the Charles Ponzis, the Bernie Madoffs. Following the collapse of the mortgage market in 2008, it’s been common enough to point an accusing finger at the bankers who caused it. I don’t disagree with that accusation‌—‌quite the opposite‌—‌but a Ponzi scheme as wide and as deep and as old as the one we’re considering is hardly likely to have been promoted by a mere handful of bankers working in one subsection of the financial markets.

The financial mathematics are bad and getting worse all the time, but you can’t tell how bad a Ponzi scheme is by how you experience the ride. It’s not the ride that matters, it’s the way it ends. Now, you’d be right to think that Ponzi’s investors were dumb. If you think you’d be smarter than them‌—‌relax, you would be. But just as investors have become shrewder over time, so Ponzi schemes have become a little smarter too. The most outrageous recent example of a Ponzi scheme was the one operated by Bernie Madoff, under the guise of a hedge fund. When his scheme hit the wall in 2008, investors had accumulated losses of $18 billion.2 Whereas Ponzi had been sent to federal prison for just five years, Madoff was sentenced to jail for a term of 150 years, the maximum allowed. If he gets time off for good behavior, he can look forward to being released on November 14, 2139. At the time of writing, Madoff is seventy-three years old.3 Madoff wasn’t some sleazy, undereducated, illegal immigrant.


pages: 230 words: 76,655

Choose Yourself! by James Altucher

Airbnb, Albert Einstein, Bernie Madoff, bitcoin, cashless society, cognitive bias, dark matter, Elon Musk, estate planning, Mark Zuckerberg, money market fund, Network effects, new economy, PageRank, passive income, pattern recognition, payday loans, Peter Thiel, Ponzi scheme, Rodney Brooks, rolodex, Saturday Night Live, sharing economy, short selling, side project, Silicon Valley, Skype, software as a service, Steve Jobs, superconnector, Uber for X, Vanguard fund, Y2K, Zipcar

Those fees on top of fees are evil enough. But when I was trying to raise money, very smart people would say to me, “Why should I invest in you when I could invest in a great fund like Madoff?” And I never had any answer to that. In fact, I visited Bernie Madoff one time. He had a lot of employees up there. You know what he said to me? “One day, computers will be doing what all of these employees are doing.” Oh, he said another thing to me. He said, “I can’t put money with you because I don’t know where you are putting your money. The last thing we need to see is ‘Bernard Madoff Securities’ on the front page of the Wall Street Journal.” And he was right. That is the last thing he needed to see. Ultimately, I had to shut my fund down. Who could compete? So many legitimate funds that might have been better places for investor money (better to pay all the fees than lose all your money in a Ponzi scheme) couldn’t survive because the illegitimate funds crowded them out of the space.

The boss had been returning a solid 12% per year for 20 years. Everyone wanted to know how he did it. “Get some info while you are there,” a friend of mine in the business said when he heard I was visiting my neighbor’s boss. The boss said to me, “I’m sorry, James. We like you and if you want to work here, then that would be great. But we have no idea what you would be doing with the money. And here at Bernard Madoff Securities, reputation is everything”.So I didn’t raise money from Bernie Madoff although he wanted me to work there. Later, the same friend who wanted me to get “info” and “figure out how he does it” said to me: “we knew all along he was a crook.” Which is another thing common in Wall Street. Everybody knows everything in retrospect and nobody ever admits they were wrong. Show me a Wall Street pundit who says “I was wrong” and I’ll show you...I don’t know...something graphic and horrible and impossible [fill in blank].

But as we move into a “Choose Yourself” economy, you need to take control over what happens to your personal assets. Nobody else is looking out for you. You have to look out for you. The US government has laws that allow “sophisticated” or what they call “accredited” investors to invest differently than “unsophisticated.” Some vehicles that sophisticated investors invest in include hedge funds, funds of hedge funds, derivatives, venture capital funds, private equity funds. Bernie Madoff’s fund, for instance, was made up entirely of sophisticated investors. Right now, get down on your hands and knees and pray to God or Allah or Buddha or whoever if you are an unsophisticated investor. A fraud doesn’t become a huge fraud unless it has the blessings of many sophisticated investors. If you give me the year, I can give you a scam that took place. In the ’90s it was Reg S trading, and everyone involved went to jail.


pages: 232 words: 71,965

Dead Companies Walking by Scott Fearon

bank run, Bernie Madoff, business cycle, corporate raider, creative destruction, crony capitalism, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, Golden Gate Park, hiring and firing, housing crisis, index fund, Jeff Bezos, Joseph Schumpeter, late fees, McMansion, moral hazard, new economy, pets.com, Ponzi scheme, Ronald Reagan, short selling, Silicon Valley, Snapchat, South of Market, San Francisco, Steve Jobs, survivorship bias, Upton Sinclair, Vanguard fund, young professional

It wasn’t just elitism that led investors to trust Madoff with their money. Two other factors contributed to their faith. The first was plain old greed. Madoff’s phony returns were phenomenal, and phenomenally consistent. Everybody was too busy basking in the money he was supposedly making them to realize that his fund’s performance was almost certainly too good to be true. The second factor had to do with identity. For a large number of his investors, Bernie Madoff was “one of us.” He was a respected, even revered figure in the Jewish community—and many of his victims came from that world because of it. This is an age-old problem in both business and investing. Call it the country club effect. Even the sharpest, most astute professionals tend to perform less due diligence when they’re dealing with someone with whom they have an affinity. Whether these ties are based on ethnic, class, or family background is immaterial.

G(r)ifted The thing that really gets me about guys like my former friend the hedge fund manager, and way too many others in my industry, is that they present themselves as pillars of their communities while they’re secretly scamming their investors. The only reason I trusted my friend with my money in the first place was that he came off as a decent family man. I assumed that someone who seemed so wholesome would manage my money responsibly. That assumption was wrong. Another way sleazy money managers burnish their reputations is by spreading huge amounts of money around to charities and other worthy causes. That was one of Bernie Madoff’s main MOs, and it worked for him for decades. No one wanted to believe that such a generous philanthropist was a complete fraud. A few years ago, I attended a fund-raiser for a school I helped found for disabled kids. It’s a great event that we throw every year. We always start off with a silent auction and then we bring on some entertainment. That year, both Dana Carvey and Robin Williams were scheduled to perform.

Tricks like allocation and front running have been around for a long time, and they’re still quite popular. You might think someone in the regulatory sector would, I don’t know, regulate these behaviors. But agencies like the Securities and Exchange Commission (SEC) aren’t just outmanned and outgunned by Wall Street; they’ve essentially abdicated their responsibilities for overseeing my industry. Sure, they make occasional headlines for busting a few blatantly bad actors like Larry Goldfarb and Bernie Madoff, but these cases are the proverbial exceptions that prove a rule. The vast majority of Wall Street’s scams not only go unpunished, but many of them are allowed to continue out in the open without the faintest threat of prosecution. About ten years ago, I got a voice mail from a woman working for a well-known and well-connected boutique brokerage in Arkansas. She said they were arranging a PIPE (private investment in public equity) for Stonepath Group Inc.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

American ideology, asset allocation, Bernie Madoff, buy and hold, Cass Sunstein, Credit Default Swap, David Brooks, delayed gratification, diversification, diversified portfolio, Donald Trump, Elliott wave, en.wikipedia.org, estate planning, financial innovation, Flash crash, game design, greed is good, high net worth, impulse control, income inequality, index fund, London Whale, longitudinal study, Mark Zuckerberg, money market fund, mortgage debt, oil shock, payday loans, pension reform, Ponzi scheme, post-work, quantitative easing, Ralph Nader, RAND corporation, random walk, Richard Thaler, Ronald Reagan, Saturday Night Live, Stanford marshmallow experiment, stocks for the long run, too big to fail, transaction costs, Unsafe at Any Speed, upwardly mobile, Vanguard fund, wage slave, women in the workforce, working poor, éminence grise

Moreover, much is made of the fact that the chief whistleblower in the Iceland fiscal fiasco was a woman, leaving one to wonder if whistleblowers such as Bernard Madoff–nemesis Harry Markopolos and Lehman Brothers’ practically forgotten Matthew Lee (who lost his job for his troubles) should be considered chopped liver. After all, many men are quite conservative with money (I know, I’m married to one of them) while many women are quite capable of engaging in risky investment strategies, being greedy, and committing out-and-out theft. This is something many women’s cheerleaders would rather not acknowledge. But how then to account for Lehman Brothers CFO Erin Callan, who went on television less than a week before the venerable bank crashed to assure investors that all was right with her books; JPMorgan Chase’s Ina Drew, the supervisor of the infamous “London Whale” trader who lost the bank billions of dollars; or alleged Bernard Madoff accomplice Sonja Kohn who, according to a lawsuit filed against her by Madoff bankruptcy trustee Irving Picard, “masterminded a vast illegal scheme”?

Yet Orman seems in recent years to have problems with other people’s perfection. As our collective finances got tighter over the first decade of the millennium, Orman’s New Age–oriented financial advice became increasingly hectoring. She yelled at people who got themselves into too much debt, whether it happened via a bout of unemployment or by taking on too much in college loans. She blamed the victims of Bernie Madoff for the fact that they had invested their funds in what turned out to be a Ponzi scheme by telling them, “You walked right into that financial concentration camp.” She lectured people on her popular “Can I Afford It?” and “1 on One” segments on her CNBC show, weighing in on people’s desires to do such things as purchase a Porsche (denied) or even the desire to have a second child (also denied).

As a result, automatic defaults were hurting many they were supposed to help, because higher income individuals who would likely have chosen to defer even more of their salary for retirement no longer did, according to the Employee Benefits Research Institute, proving nothing so much as how hard it is to manipulate us into doing the right thing. Third, there was actually no proof any of this was going to play out as we thought it would. THE CONVENTIONAL WISDOM MIGHT WELL BE WRONG Investing is risky and there are no guarantees. This is not something very many people will tell you. You can invest your heart out, do all the right things (You didn’t put all your money in Enron! You avoided Bernie Madoff!), diversify properly, not get laid off at a bad time like Carol Friery, and still, at the end of the day, end up way, way short of your goals. The mutual fund industry and many personal finance columnists are fond of quoting statistics, usually ones that reflect well on putting your money in stocks. The average annual return for the S&P 500 from 1927 to 2011 is 9.75 percent (that number, of course, does not include fees).


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

"Robert Solow", Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, Sam Peltzman, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, survivorship bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

The more volatile asset B is the U.S. stock market. Asset D is Pfi zer, the pharmaceutical company. Fi nally, asset C is one you may not have heard of, the Fairfield Sentry fund. What’s the Fairfield Sentry fund? It was one of the feeder funds for the Bernie Madoff Ponzi scheme, the decades long, multibillion-dollar Finance Behaving Badly • 333 $18 $16 Cumulative returns $14 $12 $10 D $8 $6 C $4 B $2 A $0 Figure 10.2. Cumulative returns of a one-dollar investment in each of four financial assets over an unspecified time period. Source: author’s calculations. fraud. If you ever wondered how Bernie Madoff could fool so many people for so long, think about your own choice just a few minutes ago. In case you’re wondering, figure 10.3 contains the subsequent performance of these four assets. On February 14, 2008, just 10 months before all his schemes came crashing down, Madoff flew down to Palm Beach, Florida, to celebrate the ninety-fift h birthday of his mentor, friend, and business associate, Carl Shapiro.1 Madoff was almost a son to Shapiro, the “cotton king of the garment industry” turned philanthropist.

Schwartz, Robert A., and David K. Whitcomb. 1977. “The Time-Variance Relationship: Evidence on Autocorrelation in Common Stock Returns.” Journal of Finance 32: 41–55. Seal, David. 2009. “Madoff ’s World.” Vanity Fair. March 4. http://www.vanityfair.com /news/2009/04/bernard-madoff-friends-family-profi le Securities and Exchange Commission (SEC). 1969. 35th Annual Report for the Fiscal Year Ended June 30th, 1969. Washington, DC: Government Printing Office. –––. Office of Investigations. 2009. Investigation of Failure of the SEC to Uncover Bernard Madoff ’s Ponzi Scheme. Public version. Report OIG-509. August 31. Washington, DC: Government Printing Office. –––. 2014. Agency Financial Report: Fiscal Year 2014. Washington, DC: Securities and Exchange Commission. Sharpe, William F. 1964. “Capital Asset Prices—A Theory of Market Equilibrium Under Conditions of Risk.”

His reputation was more than sound and, until the very bitter end, his clients were delighted with his service. 334 • Chapter 10 $25 Cumulative returns $20 U.S. Treasury bills Stock market Pfizer Fairfield Sentry $15 $10 $5 $0 Nov–90 Nov–93 Nov–96 Nov–99 Nov–02 Nov–05 Nov–08 Nov–11 Nov–14 Figure 10.3. Cumulative returns of one-dollar investment in each of four assets from December 1990 to December 2015: U.S. Treasury bills, the CRSP valueweighted stock market index, Pfizer, and Fairfield Sentry fund, which was the feeder fund for the Bernie Madoff Ponzi scheme. In fact, Madoff was engaging in what is known as “affinity fraud,” deliberately courting investors who felt they had a personal connection with him. Charities were a popular target. Madoff claimed to invest in proprietary strategies, but in reality, he hadn’t traded since the early 1990s. The basis for his wealth management scheme was simple. First, take in money from trusting investors, and second, keep it for himself.


pages: 261 words: 71,798

Dangerous Personalities: An FBI Profiler Shows You How to Identify and Protect Yourself From Harmful People by Joe Navarro, Toni Sciarra Poynter

Bernie Madoff, business climate, call centre, Columbine, delayed gratification, impulse control, Louis Pasteur, Norman Mailer, Ponzi scheme, social intelligence, Steve Jobs, Ted Kaczynski

THE WAY OF THE PREDATOR Predators can be nuanced and hard to detect if you don’t know what to look for. They can be intelligent, friendly, attractive, quiet, reclusive, delinquent, or any of a number of other characteristics. Being successful, having friends, or holding a status position doesn’t preclude someone from being a predator—a lesson that Penn State faculty, athletes, alumni, and students learned from Jerry Sandusky’s multiple convictions for sexually abusing children, and that Bernie Madoff’s friends and colleagues learned following his colossal swindle scheme. These individuals are persistently calculating, manipulative, and aggressively predatory. When you read about someone who meticulously planned and executed a crime, who stalked and staked out his victim, who’s been committing criminal acts for a long time, who traveled distances to achieve an illicit endeavor, or who’s constructed elaborate Ponzi schemes, you’re reading about predators.

The dangerous personalities among us harm us behind closed doors at home, at church, at school, and in the office, often preying in secrecy on the unsuspecting or the trusting—and for the most part, no one finds out until it’s too late. When they do make the headlines, it’s on those rare occasions when they get caught. They are responsible for many of the nearly 15,000 homicides, 4.8 million domestic assaults, 2.2 million burglaries, 354,000 robberies, and 230,000-plus sexual assaults that occur annually in the United States, many of which go unreported and unpunished.2 Or, like Bernard Madoff, they may embezzle money from the elderly or even friends for years (on such a grand scale, in his case, that the economic wellbeing of thousands was compromised). They can go undisturbed for decades, destroying lives as convicted child rapist Jerry Sandusky did at Pennsylvania State University. Think back to those times in your own life when someone stole something from you or took hurtful advantage of you.

In the movie Goodfellas, rising mobster Henry Hill (played by Ray Liotta) uses attentiveness to court Karen, his future wife, treating her to great restaurants, front-row seats, the best food, the best wine, no waiting in line. She is the focus of his total attention. Once they’re married, boom, it’s over. The narcissist worked for and got what he wanted, so what’s the problem when he comes home drunk, smelling of other women? What his wife wants doesn’t matter; the only thing that matters is what he feels he’s entitled to. He has used attentiveness to ensnare, but he doesn’t really care. In real life, financier Bernard Madoff used connections and friendships to ensnare trusting people in his Ponzi scheme. The crushing difference between what they expected and what they got is the terrible truth of relationships with a narcissistic personality. You expect to be treated as an equal, as a friend, but a narcissist has no equal. For the narcissistic personality, friends are functional. They serve a purpose: to provide the narcissist with something wanted or needed.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

Might not the managers of Bear Stearns, who banked large bonuses each year, been inspired to do this because they could reshape financial contracts to produce high yields through option-like structures, with the consequences of their excess seemingly never to be felt due to the salutary effects of inflation, or deferred to some indistinct future moment? What is intriguing is that to attract prodigious amounts of investment capital, hedge funds no longer needed to post eye-popping returns, just 22 ENDLESS MONEY a constant stream of respectable profits and maybe a few mildly down months, a model that shysters like Bernie Madoff mastered to the pleasure of their sheep. How were derivatives used to enhance return in a way suggestive of fake alpha? An oft-quoted example is the case where a small hedge fund set up a subsidiary backed by a paltry $4.6 million guaranteed $1.3 billion of subprime mortgages for the Swiss banking giant UBS. When it was called upon to put up additional collateral, it failed. However, the hedge fund had posted attractive returns of some 44 percent annually through the leverage on the fees while things were going well, making them an exquisite example of a legitimized producer of fake alpha that fed off the option premium collectible from the credit default swap gravy train.4 But this gross example trivializes the systemic practice.

Operational Risk Operational risk accounts for a significant category of investor losses; it is fraud or more often the case plain old mismanagement (think of the preposterous assumptions of Long-Term Capital Management). We are told it is hard to guard against it and that there are no software packages that can avert it. Of course, the disinfectant of transparency goes a long way, but common sense is the most effective tool at our disposal to avoid being sucked into such schemes. The centerpiece of operational risk for our time has to be the Bernie Madoff scandal, which broke in December 2008. However, the continual financial market meltdown has revealed other giant Ponzi schemes, such as the failure of the $50 billion Stanford Group in February 2009. Oddly, most mainstream professional money managers had never heard of Madoff, yet he had raised over $50 billion. The public response will likely be a vociferous demand for yet more intensive regulation of the financial industry (a topic examined in detail later in this book), yet Madoff ’s operation was not in fact a hedge fund.

In so doing, they release themselves of guilt should anything go wrong (which happens to some percentage of any risky investment by nature), but investors learn to ignore this rubbish and even associate the better-run firms with the most official looking and weightiest paperwork. In the end, the despot takes his cut, the investors lose out and honorable money managers are burdened. Fraudsters such as Bernie Madoff or Allen Stanford, both major Democratic Party supporters, might escape the long arm of the law indefinitely unless a super-bear market exposes missing funds when redemptions are requested, especially if they make well-placed donations to political campaigns as did Marc Rich (through his wife), earning him a pardon by the ultimate wizard of relativism, President Bill Clinton. For his part, in the last election cycle Stanford placed contributions to numerous Democratic politicians for over $30,000, but covered all bases by also making a $28,000 one to the National Republican Committee.


pages: 209 words: 53,175

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

"side hustle", airport security, Amazon Web Services, Bernie Madoff, business cycle, computer age, coronavirus, discounted cash flows, diversification, diversified portfolio, Donald Trump, financial independence, Hans Rosling, Hyman Minsky, income inequality, index fund, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, knowledge worker, labor-force participation, Long Term Capital Management, margin call, Mark Zuckerberg, new economy, Paul Graham, payday loans, Ponzi scheme, quantitative easing, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Stephen Hawking, Steven Levy, stocks for the long run, the scientific method, traffic fines, Vanguard fund, working-age population

Gupta and Rajaratnam both went to prison for insider trading, their careers and reputations irrevocably ruined. Now consider Bernie Madoff. His crime is well known. Madoff is the most notorious Ponzi schemer since Charles Ponzi himself. Madoff swindled investors for two decades before his crime was revealed—ironically just weeks after Gupta’s endeavor. What’s overlooked is that Madoff, like Gupta, was more than a fraudster. Before the Ponzi scheme that made Madoff famous he was a wildly successful and legitimate businessman. Madoff was a market maker, a job that matches buyers and sellers of stocks. He was very good at it. Here’s how The Wall Street Journal described Madoff’s market-making firm in 1992: He has built a highly profitable securities firm, Bernard L. Madoff Investment Securities, which siphons a huge volume of stock trades away from the Big Board.

Madoff’s firm can execute trades so quickly and cheaply that it actually pays other brokerage firms a penny a share to execute their customers’ orders, profiting from the spread between bid and ask prices that most stocks trade for. This is not a journalist inaccurately describing a fraud yet to be uncovered; Madoff’s market-making business was legitimate. A former staffer said the market-making arm of Madoff’s business made between $25 million and $50 million per year. Bernie Madoff’s legitimate, non-fraudulent business was by any measure a huge success. It made him hugely—and legitimately—wealthy. And yet, the fraud. The question we should ask of both Gupta and Madoff is why someone worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more. Crime committed by those living on the edge of survival is one thing.

The only way to know how much food you can eat is to eat until you’re sick. Few try this because vomiting hurts more than any meal is good. For some reason the same logic doesn’t translate to business and investing, and many will only stop reaching for more when they break and are forced to. This can be as innocent as burning out at work or a risky investment allocation you can’t maintain. On the other end there’s Rajat Guptas and Bernie Madoffs in the world, who resort to stealing because every dollar is worth reaching for regardless of consequence. Whatever it is, the inability to deny a potential dollar will eventually catch up to you. 4. There are many things never worth risking, no matter the potential gain. After he was released from prison Rajat Gupta told The New York Times he had learned a lesson: Don’t get too attached to anything—your reputation, your accomplishments or any of it.


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Framing Class: Media Representations of Wealth and Poverty in America by Diana Elizabeth Kendall

Bernie Madoff, blue-collar work, Bonfire of the Vanities, call centre, David Brooks, declining real wages, Donald Trump, employer provided health coverage, ending welfare as we know it, fixed income, framing effect, Georg Cantor, Gordon Gekko, greed is good, haute couture, housing crisis, illegal immigration, income inequality, mortgage tax deduction, new economy, payday loans, Ponzi scheme, Ray Oldenburg, Richard Florida, Ronald Reagan, Saturday Night Live, telemarketer, The Great Good Place, Thorstein Veblen, trickle-down economics, union organizing, upwardly mobile, urban planning, working poor

Subsequent investigation reveals that the victim “was trapped inside the car’s windshield after the accident and that the driver—a high profile publicist—left the man dying in her garage” before disposing of the body.71 “Darwinian” uses what Law & Order refers to as a “rippedfrom-the-headlines” plot that combines two real criminal cases, one in which a woman (of more modest means than in the TV show) left a man to die on her windshield after hitting him with her car and a second involving a wellknown society publicist convicted on a felony charge of leaving the scene of an accident after she backed her Mercedes SUV into a group of people going to a night club. This episode is characteristic of the bad-apple messages that Law & Order and other crime dramas send to viewers.72 When Bernard (“Bernie”) Madoff was accused of perpetrating a $65 billion fraud in a Ponzi scheme, set up through Bernard L. Madoff Investment Securities, that cost many investors their life savings, a Law & Order episode combined elements of his crimes with the murder of a television reporter: While investigating the murder of television reporter Dawn Prescott, detectives Lupo and Bernard discover that she was involved in a love triangle involving 9781442202238.print.indb 75 2/10/11 10:46 AM 76 Chapter 3 another reporter at the station.

Elissa Gootman, “Publicist Gets Jail Sentence and Scolding,” New York Times, October 24, 2002, A28. 73. Lawrence B. Ebert, “‘Law & Order’ Plotline Follows Larry Mendte Story and Madoff Scam,” IPBIZ, March 25, 2009, http://www.ipbiz.blogspot.com/2009/03/ law-order-plotline-follows-larry-mendte.html (accessed October 17, 2010). 74. Steve Fishman, “Bernie Madoff, Free At Last,” New York Magazine, June 14–21, 2010, 35. 75. Alex Kuczynski, “For the Elite, Easing the Way to Prison,” New York Times, December 9, 2001, ST1, ST2. 76. Fishman, “Bernie Madoff, Free At Last,” 35. 77. Warren St. John, “Advice from Ex-Cons to a Jet-Set Jailbird: Best Walk on Eggs,” New York Times, July 13, 2003, ST1. 78. Juan A. Lozano, “Judge Vacates Conviction of Kenneth Lay,” Washington Post, October 18, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/ 10/18/AR2006101800201_pf.html (accessed October 15, 2010). 79.

“Miner Chord: Is a Working-Class Hero Still Something to Be?” ADWEEK Southwest, August 5, 2002, 9. “Finding Third Places: Other Voices, Different Stories.” Pew Center for Civic Journalism. 2004. www.pewcenter.org/doingcj/videos/thirdplaces.html (accessed July 6, 2004). Firestone, David. “4 Dead and 9 Missing in a Pair of Alabama Mine Blasts.” New York Times, September 25, 2001, A14. Fishman, Steve. “Bernie Madoff, Free At Last.” New York Magazine, June 14–21, 2010, 35. Fitzgerald, F. Scott. “The Rich Boy.” In The Short Stories of F. Scott Fitzgerald, edited by Mathew J. Brucoli, 317–49. New York: Scribner, 1995 [1926 in Redbook magazine]. Florida, Richard. The Rise of the Creative Class: And How It’s Transforming Work, Leisure, Community and Everyday Life. New York: Basic, 2002. Fountain, John W. “Chicago Looks for Home for Shelter for Homeless.”


pages: 613 words: 181,605

Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees by Patrick Dillon, Carl M. Cannon

accounting loophole / creative accounting, affirmative action, Bernie Madoff, buy and hold, collective bargaining, Columbine, computer age, corporate governance, corporate raider, desegregation, energy security, estate planning, Exxon Valdez, fear of failure, fixed income, Gordon Gekko, greed is good, illegal immigration, index fund, John Markoff, mandatory minimum, margin call, Maui Hawaii, money market fund, new economy, oil shale / tar sands, Ponzi scheme, Ralph Nader, rolodex, Ronald Reagan, Sand Hill Road, Silicon Valley, Silicon Valley startup, Steve Jobs, the High Line, the market place, white picket fence, Works Progress Administration, zero-sum game

Now they would pick up the pace. 24 THE PATIENCE OF JOB Little in the way of personal exchanges now entered the preamble of the regular business conversations between Bill Lerach and Mel Weiss. Once there had been rambling, reciprocal check-ins about their families, or (usually from Mel to Bill) the latest stock market tips. A few years back Mel had even bragged about his inclusion in an exclusive investment fund run by a friend by the name of Bernie Madoff. Told it was a sure thing, Lerach flinched. “Sure things” touted by Mel often did not pan out.* On this day Weiss was furious with his protégé and let him know it. “I just got a call from Max Berger,” Weiss said stonily. Lerach knew Max A. Berger as a star partner of the big plaintiffs’ firm Bernstein, Litowitz, Berger & Grossman. The firm was representing the New York State Common Retirement Fund, the lead plaintiff in the WorldCom case.

Before the waiter arrived, McGahan told Isaacs he felt he’d gone as far as he could in assembling a case against Seymour Lazar, the man they hoped would prove the tip of the Milberg Weiss iceberg. Isaacs replied that he’d seen the draft and, in his opinion, the whole investigation had reached a critical point of whether to keep investigating, discontinue, or push forward and out into the open. Did he have an opinion? McGahan was anxious to know. Yes, Isaacs told his younger colleague, previewing what he would recommend to Cardona. “Let’s indict.” * Among the many victims of Bernie Madoff’s Ponzi scheme was Mel Weiss. Although the amount of his loss was not disclosed publicly, Bill Lerach estimated it to be between $20 million and $30 million. * “I know what I don’t know,” Ebbers would later testify at his own trial. “I don’t know technology and engineering. I don’t know accounting.” The charges against him hinged on the last of those three claims, and the jurors and a federal judge chose not to believe him.

Two weeks later the U.S. attorney’s office in Los Angeles announced that the government had settled with the law firm of Milberg Weiss. The firm, soon to be known as only Milberg, agreed to pay $75 million dispersed over five years and accept government oversight in return for the removal of charges against it. In December, four months after Mel Weiss began serving his prison sentence, he learned that his friend Bernie Madoff had fleeced him, along with hundreds of other “exclusive” investors, in the largest private investment fraud in history. Estimates of the amount Madoff bilked ran as high as $50 billion. Mel Weiss alone was believed to have lost upward of $20 million. Weiss was not the only victim in the Milberg Weiss circle. While serving his six-month sentence in the Federal Correctional Institution at Otisville, New York, David Bershad learned that his investments with Mad-off had vanished.


pages: 404 words: 124,705

The Village Effect: How Face-To-Face Contact Can Make Us Healthier, Happier, and Smarter by Susan Pinker

assortative mating, Atul Gawande, Bernie Madoff, call centre, cognitive dissonance, David Brooks, delayed gratification, Edward Glaeser, epigenetics, Erik Brynjolfsson, estate planning, facts on the ground, game design, happiness index / gross national happiness, indoor plumbing, invisible hand, Kickstarter, longitudinal study, Mark Zuckerberg, medical residency, Menlo Park, meta analysis, meta-analysis, neurotypical, Occupy movement, old-boy network, place-making, Ponzi scheme, Ralph Waldo Emerson, randomized controlled trial, Ray Oldenburg, Silicon Valley, Skype, social intelligence, Stanford marshmallow experiment, Steven Pinker, The Great Good Place, The Wisdom of Crowds, theory of mind, Tony Hsieh, urban planning, Yogi Berra

Thirty-five others were forced to accept handouts to pay for rent, food, Ensure, and adult diapers from the charities they had not long before supported with their own donations.1 No one wants to spend their golden years financially vulnerable and dependent on others. And for a proud generation of savers, most of whom had cut their teeth during the Depression and who had spent their adult lives intent on being self-supporting, becoming penniless was the ultimate disgrace. How did Earl Jones pull it off? As was the case with Bernie Madoff, the trust inherent in a tightly knit, homogeneous social network helped Jones build a legitimate career at first. As a member of the community, it’s easy to establish one’s bona fides. And once he had earned other members’ confidence, he no longer had to prove himself. The pressures and temptations built. “I can see him sitting in that chair,” Mary Coughlan said, pointing to where I was sitting.

But trading in honest signals—the lingua franca of close social contact—is not always a force for good. Getting up close and personal can swing both ways, especially in business. While face-to-face contact can bring increased performance, customer loyalty, satisfaction, and profits, it can also lead to big-time betrayal. Affinity Fraud How could so many people fall for the outsized promises of Earl Jones—or Bernie Madoff, for that matter? As social animals, “the default is to trust until there’s a reason not to,” said the late Robyn Dawes, a psychologist at Carnegie Mellon who was one of the pioneers of behavioral economics.7 When it comes to having confidence in other people, our group or religious affiliations work as a stand-in for family relationships. Trusting others who look and sound like us feels natural; there’s a visceral satisfaction that accompanies letting down one’s guard.

They trusted an elder with their savings, as did about 2,500 other members of the plain community, as the Mennonites and Amish call themselves. Monroe Beachy, now in his late seventies, was a respected financial advisor who lived a modest lifestyle and acquired his financial bona fides in H&R Block classes. Through his company, A&M Investments, Beachy took in about $33 million from his community over twenty-odd years. Much like Bernie Madoff and Earl Jones, Beachy promised a rate of return that was better than the bank’s—and all through risk-free government bonds. “Word spread about his safe, steady returns. Parents encouraged their children to practice thrift by opening A&M accounts, too,” wrote business reporter Diana Henriques. When the Ponzi scheme broke, Beachy’s own family members and more than a dozen churches, nonprofits, and charities lost their shirts.


pages: 455 words: 138,716

The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi

banking crisis, Bernie Madoff, butterfly effect, buy and hold, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty

The government similarly decided not to press forward with cases against a number of other prominent financial fraud targets. In early 2010 the DOJ decided to end the investigation of AIG Financial Products chief Joe Cassano, the patient zero of the financial crisis, whose half-trillion-dollar portfolio of unsecured credit default swaps imploded in 2008, forcing the government to bail out AIG and sending the world economy into a tailspin. Cases involving Ponzi scheme artists Bernie Madoff and Allen Stanford were restricted to a few defendants apiece, while banks and other institutions that aided their frauds got off clean. It would be years before the Obama administration would begin again to look at the role played in the Madoff scandal by JPMorgan Chase, Madoff’s banker. Meanwhile, after the first trial of baseball great Roger Clemens ended in a mistrial, the government pushed forward, keeping dozens of agents and lawyers on the case and deciding ultimately to retry the arch-villain, accused of lying about taking steroids.

The situation was tenable so long as housing prices kept rising and these teeming new populations of home borrowers could keep their heads above water, selling or refinancing their way out of trouble if need be. But the instant the arrow began tilting downward, this rapidly expanding death-balloon of phony real estate value inevitably had to—and did—explode. In other words, it was a Ponzi scheme, no different than the Bernie Madoff caper, only executed on an exponentially huger scale. The scheme depended upon the ability of a nexus of large financial companies to factory-produce and sell these magic home loans fast enough, and in big enough numbers, to continually keep more money coming in than going out. Once the bubble burst, lawsuits were filed everywhere and whistle-blowers emerged by the dozen, showing, in graphic documentary detail, how nearly every major financial company in America had chosen to participate in this enormous fraud.

Hedge funds, basically big pools of money managed by professional traders, are almost totally unregulated. A fund often begins as a one-man operation, run by a smooth-talking Wall Street front man who trolls the very rich, hustling for seed money. There are no real regulatory audits of hedge funds, and no government body checks hedge funds’ trades or verifies their claims. It even came out, in the famous Bernie Madoff case, that despite numerous complaints to the SEC over the years from reputable sources, nobody in the government even checked to make sure Madoff’s hedge fund even made trades at all. Madoff actually went more than thirteen years without making a single stock purchase and yet somehow survived several SEC investigations—that’s how flimsy government regulation of hedge funds has been and still is.


pages: 309 words: 54,839

Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts by David Gerard

altcoin, Amazon Web Services, augmented reality, Bernie Madoff, bitcoin, blockchain, Blythe Masters, Bretton Woods, clean water, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, Ethereum, ethereum blockchain, Extropian, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, index fund, Internet Archive, Internet of things, Kickstarter, litecoin, M-Pesa, margin call, Network effects, peer-to-peer, Peter Thiel, pets.com, Ponzi scheme, Potemkin village, prediction markets, quantitative easing, RAND corporation, ransomware, Ray Kurzweil, Ross Ulbricht, Ruby on Rails, Satoshi Nakamoto, short selling, Silicon Valley, Silicon Valley ideology, Singularitarianism, slashdot, smart contracts, South Sea Bubble, tulip mania, Turing complete, Turing machine, WikiLeaks

These are so attractive to crypto fans that when Ethereum took blockchains and added “smart contracts” (programs that run on the blockchain), the first thing people did was write automatic “honest” Ponzis. High-yield investment programmes: a variety of Ponzi scheme. You might think it obvious that no investment scheme could pay 6% interest per week sustainably, particularly when it claims a “secret” investment strategy, but what worked on Bernie Madoff’s victims works on Bitcoiners. Coin doublers: send it a small amount of bitcoins and you’ll get double back! (No reason is given why anyone would just double your money.) Send a larger amount straight after and … you won’t. You’d think people would catch on, but years later these keep popping up and finding suckers. (There’s another layer of scam in there: the “doubler” never sends back coins.

His lawyer’s entire defense was that bitcoins were not “money” under US law because they were not legal tender; the judge didn’t buy it, and Shavers was required in September 2014 to pay back $40.7 million.75 He was also prosecuted for criminal securities fraud for the Ponzi in November 2014,76 pled guilty in September 2015 and was sentenced to one and a half years in jail.77 The lawyer later maintained that the SEC only went after Shavers because they were upset they hadn’t caught Bernie Madoff in time, and not at all because Shavers stole millions of dollars from people.78 The astounding thing is how successful such an obvious Ponzi had been. Pirateat40 held about 7% of all bitcoins in circulation at the time. Some Bitcoiners offered insurance against Bitcoin Savings & Trust failing, then put the insurance premiums into the scheme; or just didn’t pay up when it went down. Others offered investment schemes that were pass-throughs to Pirateat40’s scheme, while swearing up and down they weren’t.

Anarcho-capitalist Jeffrey Tucker wrote an amazing apologia, “A Theory Of The Scam,”66 in which he admits Bitcoin is suffused with fraud, but posits that “scam artists are the evil cousins of genuine entrepreneurs” and are actually a sign of health for an area – so, since good things had scams, this scam-riddled thing must therefore be good! (With all this horse poop there’s gotta be a pony in here.) No doubt subprime-mortgage-backed collateral debt obligations, Business Consulting International and Bernard L. Madoff Investment Securities LLC were just severely underpriced investment opportunities. Pirateat40: Bitcoin Savings & Trust Now that Pirateat40 closed down his operatations thanks to all the fud that was going on and growing on the forum, I expect everyone that spreads this fud, accused and insulted Pirate and the people that supported him to apologize. Not only did Pirate brought us a great opportunity for investors (once in a lifetime actually), he did help stabilise and grow steadily bitcoin price, volume exchange, and thus contributed to the success of bitcoin.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

Andrei Shleifer, asset allocation, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, John Meriwether, Long Term Capital Management, mail merge, margin call, mass immigration, merger arbitrage, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, Vanguard fund, Y2K, Yogi Berra, zero-sum game

As these funds had extremely high minimums, the fund of hedge funds model would bundle together smaller orders that would then be invested directly into the funds. Fund of hedge funds version 2.0 came when the industry added the bells and whistles of analytical research and portfolio resource allocation. Suffice it to say, the industry was crushed during the 2007 to 2009 economic crisis, which was further intensified by the devious acts of fraud of managers like Bernie Madoff. No wonder there is a tremendous cabal in the investment industry aligned against funds of hedge funds. Today, there are over 2,018 funds of hedge funds in the world. Many estimates show that close to 22 percent of all new investments into hedge funds are coming from funds of hedge funds. Since their advent, funds of hedge funds have been the vehicle of choice for new entrants into the hedge fund space.

Some of the requirements imposed by regulators include releasing their holdings and performance to the general public, providing daily liquidity, valuing shares accurately and daily, and providing investors with a prospectus prior to investing. Conversely, hedge funds are loosely regulated and currently do not have to register with the SEC or the Commodity Futures Trading Commission. And, let’s face it, registration doesn’t mean a hell of a lot these days considering that Bernard L. Madoff Investment Securities LLC was once registered with the SEC. (Allow me a quick soapbox moment: Although the media tag Madoff as a hedge fund guy, the irony was that he wasn’t running a mutual fund or a hedge fund; he was running a separate account business that made tons of money and thousands of clients bucketed him in the world of alternatives. Regulation never stopped Madoff . . . the recession did.)

In fact, we started this chapter with one of the richest men in America saying that they aren’t! He might be right, but then again he may be wrong. After all, at the time of this writing, Protégé Partners is ahead of the Oracle from Omaha. It may end badly for the fund of funds folks on this bet, but one thing is irrefutable—funds of hedge funds just flat out perform better in down markets. Madoff Factor Bernard L. Madoff Investment Securities LLC wasn’t a hedge fund or a fund of hedge funds. Madoff was a broker-dealer who did more damage to the hedge fund industry than any actual manager in history—even more damage than the now-defunct Trader Monthly magazine! Year in and year out, he would grind out consistent and low double-digit returns so as not to drawn attention to his devious plan and keep his clients happy.


pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

banking crisis, Bernie Madoff, Bernie Sanders, business cycle, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, fixed income, housing crisis, invisible hand, Long Term Capital Management, mega-rich, mortgage debt, new economy, old-boy network, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, too big to fail, trickle-down economics

Of course, the top echelon of Wall Street insiders would skim the cream off, but, the argument went, the rest of the country would benefit as well. Not only would the economy be stronger, but American individuals, pension plans, and charities could all ride this dragon skyward, through investments and through donations from the mega-rich looking for tax shelters. It is no accident, then, that in each of the recent economic collapses, from Enron to Bernie Madoff, there arose the ever-present laments from charities that were suddenly defunded. The derivatives and swaps involved buying and packaging financial risk and selling it based on a system of corresponding grades. So a bank might buy up a collection of mortgages or credit card debts from lenders, who could then take this capital to bankroll even more loans. The buyers of this securitized debt would sort and slice it into levels of predicted risk; the more risk, the higher the return, of course.

As a director of Goldman Sachs, according to Forbes, he was paid $675,770 in stock in 2007 and would have come in for some questioning had the firm gone down; Liddy had sat on its audit committee during the five years before he resigned that seat to take over AIG in September 2008. As for his salary sacrifice, not to worry: In 2005, when he was still CEO and chair of Allstate Insurance, he received $26.7 million in compensation. What we have here is a rare glimpse into the workings of the billionaires’ club, that elite gang of perfectly legal loan sharks who in only the most egregious cases will be judged as criminals—Bernard Madoff, former chair of NASDAQ, comes to mind. These other amoral sharks, who confiscated billions from shareholders and the 401(k) accounts of innocent victims, were rewarded handsomely, rarely needing to break the laws their lobbyists had purchased. The dealings between AIG and Goldman would later form the stuff of scandal, as it turned out that bailout money had been passed through AIG to pay back Goldman Sachs and other clients at full value for their questionable investments.


pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, buy and hold, commoditize, computerized trading, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, stocks for the long run, stocks for the long term, transaction costs, two-sided market, zero-sum game

Insider trading cases, including the recent, high-profile prosecution of Raj Rajaratnam from Galleon Group, certainly protect us from those gaining unfair advantages at the expense of long-term investors. However, the Rajaratnam case—the largest insider trading scandal in our nation’s history—centers around only $53 million in ill-gained profits. Compare that to the SEC’s failure to stop the $68 billion Bernie Madoff Ponzi scheme, despite being tipped multiple times. Although we praise the SEC for going after Rajaratnam, we can’t help but be disappointed in the agency’s seeming lack of action around HFT and the conflicts of interests in our market structure. HFT firms generate between $8 billion and $21 billion a year in profits. Tradebot, an HFT firm based in Kansas City, Missouri, in 2008 said it had not had a losing day in four years.6 The last few years have shown quarterly earnings from big banks engaged in HFT.

Levitt and the SEC were energized after their Order Handling Rules and Reg ATS victories. The SEC was now eyeing the NYSE. In a prescient September 1999 speech at Columbia Law School, Levitt telegraphed his next battle: “One way or another, Rule 390 should not be part of our future.”3 With pressure mounting from the large brokerage houses, the NYSE heeded Levitt’s threat and voluntarily removed the rule in May 2000. One brokerage house that was thrilled was Madoff Securities. Bernie Madoff commented, “This will very quickly change the landscape positively by giving [brokerages] more flexibility to execute orders most efficiently for their customers.”4 Another supporter was former SOES Bandit and Island ECN executive Josh Levine. “The elimination of Rule 390 is a good step toward competition in the listed-stock world,” he said.5 Both Madoff and Levine were chomping at the bit to access more NYSE order flow electronically.

The attack on the Trade Through exception was about to begin. The witness list read like a who’s who of Wall Street and included exchange executives, brokerage executives, specialists, and academics. Without Grasso to organize a coordinated defense, the NYSE auction market was dead. Tower Research, an automated trading firm, complained that Trade Through created “an unfair advantage for slower market centers.”10 Bernie Madoff stated at the hearing that the SEC should “require all ‘quoting’ market centers to employ an automated order execution facility for inter-market orders.”11 Professor Daniel Weaver of Rutgers, an associate of David Whitcomb, who was one of the original high frequency traders, demanded that “price priority should be established in all markets.”12 In December 2004, the SEC relented to the pressure from the HFT community and submitted a new Reg NMS proposal that significantly altered the Trade Through proposal, which was renamed the Order Protection Rule.


All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, asset allocation, asset-backed security, barriers to entry, Bernie Madoff, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, Long Term Capital Management, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

When young people make investing mistakes, they are not too damaging because these people typically have little in the pot and they have years of work and savings ahead. However, when an older person makes the same mistake, it can be devastating. The papers are full of sad stories about retirees’ life savings being wiped out because they put all their eggs in one basket and lost, or perhaps they were taken by the likes of a Bernie Madoff. Enron Corporation was a highly publicized corporate bankruptcy that resulted from accounting fraud that ruined the financial lives of many people nearing retirement age. You could not pick up a newspaper or popular magazine without seeing an article about a former Enron employee who lost nearly all his or her savings as a result of the company’s collapse. Some former Enron workers considered selling their homes just to pay bills.

Since the barrier of entry into the investment field is so low, it should not be surprising when the Wall Street Journal publishes a long list of brokers and advisors each week who have been disciplined by the regulatory authorities for gross negligence, misappropriation of client funds, and outright fraud. I do not want to be too critical of the brokers and advisors in the investment industry because there are many outstanding people out there. The problem you have is separating the good from the bad. There is no easy shortcut to doing this. Even those with the best credentials have fallen. And it takes only one bad decision by an investment advisor to wipe out your entire life’s savings. Bernie Madoff’s former clients know that too well. Planning for Investment Success 9 THE ASSETS IN ASSET ALLOCATION At its core, asset allocation is about dividing your wealth into different places to reduce the risk of a large loss. One hundred years ago, that may have meant your burying some cash in Mason jars around the barn in addition to hiding money in your mattress and the cookie jar. If your house went up in flames, at least the buried Mason jar money would survive.

There will be poor months, quarters, and occasionally years. There is no getting around this fact. Unfortunately, there is also a large market for financial fraud. Many unethical and unscrupulous investment experts will say that they have found a risk-free road to wealth. They are lying. High x INTRODUCTION returns do not come without risk. Many experts who said that they had the secret to success in the markets went to jail in 2008 and 2009. Bernard Madoff was the most famous person, followed by many other less famous crooks. There is no free lunch on Wall Street. There is risk. This risk can be controlled to some extent through good investment policy and prudent execution of that policy. Disciplined investors who follow their well-defined investment policy will come out far ahead over those who drift aimlessly from strategy to strategy, hoping for a lucky break.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Therefore if enforcement choices are sensitive to political pressure, firms with strong political connections should be less deterred by regulatory enforcement and exhibit lower accounting quality. Many of the firms involved in accounting scandals were known for their strong political connections. Enron, Global Crossing, Halliburton, Harken, Arthur Andersen. Fannie Mae and Freddie Mac had a lot in common with Bernie Madoff in this respect. Indeed, the study finds that the less accurate companies’ accounts are, the more these companies spend on contributions and lobbying. Taking into account that the financial industry has been extremely active in terms of lobbying and contributions in the years preceding the subprime crisis, the otherwise enigmatic lack of oversight exercised by the responsible authorities is less puzzling.

In Britain, firms which are politically connected in a narrow sense make up a still staggering quota of 39 percent of market capitalization. In France, the respective number is 8 percent, in the US 5 percent, in Germany and Japan only 1 percent. If an officer or large shareholder of a corporation is entering politics, its share price and thus the value of the corporation increases significantly (Faccio 2006). In light of the scandal around the US$50 billion investment fraud by Bernard Madoff, which the Securities and Exchange Commission (SEC) had not detected despite the numerous tips it had received, another study by Correia (2009) is particularly interesting. It reveals that more lenient treatment by regulatory agencies is an important channel through which political connections raise company value. An enforcement action by the SEC is often extremely costly for affected firms and their owners.

The Senate later concluded that the SEC had not devoted sufficient resources to the case and had been overly deferential in dealing with John Mack. SEC management had delayed Mack’s testimony for over a year, until days after the statute of limitations expired, and had fired the whistleblower. No serious and credible investigation of his claims was ever conducted, according to the Senate. It is quite clear that the failure of the SEC to detect the huge Ponzi scheme of Bernard Madoff, a major contributor 218 ECONOMISTS AND THE POWERFUL to federal candidates, parties and committees, was not an isolated case but part of a pattern (Correia 2009). Conclusion: Strengthen and Protect the Political System from Itself One school of thought concludes from this that it is best to have as small a government as possible and give it as little power as possible. This is the school of thought that inspired the US Constitution as laid down by the founding fathers after suffering decades of overbearing British rule.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, asset allocation, automated trading system, barriers to entry, Bernie Madoff, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, fault tolerance, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, interest rate swap, invention of the telegraph, job automation, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, Nick Leeson, open economy, passive investing, pattern recognition, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, race to the bottom, random walk, rent-seeking, risk tolerance, risk-adjusted returns, selection bias, shareholder value, short selling, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

Most principles of market microstructure somehow involve properties of zero-sum games. Several generous sponsors provided financial support for this project. I received “angel financing” from the New York Stock Exchange (Dick Grasso, Billy Johnston, Jim Cochrane, and George Sofianos), the Jefferies Group (Frank Baxter), Mellon Capital Management Corporation (Bill Fouse and Tom Loeb), Bernard L. Madoff Investment Securities (Bernie and Peter Madoff), First Canada Securities International (Jim Medlock), Cantor Fitzgerald (Stuart Fraser and Phil Ginsberg), and First Quadrant (Rob Arnott). Their early support allowed me to take time off from my teaching to start this project. I am also grateful to Oxford University Press, which provided a developmental grant with which I was able to pay research assistants. I appreciate the support provided to me by the USC Marshall School of Business through the Fred V.

Dealers build these inferences into their quotes ahead of time in order to avoid regretting that they traded. * * * ▶ How Madoff Controls Adverse Selection Bernard L. Madoff Investment Securities is the largest dealer in NYSE-listed stocks in the United States. The firm is not a member of the New York Stock Exchange, however. The company trades approximately 15 percent of the transaction volume in NYSE-listed stocks. Its share of total volume is smaller because Madoff’s average trade size is smaller than the average trade size at the NYSE. Madoff obtains most of its order flow through order-preferencing arrangements that it negotiates with retail brokers. Since the firm is not a member of the New York Stock Exchange, it can choose with whom it is willing to trade. Bernie Madoff and his brother Peter have chosen to provide liquidity primarily to retail clients, and primarily in the common stocks of large firms.

I particularly appreciate the generosity and encouragement that the following individuals have extended to me: Stanley Abel Howard Baker Frank Baxter Brandon Becker Gil Beebower Jeff Benton Dale Berman Charles Black David Booth Harold Bradley Kurt Bradshaw Pearce Bunting Richard Cangelosi Jim Cochrane David Colker Cromwell Coulson Larry Cuneo David Cushing Harry Davidow Pina DeSantis Mike Edleson Jim Farrell Tom Fay Gene Finn Ed Fleischman Russ Fogler Gifford Fong Stuart Fraser Dean Furbush Jim Gallagher Gary Gastineau Brian Geary Steven Giacoma Jim Gilmore Phil Ginsberg Gary Ginter Keith Goggin Wendy Gramm Dick Grasso Bob Greber Leo Guzman Spence Hilton Dave Hirschfeld Blair Hull Billy Johnson Rick Ketchum Rick Kilcollin Ray Killian Howard Kramer Ken Kramer Arthur Leavitt Charlie Lebens Marty Leibowitz Dave Leinweber Rich Lindsey Evelyn Liszka Bob Litterman Bill Lupien Bernie Madoff Peter Madoff Steven Malin David Malmquist Tim McCormick Dick McDonald Seth Merrin Dick Michaud Mark Minister Nate Most Annette Nazareth Gene Noser Bill Pratt Eddie Rabin Murali Ramaswami Bill Ryan Henry Sasser Evan Schulman Andy Schwarz Christina Sciotto Jim Scott Jim Shapiro David Shaw Katy Sherrerd Fred Siesel Deborah Soesbee George Sofianos Eric Sorensen Olof Stenhammar Rob Telsar Artie Tolendini Jack Treynor Wayne Wagner Jeffery Wecker Genie Williams Steve Wallman Steve Wunsch Steve Youngren Dorit Zeevi Four people particularly influenced the development of this book.


pages: 258 words: 73,109

The (Honest) Truth About Dishonesty: How We Lie to Everyone, Especially Ourselves by Dan Ariely

accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Broken windows theory, cashless society, clean water, cognitive dissonance, Credit Default Swap, Donald Trump, fudge factor, new economy, Richard Feynman, Schrödinger's Cat, Shai Danziger, shareholder value, Steve Jobs, Walter Mischel

Everyone nodded and laughed, appreciating his enthusiastic, non-buttoned-down approach. “Is anybody here rich?” he asked. “I know I am, but you college students aren’t. No, you are all poor. But that’s going to change through the power of CHEATING! Let’s do it!” He then recited the names of some infamous cheaters, from Genghis Khan through the present, including a dozen CEOs, Alex Rodriguez, Bernie Madoff, Martha Stewart, and more. “You all want to be like them,” he exhorted. “You want to have power and money! And all that can be yours through cheating. Pay attention, and I will give you the secret!” With that inspiring introduction, it was now time for a group exercise. He asked the students to close their eyes and take three deep, cleansing breaths. “Imagine you have cheated and gotten your first ten million dollars,” he said.

This first study showed that creativity and dishonesty are correlated, but that doesn’t necessarily mean that creativity is directly linked to dishonesty. For example, what if a third factor such as intelligence was the factor linked to both creativity and dishonesty? The link among intelligence, creativity, and dishonesty seems especially plausible when one considers how clever people such as the Ponzi schemer Bernie Madoff or the famous check forger Frank Abagnale (the author of Catch Me If You Can) must have been to fool so many people. And so our next step was to carry out an experiment in which we checked to see whether creativity or intelligence was a better predictor of dishonesty. Again, picture yourself as one of our participants. This time, the testing starts before you even set foot in the lab. A week earlier, you sit down at your home computer and complete an online survey, which includes questions to assess your creativity and also measure your intelligence.

Maybe it was his sickness, my fear of catching something in general, sleep deprivation, or just the random and amusing nature of free associations that made me wonder about the similarity between the germs my seatmate and I were passing back and forth and the recent spread of corporate dishonesty. As I’ve mentioned, the collapse of Enron spiked my interest in the phenomenon of corporate cheating—and my interest continued to grow following the wave of scandals at Kmart, WorldCom, Tyco, Halliburton, Bristol-Myers Squibb, Freddie Mac, Fannie Mae, the financial crisis of 2008, and, of course, Bernard L. Madoff Investment Securities. From the sidelines, it seemed that the frequency of financial scandals was increasing. Was this due to improvements in the detection of dishonest and illegal behavior? Was it due to a deteriorating moral compass and an actual increase in dishonesty? Or was there also an infectious element to dishonesty that was getting a stronger hold on the corporate world? Meanwhile, as my sniffling neighbor’s pile of used tissues grew, I began wondering whether someone could become infected with an “immorality bug.”


pages: 180 words: 61,340

Boomerang: Travels in the New Third World by Michael Lewis

Berlin Wall, Bernie Madoff, Carmen Reinhart, Celtic Tiger, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, fiat currency, financial thriller, full employment, German hyperinflation, Irish property bubble, Kenneth Rogoff, offshore financial centre, pension reform, Ponzi scheme, Ronald Reagan, Ronald Reagan: Tear down this wall, South Sea Bubble, the new new thing, tulip mania, women in the workforce

They lent money to American subprime borrowers, to Irish real estate barons, to Icelandic banking tycoons, to do things that no German ever would do. The German losses are still being toted up, but at last count they stand at $21 billion in the Icelandic banks, $100 billion in Irish banks, $60 billion in various U.S. subprime-backed bonds, and some yet to be determined amount in Greek bonds. The only financial disaster in the last decade German bankers appear to have missed was investing with Bernie Madoff (perhaps the only advantage to the German financial system of having no Jews). In their own country, however, these seemingly crazed bankers behaved with restraint. The German people did not allow them to behave otherwise. It was another case of clean on the outside, dirty on the inside. The German banks that wanted to get a little dirty needed to go abroad to do it. About this the deputy finance minister has not that much to say, though he does wonder, idly, how a real estate crisis in Florida ends with massive financial losses in Germany.

“I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever. This wasn’t a hypothetical scary situation, said Reed. “It’s a mathematical inevitability.” In spirit it reminded me of Bernard Madoff’s investment business. Anyone who looked at Madoff’s returns and understood them could see he was running a Ponzi scheme; only one person who had understood them bothered to blow the whistle, and no one listened to him. (See No One Would Listen: A True Financial Thriller, by Harry Markopolos.) In his negotiations with the unions, the mayor has gotten nowhere. “I understand the police and firefighters,” he says.


pages: 575 words: 171,599

The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan

airport security, Asian financial crisis, asset allocation, Bernie Madoff, British Empire, business intelligence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, delayed gratification, estate planning, Etonian, glass ceiling, high net worth, kremlinology, locking in a profit, Long Term Capital Management, Marc Andreessen, mass immigration, McMansion, medical residency, Menlo Park, new economy, old-boy network, Ponzi scheme, risk tolerance, rolodex, Ronald Reagan, short selling, Silicon Valley, sovereign wealth fund, stem cell, technology bubble, too big to fail

Millett The Sheriffs of Wall Street The Securities and Exchange Commission George S. Canellos—director, New York office David A. Markowitz—former assistant regional director, New York office Sanjay Wadhwa—assistant regional director, New York office Jason E. Friedman—senior staff attorney John P. Henderson—senior staff attorney The FBI B. J. Kang—special agent who was one of the arresting agents of Bernie Madoff and also worked the Galleon case The US Attorney’s Office, New York Preetinder S. Bharara—US attorney, Southern District of New York Reed Brodsky—assistant US attorney Andrew Z. Michaelson—special assistant US attorney on loan from the SEC Jonathan R. Streeter—assistant US attorney The Galleon Circle The Galleon Group Michael Cardillo—portfolio manager Kris Chellam—former Xilinx executive turned Galleon portfolio manager Caryn Eisenberg—Rajaratnam’s executive assistant Tom Fernandez—Rajaratnam’s Wharton classmate and head of investor relations Michael Fisherman—analyst Ian Horowitz—trader David Lau—Rajaratnam’s Wharton classmate and Asia chief George Lau—chief compliance officer Ananth Muniyappa—trader Gary Rosenbach—portfolio manager Richard Schutte—chief operating officer Leon Shaulov—portfolio manager Adam Smith—Harvard Business School graduate, former Morgan Stanley investment banker, and portfolio manager at Galleon Other Traders William J.

Dispatching examiners also would get the regulatory ball rolling before a formal order of investigation was in place. In 2006, when Christopher Cox, a California congressman, led the SEC, enforcement lawyers often got pushback when they sought formal powers to probe. Cox believed that financial players like investment banks and hedge funds could be trusted to regulate themselves. During his time, the agency missed some stunningly huge fraudsters, such as Bernie Madoff, who ran a Ponzi scheme for nearly two decades. It also overlooked troubling practices such as collateralized debt obligations that led to the financial system’s near meltdown in 2008. For a month, the SEC’s exam staff camped in Sedna’s offices. They turned up instant messages and emails that seemed to point to something suspicious. What exactly was going on was less clear. On September 21, 2006, Wadhwa received an order of investigation captioned “In the Matter of: Sedna Capital Management LLC,” giving the SEC the authority to subpoena documents and take testimony.

As I sit here in my office reflecting on the last year, I am filled with emotions. The overwhelming one is God is putting me through a test, and my duty is to do the very best I can and be prepared to accept whatever outcomes. I know I have done nothing wrong and expect to be fully vindicated.” In the same federal courthouse that has seen its share of high-profile cases against boldface names—Martha Stewart and the two Bernies, Madoff and Ebbers—the trial of the United States of America v. Rajat K. Gupta stood out. It was the most uncomfortable trial in recent memory. It pitted one corner of the establishment, represented by Gupta, the former three-time managing director of McKinsey, against the other corner of the establishment, Goldman Sachs & Co. There was no love lost between the two. In the months before the trial, Gupta had come to distrust his relationship with Goldman and view Blankfein with great disdain.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, Hyman Minsky, index fund, intangible asset, interest rate swap, Isaac Newton, joint-stock company, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, merger arbitrage, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

There is still a trade-off between liquidity and reward. The deposit account which gives the customer the best interest rate may impose penalties for early withdrawals of money. Those investments which offer the best return – shares, options, etc. – also involve the possibility of loss. The safest investments offer a steady but unspectacular return. Investments can also appear safe when they are not. Those who invested money with the fraudster Bernie Madoff thought, erroneously, that they were opting for a conservatively run portfolio. They learnt that the choice of investment manager can be just as important as the choice of investment. So before investors sign away their hard-earned savings, they should consider carefully what they expect from their investments. Might they want to withdraw their money early to pay for a car or a holiday? What value do they place on safety?

They are usually registered in an offshore haven like the Cayman Islands to give them tax privileges; they have much greater investment freedom than a mutual fund. But this also means they are very lightly regulated. In the UK, the Financial Services Authority looks after the fund managers, rather than the hedge funds themselves; in other countries, there is very little oversight at all. There have been several examples of fraud, usually when the managers lie about the nature or the value of their investments. The Bernard Madoff case is a slightly unusual one. Technically speaking, Madoff did not run a hedge fund, but hedge funds did give him money to invest. The failure to spot the fraud reflects very badly on those funds that did do so: the authorities try to restrict the damage by limiting the type of people who can invest in them; only the very rich and institutions like pension funds and university endowments can qualify.


pages: 386 words: 116,233

The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime by Mj Demarco

8-hour work day, Albert Einstein, AltaVista, back-to-the-land, Bernie Madoff, bounce rate, business process, butterfly effect, buy and hold, cloud computing, commoditize, dark matter, delayed gratification, demand response, Donald Trump, fear of failure, financial independence, fixed income, housing crisis, Jeff Bezos, job-hopping, Lao Tzu, Mark Zuckerberg, passive income, passive investing, payday loans, Ponzi scheme, price anchoring, Ronald Reagan, upwardly mobile, wealth creators, white picket fence, World Values Survey, zero day

Let's again review the physics, the mathematical formula for the Slowlane pathology to wealth: WEALTH = (Job) + (Market Investments) Or factored: WEALTH = [Intrinsic Value (Yearly)] + [Compound Interest (Yearly)] Factored further: WEALTH = (Time X Hourly or Salaried Value) + Invested Sum X (1 + Yield)time Like a job, the flaw in “compound interest” lies in the same mathematical restrictions in which numbers work AGAINST you instead of FOR you. Take a look at this chart, which highlights the effect of compound interest and that $10,000 investment. A Slowlane guru preaches that a $10,000 investment grown at 15% will be worth over $2.5 million dollars in 40 years!!! Hooray!!! What don't they tell you? They don't tell you that a 15% return year-after-year is impossible unless you invest with Bernie Madoff or Charles Ponzi. They don't tell you that in 40 years you'll be dead, and if you're not, you'll be close. They don't tell you that in 40 years, your $2.5 million will likely be worth $250,000 in today's dollars and that a gallon of milk will cost $12.00. They don't tell you that this method of wealth acceleration is not what they use. They don't tell you plenty, and yet you're supposed to believe it without question.

Whatever the truth, if you can't audit your adviser, you don't have control. If you can't critique good advice from bad you don't have control. For those who hire financial planners, literacy is insurance. Financial advisers do not solve financial illiteracy just as more money doesn't solve poor money management. Financial illiteracy exposes you to risk, and in the worst case scenario, fraud. Bernard Madoff's investment fund defrauded thousands, and billions were lost, but what's more shocking is that the whistle was blown years before. You see, when you are financially illiterate, you are deaf, and when you are deaf, you can't hear the whistle. Chapter Summary: Fastlane Distinctions The Fastlane is the means to your end because dreams cost money. Conquer big goals by breaking them down to their smallest component.

I hired her without verification and it took me several years to uncover the truth. Verify First, Trust Later Former president Ronald Reagan once said, “Trust, but verify.” When I hired the liar, I trusted but didn't verify. It took several robberies, video cameras, and public record searches to uncover the truth. I verified too late and it cost me. The most egregious cases of trust are our financial system. Bernard Madoff perpetrated the largest Ponzi scheme ever, and billions of dollars were lost. How does one man siphon billions from millions? Unverified trust. Thousands trusted Madoff and thousands failed to verify. Those who did verify didn't invest and some even blew the whistle. We are a trusting people and we want to believe the best. We want to believe in fairy tales and happily ever after. We want to believe that for two easy payments of $39.95, we can make millions investing in no-money down real estate.


The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Asian financial crisis, asset-backed security, backtesting, bank run, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, debt deflation, distributed ledger, diversification, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, labor-force participation, Long Term Capital Management, Lyft, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk/return, sharing economy, short selling, sovereign wealth fund, Uber and Lyft, uber lyft, yield curve

If a Ponzi scheme is to recover from a run, then it will become even larger; the restoration of confidence following the successful test of confidence suggests this, as also does the requirement for the scheme to continue to grow larger because any outflows need to be financed with new inflows. For example, imagine a hypothetical—admittedly completely unrealistic—alternative scenario for the notorious, and huge, Ponzi scheme run by Bernard (“Bernie”) Madoff. Madoff’s giant Ponzi scheme collapsed in December 2008, during the global carry crash associated with the collapse of Lehman Brothers. At the time of the Madoff scheme collapse, Madoff’s clients had an illusory US$65 billion standing to their credit in the scheme. Madoff’s scheme was a classic Ponzi scheme, operated simply by marking up client accounts to reflect fabricated good and consistent returns, while financing any client withdrawals from the scheme with new client inflows.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, plutocrats, Plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

The only way anyone can continue to have an income after they stop working is to put aside money today that they can use later in life. If the average person needs $40,000 a year to live in retirement and will on average live twenty years, that means that they need $800,000 over that period. Obviously, you and I can’t save that kind of cash. There are only two ways to solve the problem. One is pay-as-you-go ‘‘unfunded’’ government pensions like Social Security. These are classic Ponzi schemes, sort of Bernie Madoff on a much vaster scale. Today’s payroll taxes are not invested; individuals have no accounts and don’t have any legal right to a pension. Instead, people working today are taxed to pay benefits to people who are retired or on disability. As long as people mostly died before becoming eligible or didn’t live long in retirement, this worked fine. But the public doesn’t understand this scheme for what it is.

We would have demanded it. Sitting out a boom is almost impossible for a publicly traded company. The banks misunderstood their real risks and had too much faith in financial rocket science, but even if we resent the enormous salaries and perks they gave themselves, there is scant evidence of illegality or even conscious recklessness related to the collapse. The poster child of the meltdown has become Bernie Madoff, just as Charles Ponzi is still remembered from the Roaring Twenties. Madoff ’s and other Ponzi schemes by money managers were discovered when the markets plunged, but his scheme was a classic investment scam that had run for decades under the noses of the regulators and had nothing to do with the bankers and instruments at the center of the meltdown. As Warren Buffett wrote, ‘‘It is only when the tide goes out that you see who has been swimming 175 176 FINANCIAL MARKET MELTDOWN naked.’’


pages: 294 words: 89,406

Lying for Money: How Fraud Makes the World Go Round by Daniel Davies

bank run, banking crisis, Bernie Madoff, bitcoin, Black Swan, Bretton Woods, business cycle, business process, collapse of Lehman Brothers, compound rate of return, cryptocurrency, financial deregulation, fixed income, Frederick Winslow Taylor, Gordon Gekko, high net worth, illegal immigration, index arbitrage, Nick Leeson, offshore financial centre, Peter Thiel, Ponzi scheme, price mechanism, principal–agent problem, railway mania, Ronald Coase, Ronald Reagan, short selling, social web, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, time value of money, web of trust

The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses. Consider a simple investment fraud, like Ponzi’s or the one run by Bernard Madoff, simplifying away all the detail and concentrating on the mathematics of the investment returns. You take in a million dollars from your investors, promising them a return of 25 per cent on their money. Instead, you steal it. A year goes by, and you aim to keep the fraud going by raising new money from another set of mugs. You get a tame accountant to ‘verify’ that you have made a 25 per cent profit, and armed with these amazing performance figures, you go out on the road to raise … how much?

So it attempted to manage its snowball by very aggressive sales practices. This isn’t the best way of doing things. In an investment scam, history has shown us that you are better off doing what you can to manage the outflows directly. If people hardly ever take the money out of your scam, you’re home free. For a while, anyway. Which brings us to: Hedge fund fraud The name synonymous with hedge fund fraud in the twenty-first century is Bernard Madoff. Bernie played a very long game, typically promising returns of only 8–12 per cent to his investors rather than the spectacular numbers usually associated with a Ponzi scheme. But it was this careful management which motivated his investors to keep their money with him, rather than withdrawing it; his fund never had the volatile ups and downs which drive redemptions. Ironically, though, because of the way compound interest works, the fact that the scheme went on so long meant that the fiction ended up being truly immense.

One of the reasons why Madoff’s redemptions loomed so large in the financial crisis was that investors had suddenly become scared of secretive funds with unusually consistent returns and small or obscure firms of accountants as their auditors. This fear arose in the aftermath of the collapse of Bayou Capital in 2005. Bayou anticipated almost all the problems of Madoff – and provides a clear insight into the central issue of redemption management and the unique characteristics of a hedge fund Ponzi scheme. It also reads as if a Hollywood studio had commissioned a script for ‘The Bernard Madoff Story’, then handed it to Quentin Tarantino with instructions to punch it up a bit. Bayou Capital Sam Israel had always been a devout believer in the possibility of easy money. As a stock trader specialising in short-term and opportunistic speculative ideas, he had been apprenticed to some of the most legendary names on Wall Street and had learned exactly the wrong lessons from all of them.


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, business cycle, buy and hold, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Treasuries at historically low interest rates—or even no interest rates! In December 2008, the Treasury auctioned off $30 billion of four-week Treasury bills for a yield of zero percent. It was as if the buyers were saying, “Wrap this money in foil and put it in the freezer, bury it in the lawn behind the White House, but for goodness’ sake don’t put it in the stock market, don’t give it to Bernie Madoff, and don’t buy securitized mortgages. Just give it back intact in four weeks.” In fact the panic was so great that the very appeal of U.S. Treasury debt was the printing press. Investors knew that they could get dollars back, even if the ink hadn’t dried. The scramble for the printing press guarantee was so great that in the secondary market some were willing to park their money in bonds that yielded less than zero, that is, negative rates, returning slightly less than their cost on maturity.

Dollarcollapse.com This is a very useful site, providing a daily compendium of links to commentary and breaking news about the economy, the dollar, precious metals, the real estate market, and more. www.dollarcollapse.com. Clusterstock.com Business and financial news and commentary, gossipy at times, but willing to take a close-up look at the dark side of Wall Street. No other source provided as much information about the Bernie Madoff scandal as www.clusterstock.com. Credit Writedowns Featuring news and opinion on finance, economics, and markets, the site seeks to provide early warning signals for what to expect in the global economy. Especially good at spotting European economic news that is missed elsewhere. The site’s “Credit Crisis Timeline” is a comprehensive collection of accounts of the unfolding credit crisis, while it also provides an overview called “The Dummy’s Guide to the U.S.


pages: 117 words: 31,221

Fred Schwed's Where Are the Customers' Yachts?: A Modern-Day Interpretation of an Investment Classic by Leo Gough

Albert Einstein, banking crisis, Bernie Madoff, corporate governance, discounted cash flows, diversification, fixed income, index fund, Long Term Capital Management, Northern Rock, passive investing, Ralph Waldo Emerson, random walk, short selling, South Sea Bubble, The Nature of the Firm, the rule of 72, The Wealth of Nations by Adam Smith, transaction costs, young professional

Remember though, you’ll be getting no advice, so make sure you have got your facts absolutely right before you make the trade, or you could end up buying the wrong thing, or the wrong amount, by mistake. 32 CROOKS ‘The crookedness of Wall Street is in my opinion an overrated phenomenon.’ It all depends on how you define crookedness. On the broadest level – of intellectual dishonesty, say – one might argue that almost the entire financial services industry, with very few exceptions, is dishonest because it is based on a number of false or misleading premises. Here are some examples: DEFINING IDEA… Your Honor, I cannot offer you an excuse for my behavior. ~ BERNIE MADOFF The fund management business, by and large, not only promotes the idea that active fund managers have a superior ability in stock-picking (which, as we have seen, is not borne out by the evidence) but also connives at producing misleading information about past performance by constantly merging and closing funds, and opening new ones. Stock brokers (often now departments of larger institutions) encourage customers to ‘churn’ their portfolios, which means to buy and sell securities for no good reason, thus generating extra commissions for the broker.

So let’s be generous and just call all of the above ‘questionable practices’. What about the real crooks? They may be in a minority, as Schwed rightly says. Often they seem to start out with good intentions but slowly get drawn into fiddling that mushrooms over the years into a gigantic fraud. Here are just a few of the prominent characters from the Rogues’ Gallery during the last few years: Bernie Madoff, arrested in December 2008 for running a fraudulent investment scheme that collapsed owing more than 60 billion dollars; Bernard Ebbers, former CEO of Worldcom, a large telecommunications company, jailed in 2005 for false financial reporting that resulted in a loss of some 11 billion dollars to investors; Jack Grubman, a stock analyst who was fined and banned for life from the securities industry in 2004 for producing over-optimistic reports and ratings on some of the companies he followed; David Walsh, founder of Bre-X Mining, which went bankrupt in 1997 after it was discovered that a gold mine it owned in Borneo had been fraudulently ‘salted’ with gold; Michael Milken, father of the junk bond industry, convicted of insider trading in 1989.

They have to look as if they are pursuing wrongdoers ruthlessly, even when it isn’t very clear who the wrongdoers are, or even if there are any. It is not an easy job, because people are always complaining that the regulators are either too lax or too zealous. The SEC is usually accused of being overzealous, and of hounding perfectly innocent people, while the FSA (and its predecessors) have often been seen as toothless and afraid to act. But then again, the SEC has been roundly criticised for investigating Bernie Madoff (see chapter 32) several times without finding much wrong (after a number of complaints) before the firm finally collapsed, revealing the biggest fraud in history. And lately the FSA has been getting very tough with some of the smaller players, for example by fining Thinc Group, a financial adviser, £900,000 in 2008 for misselling subprime mortgages. Maybe they do these things better in China.


pages: 316 words: 117,228

The Code of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, barriers to entry, Bernie Madoff, bilateral investment treaty, bitcoin, blockchain, Bretton Woods, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Donald Trump, double helix, Edward Glaeser, Ethereum, ethereum blockchain, facts on the ground, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, full employment, global reserve currency, Hernando de Soto, income inequality, intangible asset, investor state dispute settlement, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, land reform, land tenure, London Interbank Offered Rate, Long Term Capital Management, means of production, money market fund, moral hazard, offshore financial centre, phenotype, Ponzi scheme, price mechanism, price stability, profit maximization, railway mania, regulatory arbitrage, reserve currency, Ronald Coase, Satoshi Nakamoto, secular stagnation, self-driving car, shareholder value, Silicon Valley, smart contracts, software patent, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, trade route, transaction costs, Wolfgang Streeck

Johann Plenge, Gründung und Geschichte des Crédit Mobilier (Tübingen: Verlag der H. Laupp’schen Buchhandlung, 1903); the book includes the articles of incorporation of the bank. 62. For a short definition and the description of the original Ponzi scheme, see https://www.investopedia.com/terms/p/ponzischeme.asp (last accessed August 8, 2018). n ote s to c h a P te r 5 255 63. Robert Lenzner, “Bernie Madoff ’s $50 Billion Ponzi Scheme,” December 12, 2008, available online at www.forbes.com. 64. Karl Marx, “Crédit Mobilier,” New York Daily Tribune, part III, July 11, 1856. Available online at http:// marxengels .public -archive .net /en /ME0978en .html (last accessed August 28, 2018). 65. Ibid. 66. Greece and Portugal could be listed here as well. However, their problems stemmed at least in part from excessive government borrowing.

This resembles a Ponzi scheme, named after an ItaloAmerican of the early twentieth century who attracted investors by promising them extraordinary returns, when in fact he simply used the money that new investors paid in to pay out dividends to the previous ones.62 This works as long as enough investors show up every day; indeed, it can work for decades even under the eyes of powerful financial market regulators, such as the SEC, as Bernard Madoff ’s secretive Ponzi scheme, which blew up only after the 2008 crisis, has demonstrated.63 Still, at some point some investments must produce some real returns for the company to survive—a tall order in the case of Crédit Mobilier, given that most investments were made in infrastructure projects that, by nature, are long-term investments. Eventually, investors in Crédit Mobilier grew weary and once too many did, others followed.


I Love Capitalism!: An American Story by Ken Langone

activist fund / activist shareholder / activist investor, Berlin Wall, Bernie Madoff, Bernie Sanders, business climate, corporate governance, East Village, fixed income, glass ceiling, income inequality, Paul Samuelson, Ronald Reagan, short selling, Silicon Valley, single-payer health, six sigma, VA Linux, Y2K, zero-sum game

That Friday night, September 19, 2008, in the thick of the biggest financial crisis since the Great Depression, Reed Elsevier had to wire in $4.3 billion. We at Invemed got $200 million for our ChoicePoint shares. It was a nice time to have a lot of cash. Now the story gets more interesting. A few weeks later, a close friend of mine, a big deal maker who will remain anonymous, called me up and said, “Bernie Madoff knows all about you, and he would love to talk to you.” I’d never met Bernie Madoff. All I knew about him was that he was a weird, reclusive guy with the reputation of being the biggest option player on Wall Street. He had some kind of fund that nobody knew anything about; it was very successful, but nobody understood how it worked. A black box. But as a courtesy to my friend, I said, “Okay, I’ll see him, for you.” Now, I don’t know beans about options: puts and calls and strips and straddles and all this other crap.

Smart people can have the wool pulled over their eyes as easily as dumb people, if not more so. I’m not saying Steve and I are smarter than anyone else: we just happened not to like the flavor of what Bernie Madoff was selling. Steve later told me the complete lack of volatility in Madoff’s fund put him off: Steve is a firm believer that volatility is part of the equation in high-end investment, that wealthy investors ought to tolerate more uncertainty in return for higher numbers. Two weeks after the meeting, on December 11, 2008, my office phone rang, and my assistant Pam told me Steve Holzman was on the line. I picked up. “Holy shit, did you hear the news?” Steve said. He’d just seen on his Bloomberg terminal that Bernie Madoff had been arrested for securities fraud. “I feel like the guy who flirted with Lorena Bobbitt at a bar,” Steve said. Of course, after Madoff was arrested, it hit me exactly what he’d been doing: as the crisis unfolded and his clients stampeded out the door, he needed money to pay them off and keep the game going.

Now, I don’t know beans about options: puts and calls and strips and straddles and all this other crap. All I do is pick stocks, and I never buy anything I don’t understand. But I have an investment partner, Steve Holzman, who loves to screw around with options, and he’s done very well with it. So I phoned him and said, “Steve, do me a favor. Bernie Madoff wants to meet with me. I don’t know what the hell he does; would you come along so there’s somebody knowledgeable in the room?” Steve sounded less than interested. Madoff’s fund wasn’t his cup of tea, he said, and it probably wasn’t mine either. “Please, Steve, do me a favor,” I said. “I’m doing this as a courtesy for a guy who’s a very dear friend of mine.” So Steve agreed, and we went to the meeting. Four thirty on a Monday afternoon.


pages: 384 words: 118,572

The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova

attribution theory, Bernie Madoff, British Empire, Cass Sunstein, cognitive dissonance, coherent worldview, Daniel Kahneman / Amos Tversky, endowment effect, epigenetics, hindsight bias, lake wobegon effect, lateral thinking, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, post-work, publish or perish, Richard Thaler, risk tolerance, side project, Skype, Steven Pinker, the scientific method, tulip mania, Walter Mischel

David Maurer describes one victim who, several years after falling for a well-known wire con—the grifter pretends to have a way of getting race results seconds before they are announced, allowing the mark to place a sure-win bet—spotted his deceivers on the street. He ran toward them. Their hearts sank. Surely, he was going to turn them in. Not at all. He was wondering if he could once more play that game he’d lost at way back when. He was certain that, this time, his luck had turned. The men were only too happy to comply. Even someone like Bernie Madoff went undetected for at least twenty years. He was seventy when his scheme crumbled. What if he’d died before it blew up? One can imagine a future where his victims would be none the wiser—as long as new investments kept coming in. In June 2007, Slate writer Justin Peters decided to be creative about his airfare to Italy. Short on money, he was nevertheless eager to spend a few months out of the country.

Barnum may never have said, “There’s a sucker born every minute.” (He very likely did not.) But among the con men of the early twentieth century, there was another saying. “There’s a sucker born every minute, and one to trim ’em and one to knock ’em.” There’s always something to fall for, and always someone to do the falling. Who is the victim and who, the con man? What kinds of people are the Bernie Madoffs and Captain Hansens of the world? And do a Norfleet and a Peters share some underlying traits that bind them together? Is there a quintessential grifter—and a quintessential mark? * * * Eighteen State Street. A small, two-window-wide cream house. Teal-and-white trimmed shutters. Grass sprouting in between slabs of surrounding concrete. A small teal-and-cream garage, a basketball hoop affixed to the top.

Machiavellianism, it seems then, may, like psychopathy, predispose people toward con-like behaviors and make them better able to deliver on them. Delroy Paulhus, a psychologist at the University of British Columbia who specializes in the dark triad traits, goes as far as to suggest that “Machiavellian” is a better descriptor of the con artist than “psychopath.” “It seems clear that malevolent stockbrokers such as Bernie Madoff do not qualify as psychopaths,” he writes. “They are corporate Machiavellians who use deliberate, strategic procedures for exploiting others.” So wherein lies the truth: is the con artist psychopath, narcissist, Machiavellian? A little bit of all? Demara seems to be proof of the “all of the above” choice. Doctors are often accused of playing God. Demara took that criticism to a grotesque extreme.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

In the wake of the collapse of Bear Stearns, the SEC inspector general found that the agency not only took no meaningful action under the Consolidated Supervised Entity program, but also did a poor job implementing its Broker-Dealer Risk Assessment program (created in 1992 in response to the failure of Drexel Burnham Lambert). Under that program, the SEC received quarterly and annual reports from 146 broker-dealers—but generally only reviewed six of them.95 Most famously, the SEC managed to overlook Bernie Madoff’s $65 billion Ponzi scheme, despite tips and investigations going back to 1992.96 This failure to regulate the securities markets effectively was a consequence of the deregulatory ideology introduced by Ronald Reagan as well as the political influence of Wall Street. James Coffman, a former assistant director of the SEC’s enforcement division, wrote, Elected deregulators appointed their own kind to head regulatory agencies and they, in turn, removed career regulators from management positions and replaced them with appointees who had worked in or represented the regulated industries.

., April 20, 2007), available at http://www.sec.gov/news/speech/2007/spch042007psa.htm. 95. U.S. Securities and Exchange Commission Office of Inspector General, SEC’s Oversight of Bear Stearns and Related Entities: Broker-Dealer Risk Assessment Program, September 25, 2008, available at http://www.sec-oig.gov/Reports/AuditsInspections/2008/446-b.pdf. 96. U.S. Securities and Exchange Commission, Office of Investigations, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme—Public Version, August 31, 2009, available at http://graphics8.nytimes.com/packages/pdf/business/20090904secmadoff .pdf. The total amount missing from client accounts was approximately $65 billion, including fake investment returns; the actual amount invested by and not returned to clients was closer to $20 billion. 97. James Coffman, “An Inside Perspective on Regulatory Capture,” The Baseline Scenario, August 14, 2009, available at http://baselinescenario.com/2009/08/14/an-inside-perspective-on-regulatory-capture/. 98.


pages: 340 words: 91,745

Duped: Double Lives, False Identities, and the Con Man I Almost Married by Abby Ellin

Bernie Madoff, bitcoin, Burning Man, business intelligence, Charles Lindbergh, cognitive dissonance, Donald Trump, double helix, dumpster diving, East Village, feminist movement, forensic accounting, fudge factor, hiring and firing, Internet Archive, longitudinal study, Lyft, mandatory minimum, meta analysis, meta-analysis, pink-collar, Ponzi scheme, Robert Hanssen: Double agent, Ronald Reagan, Silicon Valley, Skype, Snapchat, telemarketer, theory of mind, Thomas Kuhn: the structure of scientific revolutions

By way of explanation, Lyman says this: “A man can be faithful to himself or to other people, but not to both, at least not happily.”10 The Broadway darling Dear Evan Hansen focused on a morose teenager who pretends to be a close friend of a classmate who committed suicide, fooling his family. The audience was supposed to sympathize with the con man. Of course, there have also been real-world figures leading closeted lives, historical counterparts to our Bernie Madoffs: Thomas Jefferson (who fathered six children with his slave Sally Hemings). Charles Lindbergh (who had three separate families on two continents). J. Edgar Hoover (a racist, cross-dressing, anti-gay gay man). Lance Armstrong. Harvey Weinstein. Pop culture is littered with deceit: Hitchcock’s films are all about deception, from Suspicion to Vertigo to Rear Window. More recently there was The Departed, a fictionalized account of Boston mob boss Whitey Bulger and his Winter Hill Gang.

So it seems prudent to begin an exploration of serial lying by simply asking, “Why?” We’re all familiar with those stories: a man, maybe powerful, maybe not, lies to his wife, children, employers, colleagues, country about his position, his accomplishments, his romantic entanglements. The deception begins small and then spirals and spirals until it’s got everyone running in circles, including the duper. It’s Bernie Madoff and Lance Armstrong and Arnold Schwarzenegger and thousands of others. I know this story especially well. And frankly, by now it feels overly familiar, even expected. Of course, in the huge range of stories about emotional fraud, those about people, particularly men, lying over the long term in order to have more sex/money/power/fame far outnumber other categories. But I was intrigued by people who led secret lives for different reasons.

She believes that when a trauma is caused by someone we know—someone with whom we have a relationship—and it feels targeted and personal, it’s much harder to recover from than if a trauma is accidental and impersonal.7 Research backs this up. A 2000 study found that PTSD is less toxic when it’s caused by a natural disaster, like an earthquake, a tornado, or a tsunami, than when it’s caused by humans.8 Still, the betrayal doesn’t have to be perpetrated by a loved one to cause real distress. Eight to ten months after Bernie Madoff’s Ponzi scheme came to light, social worker Audrey Freshman conducted an online survey of 172 Madoff victims using the list of 17 symptoms of PTSD as listed in the DSM-5. Almost 56 percent of the victims met criteria for a presumptive diagnosis of PTSD. Nearly 61 percent had high levels of anxiety, 58 percent had depression, and 34 percent struggled with other health issues.9 Many of the respondents were Jewish, like Madoff, and either knew him personally or had him recommended to them by their own financial advisers, all of which exacerbated their distress.


pages: 202 words: 58,823

Willful: How We Choose What We Do by Richard Robb

activist fund / activist shareholder / activist investor, Alvin Roth, Asian financial crisis, asset-backed security, Bernie Madoff, capital asset pricing model, cognitive bias, collapse of Lehman Brothers, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, delayed gratification, diversification, diversified portfolio, effective altruism, endowment effect, Eratosthenes, experimental subject, family office, George Akerlof, index fund, information asymmetry, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, loss aversion, market bubble, market clearing, money market fund, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, principal–agent problem, profit maximization, profit motive, Richard Thaler, Silicon Valley, sovereign wealth fund, survivorship bias, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, ultimatum game

So sellers remind consumers that the product exists, then let their reason be a slave to their passions. The “soft sell” allows prospective buyers to connect the dots. This applies in other arenas as well—in movies, and perhaps in real life, people rebel against the romantic interest who seems too perfect. (The extreme case of the soft sell is the anti-sell, in which customers are actively discouraged. Bernie Madoff was famously a master of this dark art.) Parents try to stake out the middle ground that allows children to choose freely which challenges to pursue, while steering them clear of mistakes. After graduating from college with a degree in archaeology and anthropology, my daughter, Alice, asked me which career was best. Did she need to work at a not-for-profit to be a good person? The second question was relatively easy.


pages: 411 words: 80,925

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live by Rachel Botsman, Roo Rogers

Airbnb, barriers to entry, Bernie Madoff, bike sharing scheme, Buckminster Fuller, buy and hold, carbon footprint, Cass Sunstein, collaborative consumption, collaborative economy, commoditize, Community Supported Agriculture, credit crunch, crowdsourcing, dematerialisation, disintermediation, en.wikipedia.org, experimental economics, George Akerlof, global village, hedonic treadmill, Hugh Fearnley-Whittingstall, information retrieval, iterative process, Kevin Kelly, Kickstarter, late fees, Mark Zuckerberg, market design, Menlo Park, Network effects, new economy, new new economy, out of africa, Parkinson's law, peer-to-peer, peer-to-peer lending, peer-to-peer rental, Ponzi scheme, pre–internet, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Simon Kuznets, Skype, slashdot, smart grid, South of Market, San Francisco, Stewart Brand, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thorstein Veblen, Torches of Freedom, transaction costs, traveling salesman, ultimatum game, Victor Gruen, web of trust, women in the workforce, Zipcar

Williams describe these rules as “weapons of mass collaboration” and argue that they may give birth to a golden era equal to the Italian Renaissance or Athenian democracy.34 Social networking is probably the most inclusive and culturally disruptive development of our time. Even those on the isolated peripheries of our society, such as someone in Siberia or on the equator, or someone with a unique hobby such as collecting miniature Polish pipe organs, can find a group to share and connect with based on common interests. Every investigative journalist knows that the key to breaking a news story is that money always leads to the top. Whether it’s Al Capone or Bernard Madoff, taxes or Ponzi schemes, money is linked to power and control. If we apply these principles to Web 2.0, we find a surprising new relationship between money and power. The Internet is inherently democratic and decentralized. One of the first celebrated examples of this autonomous force was in 1991 when a twenty-one-year-old Finnish student posted a simple request on Usenet (a global discussion forum) for help from his mother’s Helsinki apartment.

Like Meetup, Linux, MyBO, Clickworkers, and Kickstarter, IfWeRanTheWorld it is part of a reestablishment of community relationships not just through local activities but through the vast global infrastructure of the Internet. In this sense, the very concepts of “neighbor” and “community” are being redefined and expanded as the “Me” generation is being replaced by the “We” generation.” Reconnection Beyond Consumerism On June 29, 2009, Bernard Madoff stood in front of Judge Denny Chin of the U.S. District Court in New York, pleaded guilty to an eleven-count criminal complaint, and was sentenced to 150 years in prison, the maximum sentence allowed. Madoff’s notorious crime was the creation of a $65 billion Ponzi scheme, the largest investor fraud ever committed by a single person. But while Madoff’s actions were abhorrent and the punishment was fitting, we have all in some way been a part of and fallen victim to a far greater Ponzi scheme.


pages: 274 words: 60,596

Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam

Albert Einstein, asset allocation, Bernie Madoff, buy and hold, diversified portfolio, financial independence, George Gilder, index fund, Long Term Capital Management, new economy, passive investing, Paul Samuelson, Ponzi scheme, pre–internet, price stability, random walk, risk tolerance, Silicon Valley, South China Sea, stocks for the long run, survivorship bias, transaction costs, Vanguard fund, yield curve

You don’t have to be smarter than a fifth grader to realize that paying 18 percent interest on credit-card debt and investing money that you hope will provide returns of 10 percent makes as much sense as bathing fully clothed in a giant tub of Vaseline and then travelling home on the roof of a bus. Paying off credit-card debt that’s charging 18 percent in interest is like making a tax-free 18 percent gain on your money. And there’s no way that your investments can guarantee a gain like that after tax. If any financial adviser, advertisement, or investment group of any kind promises a return of 18 percent annually, think of disgraced U.S. financier Bernie Madoff and run. Nobody can guarantee those kinds of returns. Well, nobody except the credit-card companies. They’re making 18 to 24 percent annually from you (if you carry a balance), not for you. How and Why Stocks Rise in Value You might be wondering how I averaged 10 percent a year on the stock market for 20 years. There were certainly years when my money dropped in value, but there were years when I earned a lot more than 10 percent as well.

She defaulted on the loan, but she didn’t think it was fair that Daryl should be able to keep the motor home. Her husband had not known about the loan. He came into Daryl’s office with a lawyer, but the contract was legally airtight; there was nothing the lawyer could do about it. But, as Daryl explained, he took pity on the woman and gave the motor-home ownership back to the couple. It sounded like an amazing operation. However, nobody can guarantee you 54 percent on your money—ever. Bernie Madoff, the currently incarcerated Ponzi-scheming money manager in the U.S. promised a minimum return of 10 percent annually and he sucked scores of intelligent people into his self-servicing vacuum cleaner—absconding with $65 billion in the process.2 He claimed to be making money for his clients by investing their cash mostly in the stock market, but he just paid them “interest” with new investors’ deposits.

After a year, the investment club added another $20,000. Other friends were also tempted by the easy money. One friend took out a loan for $50,000 and plunked it down on Insta-Cash Loans, and he began receiving $2,250 a month in interest from the company. Another friend deposited more than $100,000 into the business; he was paid $54,000 in yearly interest. But Alice’s Wonderland was more real than our fool’s paradise. Like Bernie Madoff (who was caught after Daryl) the party eventually ended in 2006 and the carnage was everywhere. We never found out whether Daryl intended for his business to be a Ponzi scheme from the beginning (he was clearly paying interest to investors from the deposits of other investors) or whether his business slowly unraveled after a well-intentioned but ineffective business plan went awry. Klein was eventually convicted of breaching the provincial securities act, preventing him from engaging in investor-relations activities until 2026.4 The fact that he was slapped on the wrist, however, was small consolation for his investors.


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

affirmative action, Affordable Care Act / Obamacare, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, carried interest, circulation of elites, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, creative destruction, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, Gunnar Myrdal, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Kenneth Arrow, Mark Zuckerberg, mass affluent, mass incarceration, means of production, meta analysis, meta-analysis, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, plutocrats, Plutocrats, Ponzi scheme, Ralph Waldo Emerson, rolodex, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

“You have these politicians that are selling this mistrust,” he said in reference to the ceaseless rhetoric from conservatives about government’s inevitable incompetence. “And the federal government sure as hell hasn’t helped.” And yet the private sector has fared no better: from the popping of the tech bubble, to Enron, WorldCom, and Global Crossing, to the Big Three automakers, to Lehman Brothers, subprime, credit default swaps, and Bernie Madoff, the overwhelming story of the private sector in the last decade has been perverse incentives, blinkered groupthink, deception, fraud, opacity, and disaster. So comprehensive and destructive are these failures that even those ideologically disposed to view big business in the best light have had to confront them. “I’ve always defended corporations,” a Utah Tea Party organizer named Susan Southwick told me. “ ‘Of course they wouldn’t do anything they knew was harming people; you guys are crazy.’

Amid drums and whoops and chants of “We! Are! The 99 percent!” he leaned in and said, “I realize that’s scary for some people.” Beyond left and right isn’t just a motto. Those most devoted to the deepest kinds of structural reform of the system are insistent that they do not fall along the traditional left-right axis. Just as elite failure claims a seemingly unrelated number of victims—the Palm Beach retiree bankrupted by Bernie Madoff and the child left homeless after his mother’s home was foreclosed—so, too, will you find that among those clued in to elite failure, left/right distinctions are less salient than those between what I call insurrectionists and institutionalists. Paul Krugman is one prominent example of an insurrectionist. A man who was once a defender of elite competence and neoliberal technocracy against its populist foes, he has come to believe there is something very wrong with the people running the country: “At the beginning of the new millennium,” he writes in his 2004 book, The Great Unraveling, “it seemed that the United States was blessed with mature, skillful economic leaders, who in a pinch would do what had to be done.

The more you learn about the documented instances of active, coordinated conspiracy and collusion, the harder it is to dismiss even the most seemingly far-fetched allegations of wrongdoing. This applies far more broadly than to the Church. On one hand, we can view scandal and revelation as fundamental proof that ultimately the truth will out. That is how an institutionalist is disposed to interpret things. But we can just as easily take a more cynical view: If, say, Bernie Madoff was allowed to pull off his $50 billion heist for decades with no sanction, if the SEC ignored a detailed letter from a knowledgeable whistle-blower titled simply “The World’s Largest Hedge Fund Is a Fraud,” then what’s to say they’re not ignoring the next Madoff as I write this? In this way, more information and more openness can, perversely, feed more mistrust and more wild speculation: The more we know, the more we realize just how in the dark we truly are.


pages: 135 words: 26,407

How to DeFi by Coingecko, Darren Lau, Sze Jin Teh, Kristian Kho, Erina Azmi, Tm Lee, Bobby Ong

algorithmic trading, asset allocation, Bernie Madoff, bitcoin, blockchain, buy and hold, capital controls, collapse of Lehman Brothers, cryptocurrency, distributed ledger, diversification, Ethereum, ethereum blockchain, fiat currency, Firefox, information retrieval, litecoin, margin call, new economy, passive income, payday loans, peer-to-peer, prediction markets, QR code, reserve currency, smart contracts, tulip mania, two-sided market

Retrieved from https://www.synthetix.io/uploads/synthetix_litepaper.pdf ~ Chapter 9: Decentralized Fund Management Making Sense of the Mutual Fund Scandal Everything you may not want to ask (but really should know) about the crisis that's rocking the investment world. (2003, November 24). Retrieved from https://money.cnn.com/magazines/fortune/fortune_archive/2003/11/24/353794/index.htm The Editors of Encyclopaedia Britannica. (2020, February 26). Bernie Madoff. Retrieved from https://www.britannica.com/biography/Bernie-Madoff Frequently Asked Questions on TokenSets. (n.d.). Retrieved from https://www.tokensets.com/faq Liang, R. (2019, April 23). TokenSets is Live: Automate your Crypto Portfolio Now. Retrieved from https://medium.com/set-protocol/tokensets-is-live-automate-your-crypto-portfolio-now-50f88dcc928d Sawinyh, N. (2019, June 17). Interview with TokenSets creators.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, Kickstarter, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

George Soros, hedge fund manager Where did all the money go? My father-in-law asked that question in the aftermath of the credit crunch of 2007 and 2008, when house prices, share prices and corporate bond prices all tumbled. It seemed a reasonable point. If all the assets in the world were worth, say, $3 trillion one year and $2 trillion the next, what happened to that missing trillion? To explain the answer, we have to turn to the career of Bernie Madoff, a convicted fraudster. Madoff was an American stockbroker who had a prominent role in the finance industry, serving as chairman of the board of directors of the National Association of Securities Dealers. On the side, he ran an investment operation, looking after the funds of clients. He claimed a near-perfect record, hardly ever losing money in a given month, and reporting steady annual returns.

The scheme was based on international postal coupons which, he said, could be bought cheaply in Europe and exchanged for stamps in the US.7 The scheme had some basis in fact, although it would never have worked if attempted on a large scale. However, Ponzi did not try to make it work. He simply relied on his charm to entice investors. Should a few investors want to withdraw their money, he could pay them off with the money taken from new applicants. Bernie Madoff effectively used the same system without offering returns on the Ponzi scale; it was the steadiness of his returns, not the size of them, that ought to have made investors suspicious. This kind of fraud is also known as a pyramid scheme and it is a recurrent historical phenomenon. Women Empowering Women was a British version in the 1990s. Person B pays Person A a thousand dollars; B then hopes to raise the same sum from each of Persons C and D.

Five more stages after that and the scheme would require more investors than there are people on the planet.8 The Ponzi scheme was built on a similar epic scale. With money doubling every three months, investors would have been 16 times better off in a year and 256 times better off in two. Within five years, anyone who had invested a single dollar would have become a millionaire. We know that pyramids must eventually collapse, and the higher the return (or promised return), the faster that collapse will come. (Bernie Madoff’s scheme lasted so long because he offered reliable, rather than outlandishly high, returns.) The outright frauds have no investment justification at all. But even pyramid markets based on a genuine social change (such as the creation of the Internet) are doomed to eventual failure. The Ponzi stage described by Minsky is often known as a ‘greater fool’ process. Buyers do not believe prices are justified but think they will find a gullible buyer willing to pay even more.


pages: 194 words: 59,336

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J L Collins

"side hustle", asset allocation, Bernie Madoff, buy and hold, compound rate of return, diversification, financial independence, full employment, German hyperinflation, index fund, money market fund, nuclear winter, passive income, payday loans, risk tolerance, Vanguard fund, yield curve

This financial stuff just all seems so complex, it is not surprising that many people welcome the idea of turning it over to a professional who will, hopefully, get better results. Unfortunately most advisors don’t get better results. Investing only seems complex because the financial industry goes to great lengths to make it seem complex. Indeed, many investments are complex. But as you now already understand, not only are simple index investments easier, they are more effective. Advisors are expensive at best and will rob you at worst. Google Bernie Madoff. If you choose to seek advice, seek it cautiously and never give up control. It’s your money and no one will care for it better than you. But many will try hard to make it theirs. Don’t let it happen. When I say investment advisors, I am also referring to money managers, investment managers, brokers, insurance salespeople (who often masquerade as financial planners) and the like. Any and all who make their money managing yours.

This makes them perhaps the most aggressively recommended products advisors offer and certainly among the most costly to you. Annuities and whole/universal life insurance carry commissions as high as 10%. Worse, these commissions are buried in the investment so you never see them. How such fraud is legal I can’t say. But it is. Hedge funds and private investments all make their salespeople wealthy, along with the operators. Investors? Maybe. Sometimes. Nah, not so much. Remember Bernie Madoff? People literally begged him to take their money. His credentials were impeccable. His track record too. Only the “best” investment advisors could get you in. Mr. Madoff paid them handsomely to do so. As did their clients. Oops. If all this weren’t enough, if you’re not paying attention, there is more money to be mined at your expense by “churning” your account. Churning refers to the frequent buying and selling of investments to generate commissions.

Rule #2: You are likely to be conned in an area of your expertise. The reason is simple: Targeting and ego. When con men pick a scam they look for people to whom it will naturally appeal. Those are people in the field. People feel secure and safe in those areas they know well. They believe they will be too smart to be caught unawares. Smart people know the areas they don’t know and tend to be far more cautious there. Many of Bernie Madoff’s victims were financial professionals. Rule #3: Con men (and women) don’t look like con men. This isn’t the movies. They’re not going to have slouch hats pulled low over their shifty eyes. Successful con men look like the safest, most trustworthy, honest, stable, comforting people imaginable. You won’t see them coming. Or rather you will, and you’ll be warmly welcoming them. Rule #4: 99% of what they say will be true.


pages: 354 words: 110,570

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World by Tom Wright, Bradley Hope

Asian financial crisis, Bernie Madoff, collapse of Lehman Brothers, colonial rule, corporate social responsibility, Credit Default Swap, Donald Trump, failed state, family office, forensic accounting, Frank Gehry, high net worth, Nick Leeson, offshore financial centre, Ponzi scheme, Right to Buy, risk tolerance, Snapchat, South China Sea, sovereign wealth fund

But in the fall of 2009, armed with almost endless amounts of money, Low embarked on a period of incessant partying—and networking. Even after the payments to Obaid and others, hundreds of millions of dollars were just sitting in the Good Star account he controlled in Switzerland, for Low to deploy in any way he saw fit. There were no shareholders, no co-investors. His wasn’t a Ponzi scheme like Bernie Madoff’s, which used new money to pay “profits” to earlier investors. Madoff’s fraud led to losses of at least $18 billion, but his take was a fraction of that, as the “profits” were shared among other investors. By the time the scheme imploded in late 2008, Madoff had amassed a paper fortune of $800 million, but most of this was the value of his market-making business; the amount he personally stole was a fraction of the amount lost.

U.S. regulators had been caught napping, and the collapse of Lehman Brothers and Bear Stearns, under the weight of bad mortgage loans, led to tighter scrutiny of banks’ actions. That extended to anti–money laundering, as Treasury and the Justice Department began to hand out heftier punishments to transgressors. Wachovia Bank, in early 2010, agreed to pay $160 million in penalties for failing to report $8 billion in dodgy transfers. Around this time, the Justice Department was building its case against J.P. Morgan, where Bernie Madoff held his accounts, eventually leading to a record $2 billion fine under the Bank Secrecy Act. These actions were forcing Wall Street and major global banks in Europe and Japan to get their act together on compliance. What Low needed was a smaller bank, one that would be dependent on his business and took compliance even less seriously than Wall Street behemoths. He found it in a struggling Swiss bank called BSI, which was owned by Italian insurance group Assicurazioni Generali.

More than $5 billion in funds, one of the largest-ever financial frauds, and it wasn’t over yet. More than a billion had been frittered away, more than a billion went into property and businesses, and more than a billion was used to pay off the prime minister and other conspirators. To resolve this crazed theft, Low wagered an IPO of 1MDB’s power plants would bring in billions of dollars. Yet he never spent long cogitating the endgame. Bernie Madoff bet he could always find new investors in his pyramid scheme, which ran more than four decades. But Madoff’s fraud, like many other examples before, collapsed when he could no longer lure new dupes, whose money he needed to pay “profits” to other investors. Low believed government funds were limitless and he could just keep on spending. State leaders were able, unlike individuals, to forgive their own administration’s debt; Low had promised Patrick Mahony, the director of investments for PetroSaudi, that Najib would eventually agree to write off hundreds of millions of dollars.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 20 19 18 17 16 15 14 13 12 11 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne Contents Tables Foreword Robert M. Solow 1 Financial Crisis: a Hardy Perennial 2 The Anatomy of a Typical Crisis 3 Speculative Manias 4 Fueling the Flames: the Expansion of Credit 5 The Critical Stage – When the Bubble Is About To Pop 6 Euphoria and Paper Wealth 7 Bernie Madoff: Frauds, Swindles, and the Credit Cycle 8 International Contagion 1618–1930 9 Bubble Contagion: Mexico City to Tokyo to Bangkok to New York, London and Reykjavik 10 Policy Responses: Benign Neglect, Exhortation, and Bank Holidays 11 The Domestic Lender of Last Resort 12 The International Lender of Last Resort 13 The Lehman Panic – An Avoidable Crash 14 The Lessons of History 15 Epilogue 2010–2020 Appendix Notes Index Tables 8.1 Reported failures in the crisis of 1847–48, by cities 12.1 Official finance commitments Appendix: A Stylized Outline of Financial Crises, 1618 to 2008 Foreword Charlie Kindleberger (CPK from now on) was a delightful colleague: perceptive, responsive, curious about everything, full of character, and, above all, lively.

The implosion of a bubble always leads to the discovery of frauds and swindles that developed in the froth of the mania; these events are reviewed in Chapter 7. Fraud and corruption are based on mis-information – both falsification and misrepresentation; some fraud also involves the theft of private information before it becomes publicly available. Some of the fraud is personal, some is corporate. Bernie Madoff ran one of the largest Ponzi schemes ever, investors lost more than $20 billion. The owners of some business conglomerates in Iceland had ‘captured’ control of the banks and then borrowed from the banks to increase their consumption and their investments. The combination of failed thrift institutions and the rapid growth of junk bonds in the 1980s cost American taxpayers more than $100 billion; some of these thrifts had been acquired by individuals who relied on the junk bonds for their financing.

Similarly the decline of 30 percent in the price of US residential real estate between 2006 and 2010 indicates that there had been a bubble in property prices, which had been especially sharp in Arizona, Florida, and California. One question is why those outside the Federal Reserve found it easier to recognize that the increase in asset prices in both episodes was non-sustainable. And in that sense the much younger Federal Reserve of the 1920s seems more heroic in its statements about asset price developments. 7 Bernie Madoff: Frauds, Swindles, and the Credit Cycle Charlie Ponzi is the most famous banker in American history, immortalized in the term ‘Ponzi scheme’. Ponzi owned a small firm that sold deposits in one of the Boston suburbs in the early 1920s; he promised to pay the buyers of these IOUs 45 percent interest a year at a time when the traditional banks were paying two or three percent. Ponzi’s operation was straightforward – he used the money that he received from the sale of deposits on Wednesday to pay the interest to those who had bought the deposits on Monday.


pages: 482 words: 121,672

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) by Burton G. Malkiel

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, beat the dealer, Bernie Madoff, bitcoin, butter production in bangladesh, buttonwood tree, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Detroit bankruptcy, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, financial repression, fixed income, framing effect, George Santayana, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stocks for the long run, survivorship bias, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond, zero-sum game

Trading generates commissions, and commissions are the lifeblood of many brokerage houses. The technicians do not help produce yachts for the customers, but they do help generate the trading that provides yachts for the brokers. APPRAISING THE COUNTERATTACK As you might imagine, the random-walk theory’s dismissal of charting is not altogether popular among technicians. Academic proponents of the theory are greeted in some Wall Street quarters with as much enthusiasm as Bernie Madoff addressing the Better Business Bureau from his jail cell. Technical analysts consider the theory “just plain academic drivel.” Let us pause, then, and appraise the counterattack by beleaguered technicians. Perhaps the most common complaint about the weakness of the random-walk theory is based on a distrust of mathematics and a misconception of what the theory means. “The market isn’t random,” the complaint goes, “and no mathematician is going to convince me it is.”

In the long run, though, I agree with Bernard Baruch, a legendary investor of the early twentieth century, who said, “Market timing can only be accomplished by liars.” And Jack Bogle, a legend of the late twentieth century, has remarked, “I do not know of anybody who has done it [market timing] successfully and consistently.” Investors should also never forget the age-old maxim “If something is too good to be true, it is too good to be true.” Heeding this maxim could have saved investors from falling prey to the largest Ponzi scheme ever: the Bernard L. Madoff fraud uncovered in 2008, in which $50 billion was said to have been lost. The real con in the Madoff affair is that people fell for the myth that Madoff could consistently earn between 10 and 12 percent a year for investors in his fund. The “genius” of the fraud was that Madoff offered what seemed to be a modest and safe return. Had he offered a 50 percent return, people might well have been skeptical of such pie-in-the-sky promises.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

asset allocation, backtesting, Bernie Madoff, buy and hold, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

On both the sell side and the buy side, a typical sales strategy used to promote actively managed products is for an advisor to talk up the potential for earning a superior return. What’s often left out of those conversations is the probability of achieving this return. Each investor is left to figure out the probability of success on their own. You’re setting yourself up for trouble if you don’t assess the risk of an investment. Investment frauds lure in their prey by creating the illusion of safety and a high return. Think of Bernie Madoff. He told clients they would earn high returns in the 8 to 10 percent range every year regardless of market risks. Apparently, Madoff followers didn’t ask how this return could be earned year after year with no risk of loss, or perhaps they didn’t want to know. The subprime mortgage meltdown in recent years is another example. The possibility of higher returns impeded the judgment of many institutional investors in that market.

In fact, in my opinion a vast majority of individual investors should avoid illiquid long-term investments and speculative investments. Trying to make money in illiquid long-term limited partnerships including hedge funds and venture capital funds requires considerable skill in sorting out a few profitable opportunities from the rest. For every successful limited partnership there are at least 10 poor to mediocre ones, including Bernie Madoff–type scams. Most individuals simply do not have access to top private management or have the expertise in selecting private funds. Highly skilled institutional investors pick off the attractive offerings long before the public is invited in. David Swensen, CIO of the Yale endowment fund, eloquently sums up the prospective results from private partnerships in his highly praised book, Unconventional Success.

They’re too busy managing money for the $5 billion dollar endowment funds. Paraphrasing Charles Ellis, it’s easy to tell a good manager from a mediocre one; the mediocre one wants to manage your money! If an active manager were talented, chances are you’ve never heard of him or her, and if you did, you’d never be able to hire them. It is a tragedy when poor investment decisions cripple the ability of a nonprofit organization to help others. Bernie Madoff had almost everyone fooled that he was a top hedge fund manager. He took everyone’s money, literally, and his high reported returns kept rolling in regardless of the amount he managed. Many nonprofits lost millions of dollars when Madoff’s Ponzi scheme collapsed. Other organizations lost a large portion of their assets during the global recession because the investment committees made ill-timed asset allocation decisions.


pages: 227 words: 62,177

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do by Kaiser Fung

American Society of Civil Engineers: Report Card, Andrew Wiles, Bernie Madoff, Black Swan, business cycle, call centre, correlation does not imply causation, cross-subsidies, Daniel Kahneman / Amos Tversky, edge city, Emanuel Derman, facts on the ground, fixed income, Gary Taubes, John Snow's cholera map, moral hazard, p-value, pattern recognition, profit motive, Report Card for America’s Infrastructure, statistical model, the scientific method, traveling salesman

From the manipulative politician to the blundering analyst, from the amateur economist to the hard-selling advertiser, we have endless examples of what can go wrong when numbers are misused. Cherry-picking, oversimplifying, obfuscating—we have seen them all. This book takes a different direction, a positive position: I am interested in what happens when things go right, which is to say, what happens when numbers don’t lie. The More We Know We Don’t Know What will we learn from Bernie Madoff, the New York–based fund manager–swindler who impoverished an exclusive club of well-to-do patrons over three decades until he confessed in 2008? Or from the Enron executives whose make-believe accounting wiped out the retirement savings of thousands of employees? Perhaps we ought to know why the reams of financial data, printed statements, and official filings yielded few clues to the investors, auditors, and regulators who fell for the deception.

Some technical language is introduced in these pages; it can be used as guideposts for those wanting to explore the domain of statistical thinking further. The interstitial sections called “Crossovers” take another look at the same stories, the second time around revealing another aspect of statistical thinking. The Discontent of Being Averaged Averages are like sleeping pills: they put you in a state of stupor, and if you overdose, they may kill you. That must have been how the investors in Bernie Madoff’s hedge fund felt in 2008, when they learned the ugly truth about the streak of stable monthly returns they’d been receiving up until then. In the dream world they took as real, each month was an average month; variability was conquered—nothing to worry about. Greed was the root cause of their financial ruin. Those who doubted the absence of variability in the reported returns could have saved themselves; instead, most placed blind faith in the average.


The Permanent Portfolio by Craig Rowland, J. M. Lawson

Andrei Shleifer, asset allocation, automated trading system, backtesting, bank run, banking crisis, Bernie Madoff, buy and hold, capital controls, correlation does not imply causation, Credit Default Swap, diversification, diversified portfolio, en.wikipedia.org, fixed income, Flash crash, high net worth, High speed trading, index fund, inflation targeting, margin call, market bubble, money market fund, new economy, passive investing, Ponzi scheme, prediction markets, risk tolerance, stocks for the long run, survivorship bias, technology bubble, transaction costs, Vanguard fund

Despite the Hollywood clichés about Swiss accounts, Swiss banks do have some special features, one of which it that a Swiss account places your money in a legal jurisdiction that has very specific and restrictive rules regarding who can access your account information and for what purpose. “Switzerland has never had a Bernie Madoff.”—Otto Hueppi, Swiss American Advisors, AG A second feature of Swiss banks is that oversight is very robust and Swiss banks do not have the history of corruption, failure, and fraud that has plagued other countries' banking systems (including the United States). As Swiss banker Otto Hueppi commented: “Switzerland has never had a Bernie Madoff.” In terms of absolute safety of bank accounts, Switzerland still represents a good choice if you can find a bank that will do business with you. Swiss Banking Realities for U.S. Citizens Unfortunately, Swiss accounts are largely out of reach for most Americans today due to recent U.S. changes in account information disclosure requirements.

The most successful investors on the planet have no shame in admitting they avoided an investment that they didn't understand. So don't let anyone make you feel guilty for staying away from something that doesn't make sense to you. Rule #10: Don't Depend on Any One Investment, Institution, or Person for Your Safety In the 2008 banking crisis, some institutions that existed for over a century went bankrupt almost overnight inflicting large losses on investors. In the same year Bernie Madoff, one of the founders of the NASDAQ stock exchange, was revealed to have been running a multibillion-dollar Ponzi scheme that caused tremendous losses to investors, many of whom had entrusted him with their life savings. The process above repeated itself in 2011 when another large firm, MF Global, went bankrupt and many investors found that their accounts had apparently been plundered by corrupt management.


pages: 317 words: 71,776

Inequality and the 1% by Danny Dorling

Affordable Care Act / Obamacare, banking crisis, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Boris Johnson, Branko Milanovic, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, centre right, collective bargaining, conceptual framework, corporate governance, credit crunch, David Attenborough, David Graeber, delayed gratification, Dominic Cummings, double helix, Downton Abbey, en.wikipedia.org, Etonian, family office, financial deregulation, full employment, Gini coefficient, high net worth, housing crisis, income inequality, land value tax, longitudinal study, low skilled workers, lump of labour, mega-rich, Monkeys Reject Unequal Pay, Mont Pelerin Society, mortgage debt, negative equity, Neil Kinnock, Occupy movement, offshore financial centre, plutocrats, Plutocrats, precariat, quantitative easing, race to the bottom, Robert Shiller, Robert Shiller, TaskRabbit, The Spirit Level, The Wealth of Nations by Adam Smith, trickle-down economics, unpaid internship, very high income, We are the 99%, wealth creators, working poor

A few months before the Times told us how lucky we were to have so many extraordinarily well-paid bankers in our midst, the Sunday Times had reported that it had been bankers using cocaine who had got us into this terrible mess.32 Verso/Leo Hollis The City of London: expanding its horizon When they were later interviewed about the 2008 crash, UK bankers said they had become ‘over-confident’ and ‘took more risks’, leading to the meltdown. The biggest gamblers of all, in the US, took the most cocaine. People like Bernie Madoff, once described as a financial genius and then lampooned in the tabloids, worked from an office described as ‘the north pole’ – because it contained so much white powder.33 Cocaine is the drug of the 1 per cent and of inequality. The singer Robbie Williams once quipped that cocaine is God’s way of telling you you’ve got too much money. Unsurprisingly, the highest levels of cocaine use per head in Europe are to be found in the UK.34 Cocaine is also the only drug whose use has increased since 1996, but only among the rich.

Hosking, ‘Britain Tops League of Millionaire Bankers’, The Times, 16 July 2013 – behind a paywall, so read the Guardian instead: J. Treanor, ‘More than 2,400 UK bankers paid €1m-plus, EU regulator says, Guardian, 15 July 2013. 32. ‘Bankers Use Cocaine and Got Us Into this Terrible Mess’, headline reported in The Week, 16 April 2013, covering the story behind the Sunday Times pay-wall. 33. Staff reporter, ‘Fraudster Bernie Madoff “Had So Much Cocaine in His Office It Was Dubbed the North Pole” ’, Daily Mail, 21 October 2009. 34. Robbie Williams may have heard the joke via Richard Pryor: J. Kossoff, ‘Why Cocaine Isn’t Kosher’, The Telegraph Blog, 11 August 2008. Incidentally the UK doesn’t just have the highest rate of cocaine use per head. It also has the highest number of plastic surgery operations of any country in Europe: BBC, ‘UK tops Euro plastic surgery league’, 11 March 2002, at http://news.bbc.co.uk/.


pages: 346 words: 101,763

Confessions of a Microfinance Heretic by Hugh Sinclair

accounting loophole / creative accounting, Bernie Madoff, colonial exploitation, en.wikipedia.org, end world poverty, financial innovation, financial intermediation, Gini coefficient, high net worth, illegal immigration, inventory management, microcredit, Northern Rock, peer-to-peer lending, pirate software, Ponzi scheme, principal–agent problem, profit motive

This could quickly become a spiral—more dipping into savings would further reduce the likelihood of anyone wishing to invest in FCC, requiring further dipping into savings. Client savings, however obtained, and whether forced or voluntary, could be used to meet such a shortfall, but whether this was legal or not was a valid question. And even if legal, it was no free lunch: the cash may be accessible for use in other areas, but the obligation of the MFI to return these funds to clients did not vanish. In a sense such practices can be likened to Bernie Madoff’s recent Ponzi scheme. For as long as new investors keep pouring money in, there are funds available to return to early investors, and no one need know quite how the underlying portfolio is doing for as long as the dance maintains its momentum. The more recent investors are locked in for some period before they can extract their profits, by which point more investors have been found. This is remarkably similar to a microfinance loan—clients cannot withdraw their savings until they have fully repaid their loans, by which point new clients have provided new savings to be available for such withdrawals.

But when it became clear that Madoff’s underlying investments were not doing so well, or when an MFI has high operating costs and a declining, poor-quality portfolio, the problem rapidly becomes critical. The tide goes out, and those without bathing costumes are left standing in their full glory. Thus the need for tight regulation of any institution that takes money from the general public, regulation that is often absent in developing countries. Even the SEC in America missed Bernie Madoff for some years. How much easier for a bank in a forgotten African nation recovering from a bloody civil war and years of communism? The recent financial crisis has led to endless reams of new regulations in countries already tightly regulated—how much more is this true in countries such as Mozambique? It was strange that so many alarm bells were ringing so shortly after my arrival. I certainly should have done better due diligence on Mozambique before agreeing to help fix a bank there.

If there was ever a country that demonstrated that the funding bodies had entirely lost all track of reality, it was Nicaragua. Many microfinance funds lost millions of dollars as MFIs defaulted—not their dollars, of course, but those of their own investors, thanks to their failure to consider the simple fact that pyramid schemes require permanent new injections of capital and limited withdrawals. But, as Bernie Madoff so elegantly demonstrated, the music can continue for a long time. I worked in Nicaragua frequently, mainly with Triple Jump. I later spent months based in Panama shuttling back and forth to Nicaragua, and I knew many of the MFIs there. The profit potential was excellent. Every fund was desperate to invest there, and every MFI had offers from funds crawling over each other to lend them money.


pages: 200 words: 54,897

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

bank run, barriers to entry, bash_history, Bernie Madoff, computerized markets, computerized trading, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, prediction markets, price discovery process, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day

Lastly, Lewis doesn’t claim, nor would it make sense to claim, that high-frequency traders are front-running high-frequency traders. There goes another 50% of the market, at least. In sum, I don’t know how or why Lewis extrapolates from the questionable analysis of a single trade to the entire market, but it clearly isn’t sound. The extrapolation appears as flimsy as the premise itself. When I first heard Lewis say on his press tour that, “The market is rigged,” I thought he had found another Enron or Bernie Madoff, sending legions of unsuspecting investors to the poor house. I didn’t expect to find that, based on a single trade and a few hunches, some old-school big-bank traders speculated that 0.07% of their trades’ potential value was going to another subset of traders using questionable practices. If it turned out to be true, it’s still unethical and wrong. But it’s simply absurd to claim that this would apply to every share traded in the stock market.

A broker-dealer must abide by rules that, among other things, govern trading activities, risk management, accounting, and the amount of capital reserved to pay for any trading losses. Broker-dealers are subject to periodic audits, and the SEC can drop in at any time if they have the slightest suspicion about the broker-dealer’s activities (and they do drop in). It’s a good thing. Personally, I’d be more worried about the hedge funds that ultimately fund Katsuyama’s dark pool, who have virtually no regulator oversight. What do Scott Rothstein, Arthur Nadel, and Bernie Madoff have in common? Serving as hedge fund managers, and serving time in jail. Chapter 5: Sergey Aleynikov There’s not too much to add to this chapter, as (a) it mostly focuses on a single individual, and (b) it’s largely a reprint of Lewis’ September 2013 article, which benefitted from Vanity Fair’s fact-checking team. Goldman overreacted. They wanted to send a message to programmers everywhere, and they did: steal code, go to prison.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, buy and hold, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

The charges by Arnuk and Saluzzi were sensational and potentially explosive. The markets were being manipulated. No one else had noticed what they had noticed. Regulators had been asleep. They hadn’t blown any time-out whistles or thrown any penalty flags for spoofing or momentum ignition or pinging. This was outrageous, because the SEC and FINRA were supposed to be cleaning up their act after missing abuses like Bernie Madoff’s outrageous Ponzi scheme. But after the two traders disseminated the white paper, nothing happened—nothing at all. Investors in December 2008 had other things on their minds. They were consumed by bailouts, failures, bankruptcies, and the incoming Democratic administration of Barack Obama. The white paper was little more than background noise. “Outside of our clients, no one made a stink or even mentioned our findings,” recalled Arnuk.7 The two men may have been disappointed, but they were not quitters.

She was most afraid they might clip the agency’s wings and transfer some of its authority to the Federal Reserve. In the end, the SEC would maintain its turf, but the historic legislation would end up saddling the SEC a to-do list containing more than 80 new chores, including studies and the adoption of new regulations, and a deadline of two years for most of them. Simultaneously, Schapiro struggled to reinvigorate the agency, to make it more aggressive. The SEC had missed uncovering the Bernie Madoff Ponzi scheme because somnambulant bureaucrats had ignored direct complaints between 1992 and 2008. There had been a pair of half-hearted investigations and some cursory exams of Madoff’s firm but, according to a report by the SEC’s inspector general, “a thorough and competent investigation or examination was never performed.” The episode had been a demoralizing embarrassment. Schapiro was trying to bring back the zeal and spirit that the agency had had at its inception.


pages: 295 words: 89,280

The Narcissist Next Door by Jeffrey Kluger

Albert Einstein, always be closing, Apple's 1984 Super Bowl advert, Bernie Madoff, Columbine, delayed gratification, Donald Trump, Elon Musk, impulse control, Jony Ive, longitudinal study, meta analysis, meta-analysis, plutocrats, Plutocrats, Ponzi scheme, QWERTY keyboard, Ralph Nader, Ronald Reagan, Schrödinger's Cat, Stanford marshmallow experiment, Stephen Hawking, Steve Jobs, the scientific method, theory of mind, Triangle Shirtwaist Factory, twin studies, Walter Mischel, zero-sum game

Most people concluded her performance was an effort to demonstrate to her fans that she had, you know, grown up and was, you know, no longer a child—a rite of passage as inevitable for her as for anyone else, but somehow newsworthy because it was happening to Miley. This played out in the same summer that Lady Gaga—she of the meat dress, which may or may not have had much fashion merit, but undeniably drew eyeballs—released a song called “Applause,” in which she repeats over and over the lyric “I live for the applause, applause, applause,” as frank an admission and as powerful an anthem of the age of narcissism as you could imagine. There is Bernie Madoff as well, a man whose multi-decade Ponzi scheme made him exceedingly rich, but at the cost of $65 billion in other people’s wealth, stolen from a victim list that, in the government’s records, ran 165 pages long. Hedge funds and banks made up much of that inventory of the wronged—admittedly, nobody’s idea of sympathetic victims—but there were also pension funds and charities, as well as individuals like Jack Cutter of Longmont, Colorado, a seventy-nine-year-old oil industry worker who was living with his wife on $1 million in retirement savings, a nest egg that vanished in Madoff’s care, forcing Cutter to take a job stocking supermarket shelves.

Play must come second to work, gluttony must yield to restraint, and all manner of other pleasures must be passed up entirely if they violate marriage vows, the law or simple common sense. None of that is easy, and we often fail at it miserably. “The heart wants what it wants,” said Woody Allen in a supremely narcissistic moment, as he blithely explained away his decision to ditch his longtime partner, Mia Farrow, in favor of her twenty-one-year-old daughter, Soon-Yi Previn. “Well, that’s what I did,” is how Ponzi king Bernie Madoff shrugged it off to a fellow inmate who offered the hard-to-argue-with opinion that stealing money from old ladies was a “fucked-up thing to do.” Both Madoff and Allen wanted and they took. Full stop. The idea that desire equals license is something that comes factory-loaded in all of us, and is the reason babies are not just sad or disappointed when they’re denied something, but downright furious.


pages: 385 words: 118,901

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street by Sheelah Kolhatkar

Bernie Madoff, Donald Trump, family office, fear of failure, financial deregulation, hiring and firing, income inequality, light touch regulation, locking in a profit, margin call, medical residency, mortgage debt, p-value, pets.com, Ponzi scheme, rent control, Ronald Reagan, short selling, Silicon Valley, Skype, The Predators' Ball

It was less than a year into the worst financial crisis in eighty years. The previous fall, Lehman Brothers had gone bankrupt, banks were collapsing, and millions of people were watching the value of their retirement savings go down with the plunging stock market. House prices had plummeted, revealing the corrupt machinery inside investment banks that had packaged low-quality subprime mortgages and sold them to investors all over the world. Bernie Madoff’s $20 billion Ponzi scheme had been discovered, along with the fact that the SEC missed obvious warning signs for many years. Morale had never been lower. For decades after its founding in 1934, the SEC was a feared and respected force on Wall Street, its lawyers priding themselves on their discretion and political independence. Over the previous few years, however, the culture at the SEC had changed; incompetence had become ingrained.

Bringing a billionaire in for questioning wasn’t something the SEC did every day. It wasn’t long ago, in fact, that SEC attorneys were openly discouraged from pestering important people on Wall Street. The leadership of the SEC had often hinted to the staff that the wealthiest, most successful individuals in the financial world were not to be disturbed. It was part of the former SEC chairman’s “hands-off” approach to regulation. But in 2012, post–Bernie Madoff, the agency was in the midst of a transformation. This time, no one questioned the Elan team’s desire to bring Cohen in for a deposition. The new director of enforcement was trying to make it easier for SEC attorneys to do their jobs. On March 12, Riely sent a subpoena requesting that Cohen appear to testify. They all knew it was unlikely that Cohen would say anything that would be helpful to them—it was likely to be one of the most carefully rehearsed and lawyered interviews they had ever done.

Many of them, including university endowments and pension funds managing retirement accounts for public school teachers and police officers, were only too happy to overlook the questionable things hedge funds were doing—as long as they made money. Pension fund managers in particular had enormous, in some cases impossible, financial obligations to fulfill for their retirees, and very few ways of earning the returns they needed. Cohen had made his investors so much money over the years, it was going to take a lot to compel them to leave. And if there was one thing the Bernie Madoff case had shown, it was that even sophisticated investors could fall for the lure of easy money. Once the government’s investigation of SAC reached a certain feverish stage, however, circumstances began to change. Cohen was getting calls from anxious investors seeking an explanation as to why his name was in the newspaper every few days. Wasn’t this a distraction? What was he doing to put this behind him?


pages: 294 words: 81,292

Our Final Invention: Artificial Intelligence and the End of the Human Era by James Barrat

AI winter, AltaVista, Amazon Web Services, artificial general intelligence, Asilomar, Automated Insights, Bayesian statistics, Bernie Madoff, Bill Joy: nanobots, brain emulation, cellular automata, Chuck Templeton: OpenTable:, cloud computing, cognitive bias, commoditize, computer vision, cuban missile crisis, Daniel Kahneman / Amos Tversky, Danny Hillis, data acquisition, don't be evil, drone strike, Extropian, finite state, Flash crash, friendly AI, friendly fire, Google Glasses, Google X / Alphabet X, Isaac Newton, Jaron Lanier, John Markoff, John von Neumann, Kevin Kelly, Law of Accelerating Returns, life extension, Loebner Prize, lone genius, mutually assured destruction, natural language processing, Nicholas Carr, optical character recognition, PageRank, pattern recognition, Peter Thiel, prisoner's dilemma, Ray Kurzweil, Rodney Brooks, Search for Extraterrestrial Intelligence, self-driving car, semantic web, Silicon Valley, Singularitarianism, Skype, smart grid, speech recognition, statistical model, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, Stuxnet, superintelligent machines, technological singularity, The Coming Technological Singularity, Thomas Bayes, traveling salesman, Turing machine, Turing test, Vernor Vinge, Watson beat the top human players on Jeopardy!, zero day

Al Qaeda’s attacks of 9/11 cost the United States some $3.3 trillion, if you count the wars in Afghanistan and Iraq. If you don’t count those wars, the direct costs of physical damage, economic impact, and beefed up security is nearly $767 billion. The subprime mortgage scandal that caused the worst global downturn since the Great Depression cost about $10 trillion globally, but around $4 trillion at home. The Enron scandal comes in at about $71 billion, while the Bernie Madoff fraud cost almost as much, at $64.8 billion. These numbers show that in dollar cost per incident, financial fraud competes with the most expensive terrorist act in history, and the subprime mortgage crisis dwarfs it. When researchers put advanced AI into the hands of businessmen, as they imminently will, these people will suddenly possess the most powerful technology ever conceived of. Some will use it to perpetrate fraud.

The subprime mortgage scandal: International Monetary Fund, “IMF Loss Estimates: Executive Summary,” last modified 2010, http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/exesum.pdf (accessed October 13, 2011). The Enron Scandal comes in at about $71 billion: Laws.Com, “Easy Guide to Understanding ENRON,” last modified December 6, 2011, http://finance.laws.com/enron-scandal-summary (accessed January 14, 2012). while the Bernie Madoff fraud: Graybow, Martha, “Madoff mysteries remain as he nears guilty plea,” Reuters, March 11, 2009, http://www.reuters.com/article/2009/03/11/us-madoff-idUSTRE52A5JK20090311?pageNumber=2&virtualBrandChannel=0&sp=true (accessed February 14, 2012). Enron, the scandal-plagued Texas corporation: Roberts, Joel, “Enron Traders Caught on Tape,” CBSNEWS.COM, December 5, 2007, http://www.cbsnews.com/8301-18563_162-620626.html?


pages: 234 words: 63,844

Filthy Rich: A Powerful Billionaire, the Sex Scandal That Undid Him, and All the Justice That Money Can Buy: The Shocking True Story of Jeffrey Epstein by James Patterson, John Connolly, Tim Malloy

Bernie Madoff, corporate raider, Donald Trump, East Village, Elon Musk, Isaac Newton, Jeffrey Epstein, Julian Assange, Murray Gell-Mann, Ponzi scheme, Stephen Hawking, WikiLeaks

Eventually he sued Epstein in federal court for the remaining $440,000—the case went on for a number of years. In court, Epstein told the judge that the $10,000 he’d returned was actually the payment for a horse Stroll had sold him. Like many cases involving Epstein, this one was settled out of court, the terms of the final agreement kept secret. CHAPTER 27 Steven Hoffenberg: July 10, 1987 Before there was Bernie Madoff, there was Steven Hoffenberg. In 1987, Hoffenberg was the head of Towers Financial Corporation, a company that bought debts, such as unpaid medical bills, at a very steep discount while pressing the debtors to repay in full. He’d started the company fifteen years earlier with two thousand dollars and just a handful of employees. Thanks, in part, to a grueling work ethic, he’d turned that into a much bigger concern, with twelve hundred employees and stock that traded over the counter.

For Hoffenberg, the greenmailing profits could have been huge. According to Hoffenberg, Epstein handled the attempted takeover of Pan Am—a deal that went sideways almost immediately. Steven Hoffenberg still has a lot to say on the subject. But in listening to him, one must bear in mind that in 1995, he pleaded guilty to criminal conspiracy and fraud charges involving a $460 million swindle, a familiar scheme to anyone who followed the Bernie Madoff case. Like so many others, Hoffenberg had tried to fly very high without the necessary updraft. And despite all the hours he spent at the office, he’d also developed a taste for the high life. He bought his own jet, a luxury yacht, and a Long Island mansion to go with his expensive Manhattan apartment. He’d also briefly owned a controlling interest in the New York Post. To cover his tracks, Hoffenberg had been taking money from investors and using it to pay previous investors.


pages: 553 words: 168,111

The Asylum: The Renegades Who Hijacked the World's Oil Market by Leah McGrath Goodman

anti-communist, Asian financial crisis, automated trading system, banking crisis, barriers to entry, Bernie Madoff, computerized trading, corporate governance, corporate raider, credit crunch, Credit Default Swap, East Village, energy security, Etonian, family office, Flash crash, global reserve currency, greed is good, High speed trading, light touch regulation, market fundamentalism, peak oil, Peter Thiel, pre–internet, price mechanism, profit motive, regulatory arbitrage, reserve currency, rolodex, Ronald Reagan, side project, Silicon Valley, upwardly mobile, zero-sum game

Danny Rappaport, who had become Guttman’s vice chairman, took over as acting chairman. “The press,” Guttman says, sighing. “They build you up just to tear you down. My parents saw the news and they didn’t know what to think. My mother was very upset. Had I robbed somebody? Was I going to jail? In the Jewish community, if you steal someone else’s money, that’s it, your name is blackened forever. Look at Bernie Madoff. A hundred years from now, his name among the Jews will still be synonymous with disgrace. Nobody understood what I was being accused of. So they assumed the worst. I tried to explain to my mother that no, I hadn’t stolen any money, that the regulators were coming after me with this ginned-up legal concept. My father hadn’t even told anybody in our neighborhood about his son being chairman of the oil market.

He was fined $850,000 and sentenced to five years at Rikers Island prison, a maximum-security lockup known for its violent gang population of Bloods, Crips, Latin Kings, and members of the murderous MS-13. The punishment was seen as unusually draconian for a commodities trader. “Steve begged the prosecutors to not send him there, saying he would pay them millions,” says a Nymex trader who was his friend. “They would not spare him. Guess we can’t all get the kid-glove treatment of Bernie Madoff.” Karvellas was released in 2009, but he would not discuss his time in prison. “When Steve got out, I was like, ‘How are you?’ and he’s like, ‘Fine,’ and starts talking about his family and other stuff. Then I stopped him and said, ‘No, I mean, you were at Rikers. How are you?’ He clammed up. His punishment was the worst any of us have ever seen or heard of,” says the friend. “And it’s all because of that little shit.”


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, butter production in bangladesh, buy and hold, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dogs of the Dow, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, stocks for the long run, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Trading generates commissions, and commissions are the lifeblood of many brokerage houses. The technicians do not help produce yachts for the customers, but they do help generate the trading that provides yachts for the brokers. APPRAISING THE COUNTERATTACK As you might imagine, the random-walk theory’s dismissal of charting is not altogether popular among technicians. Academic proponents of the theory are greeted in some Wall Street quarters with as much enthusiasm as Bernie Madoff addressing the Better Business Bureau from his jail cell. Technical analysts consider the theory “just plain academic drivel.” Let us pause, then, and appraise the counterattack by beleaguered technicians. Perhaps the most common complaint about the weakness of the random-walk theory is based on a distrust of mathematics and a misconception of what the theory means. “The market isn’t random,” the complaint goes, “and no mathematician is going to convince me it is.”

In the long run, though, I agree with Bernard Baruch, a legendary investor of the early twentieth century, who said, “Market timing can only be accomplished by liars.” And Jack Bogle, a legend of the late twentieth century, has remarked, “I do not know of anybody who has done it [market timing] successfully and consistently.” Investors should also never forget the age-old maxim “If something is too good to be true, it is too good to be true.” Heeding this maxim could have saved investors from falling prey to the largest Ponzi scheme ever: the Bernard L. Madoff fraud uncovered in 2008, in which $50 billion was said to have been lost. The real con in the Madoff affair is that people fell for the myth that Madoff could consistently earn between 10 and 12 percent a year for investors in his fund. The “genius” of the fraud was that Madoff offered what seemed to be a modest and safe return. Had he offered a 50 percent return, people might well have been skeptical of such pie-in-the-sky promises.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, American ideology, bank run, banking crisis, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve, zero-sum game

What it primarily does is make a massive number of rules designed to provide investors with “transparent” financial and operating information to ensure that they can make sound investments. Based on the performance of capital markets over the last 10 years, there is prima facie evidence that the SEC has failed miserably. Without even considering the fraud and abuse that the SEC failed to detect in cases like Enron, WorldCom, Fannie Mae, Freddie Mac, and Bernie Madoff, simply consider that the S&P 500 today (August 2011) is still 11 percent below where it traded in August 2000. Because the work of the SEC is somewhat eclectic, we will focus on its primary policy mistakes, a number of which have been previously discussed. One of the most significant errors by the SEC is the sanctioning of the rating agencies (Standard & Poor’s [S&P], Moody’s, and Fitch). Under an SEC rule, only debt instruments rated by S&P, Moody’s, or Fitch qualify for positive consideration under Employee Retirement Income Security Act (ERISA) rules designed to protect pension accounts.

The world would be a dramatically better place to live. Whim seeking, hedonism, shortsightedness, fraudulent manipulation, and narcissism, are not the acts of a person who is pursuing long-term happiness. These are the acts of a person with low self-esteem. I had a friend who drank 24 beers a day. He developed cirrhosis of the liver and continued to drink. He died. People say he was selfish. I think he was self-destructive. Bernie Madoff is often described as selfish, which is ridiculous. By his own admission, Madoff was miserable before he was caught. He was stealing from his best friends and from his family. He was self-destructive, not selfish. The most important lesson we can teach our children is that they should act in their long-term rational self-interest, properly understood. Acting in your rational self-interest requires a lot of thinking and a lot of work, but it has an extraordinarily high payback.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

As in the wake of the Great Crash of 1929, villains had to be found and punished. The collective delusion of the housing bubble and market forces would not suffice as an explanation for such a calamity. However, there was no single person or group of identifiable individuals to put in the dock, as Ken Lay and Jeff Skilling had been after the collapse of Enron. The discovery and prosecution of Bernie Madoff was a poor substitute, since his Ponzi scheme far predated the bubble and had nothing to do with it. No, finance and, more broadly, greed, were to blame. The general public were of course victims, and the political class would avenge them and see that never again would something like the meltdown be allowed to occur. The first order of business, though, was to get back to the world of growth and debt-driven prosperity that after a quarter century everyone took as normal, even as a birthright.

No important bankers have been sent to prison, and though several have lost considerable wealth and reputation, most remain very rich men even after losing their jobs. This is unfortunate, because the paranoid style of American politics demands that the whole thing was a plot—bizarre as it is to believe that a bunch of bankers thought they could get rich by blowing up the global economy— and plots need flesh-and-blood villains. The legal destruction of a few Bernie Madoff types might have slaked the public’s thirst for revenge. In the absence of a scapegoat to punish, the public wants to punish the banks as institutions. Of course, as in the insane practice of shareholders suing companies they invest in, punishing the banks means attacking the viability of the only institutions that actually hold and transmit deposit money for the rest of society. Few politicians understand any of this and fewer care, and the banks by their own practices and behavior have made themselves irresistible targets.


pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

Wall Street is not a bunch of greedy bastards shaking down Main Street for every last dime – although there are plenty of those types of ass wipes that do work on Wall Street. Wall Street provides a needed function in the economy. It is real. It provides real economic value. You will generate wealth, for yourself AND for society. Really. But believe me, it’s hard, if not outright impossible, for most others to see this value. Movies like Wall Street don’t help. Nor does Bernie Madoff or any of the other villains. And what the heck, Goldman Sachs Lloyd Blankfein and JP Morgan’s Jamie Dimon don’t help the cause with their massive compensation. I think they deserve their due, but they should take it all in stock and sell it when they retire. I’m proud of my 20+ years working on Wall Street. Maybe I’m just rationalizing its economic purpose to make myself feel good and so I have something to talk about at cocktail parties.


pages: 76 words: 20,238

The Great Stagnation by Tyler Cowen

Asian financial crisis, Bernie Madoff, en.wikipedia.org, endogenous growth, financial innovation, Flynn Effect, income inequality, indoor plumbing, life extension, liquidity trap, Long Term Capital Management, Mark Zuckerberg, meta analysis, meta-analysis, Peter Thiel, RAND corporation, school choice, Tyler Cowen: Great Stagnation, urban renewal

As the world became more prosperous, it seemed that relying on the optimistic expectations of others was justified. For instance, the notion that the United States was seeing a real estate bubble was a staple observation among financial commentators at the time. But it was well known that a real estate bubble had popped before—in the late 1980s—and that the United States had survived that event with a mild recession but not much calamity. The investment frauds of Bernie Madoff reflect some factors behind the broader financial crisis. The point is not that all banking is a fraud, but rather the more subtle point that we rely on the judgments of others when we decide whom to trust. For years, Madoff had been a well-respected figure in the investment community. Madoff’s fraud was possible only because so many people trusted him. The more people trusted him, the easier it was for Madoff to gain the trust of yet others.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, beat the dealer, Bernie Madoff, Black-Scholes formula, British Empire, business cycle, buy and hold, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, Edward Thorp, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

Thorp had actually used an equivalent form of the formula to very profitably trade warrants and options for years before the publication of the Black-Scholes model. He was the founder of the first market neutral fund. He established the first successful quant hedge fund. He was the first to implement convertible arbitrage. He was the first to implement statistical arbitrage. He was likely the first person to uncover that Bernie Madoff was a fraud—he developed conclusive evidence of the fraud many years before Harry Markopolos did.4 Thorp, a PhD mathematician, and near PhD physicist, came to the markets via gambling, but not gambling in the conventional sense. Normally, casino games of chance have a negative edge for the player, and the longer one plays, the greater the chance of financial ruin. This type of gambling is the antithesis of what Thorp was interested in.

He had lots of energy, as if he had so much to say and had just been waiting for the right person to talk to. The conversation ranged from the paradoxes presented by quantum physics experiments to John’s particular disgust for one fund manager, who he insisted was a fraud. I wouldn’t hear that manager’s name again for nine years, when the financial crisis exposed what John had known all along: Bernie Madoff was a fraud. College was quickly approaching. I went down to my dad’s office to seek his advice on a major. It’s quite embarrassing to say, but at this point, I had still not read Market Wizards. I had no involvement with the markets, and my father was never one to push anyone toward his own desires. I told him I wanted to be a doctor. I remember his response very clearly: “I don’t think that’s a very good fit.”


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Asset managers could charge commission to the account of their clients, while office expenses would have to be met from their own pockets. From the 1970s the structure of exchanges changed radically. The change had multiple strands, and causes. The monopoly of the New York Stock Exchange (NYSE) was challenged, first by NASDAQ, an electronic exchange established in 1971 by broker–dealers, led by Bernard Madoff. A broker is an agent; a dealer is a trader. The rise of the broker–dealer blurred the distinction between two types of transaction. The conflict of interest inherent in the broker–dealer concept, and the name of Bernard Madoff, will recur in this book. Some hot new companies, such as Intel and Microsoft, chose to list on NASDAQ rather than the NYSE. The technological shift was paralleled by regulatory changes that encouraged competition between exchanges. Today there are multiple exchanges on which shares can be traded – the London and New York stock exchanges both own electronic exchanges which compete with their main markets.

As ‘Fabulous Fab’ Tourre practised his ‘intellectual masturbation’, he had little interest in the long-term health of Goldman Sachs, much more in his own bonus. The cyber cafés of Lagos are home to the scammers who invite you to facilitate an illicit transaction in return for a large commission. The criminals call those who fall for their entreaties ‘mugus’ – people who believe they are the beneficiaries of impropriety when they are in fact the victims. There is always a supply of mugus. Some of Bernard Madoff’s clients suspected he was operating illegally, but supposed he was improperly using the information he gained from his other activities to secure exceptional returns. So clients of investment banks often believe that ‘the Edge’ – the inside information about markets obtained by undertaking a wide range of financial services activities – is used for their benefit. But even clients who are sceptical about the extent to which ‘the Edge’ benefits customers rather than insiders may find there is no practical alternative to dealing with these heavily conflicted firms.

The theft was not complicated – high returns to savers were achieved by paying any withdrawals from the funds subscribed by new investors. The new investors were attracted by the success of those who had been in the scheme from the beginning. Ponzi schemes break down when the supply of new investors is insufficient to meet the withdrawals of the old. The greatest of all Ponzi schemes in history was that perpetrated by Bernard Madoff, who claimed high returns with low volatility from an investment strategy using derivative securities. In fact, no investment activity took place.25 During the global financial crisis the demand for redemptions increased and incoming funds shrank. Unable to meet withdrawals, Madoff turned himself in to the FBI and was duly sentenced to 140 years in jail. Some of those who invested with Ponzi and Madoff made money.


pages: 91 words: 24,469

The Once and Future Liberal: After Identity Politics by Mark Lilla

affirmative action, anti-communist, Berlin Wall, Bernie Madoff, Bernie Sanders, Donald Trump, ending welfare as we know it, Gordon Gekko, mass immigration, Mikhail Gorbachev, new economy, New Urbanism, Ronald Reagan, sensible shoes, Silicon Valley

Easy in another sense, too, in that it made no moral demands. Americans have always been entrepreneurial and have always believed that to get rich is glorious. But our long-abandoned Calvinism treated wealth as a sign of moral worth, the fruit of discipline and self-denial, not the fruit of looking out for number one. The Horatio Alger stories were not Gordon Gekko stories or Ivan Boesky stories or Bernie Madoff stories. The characters did wear suspenders, but they were not masters of any universe, did not smoke big cigars or drink $1,000 bottles of wine or take clients to strip clubs. For all his social conservatism, Ronald Reagan’s vision of the good life was remarkably amoral. He did not explicitly preach or encourage hedonism; he did not extol the culture of impunity that developed during his presidency.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

Well, yes, they do invest, but not necessarily directly in production. Most of them prefer to invest in asset values. For example, they put money in the stock market and stock values go up, so they put even more money in the stock market, irrespective of how well the companies they invest in are actually doing. (remember those predictions in the late 1990s of the dow at 35,000?) The stock market has a Ponzi-like character even without the Bernie Madoffs of this world explicitly organising it so. The rich bid up all manner of asset values, including stocks, property, resources, oil and other commodity futures, as well as the art market. They also invest in cultural capital through sponsorship of museums and all manner of cultural activities (thus making the so-called ‘cultural industries’ a favoured strategy for urban economic development).

Disruptions of social networks and destruction of social solidarities can be every bit as serious. Loss of social relations is impossible to recompense with a money payment. Finally we need to note the role of crises. A crisis, after all, is nothing less than a massive phase of dispossession of assets (cultural as well as tangible). To be sure, the rich as well as the poor suffer, as the cases of housing foreclosures and losses from investing with Bernie Madoff’s crazy Ponzi scheme show. But this is how wealth and power get redistributed both within and between classes. Devalued capital assets left over from bankruptcies and collapses can be bought up at fire-sale prices by those blessed with liquidity and profitably recycled back into circulation. Surplus capital thus finds a new and fertile terrain for renewed accumulation. Crises may be, for this reason, orchestrated, managed and controlled to rationalise the irrational system that is capitalism.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

"Robert Solow", Andrei Shleifer, asset-backed security, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

David Kotz, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, Report of Investigation Case No. OIG-509, United States Securities and Exchange Commission, Office of Inspector General (2011), pp. 61–77, accessed May 29, 2015, https://www.sec.gov/news/studies/2009/oig-509.pdf. 26. James B. Stewart, “How They Failed to Catch Madoff,” Fortune, May 10, 2011. Accessed May 2, 2015. http://fortune.com/2011/05/10/how-they-failed-to-catch-madoff/. 27. Kotz, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, p. 249. 28. Ibid., p. 247. 29. Ibid., p. 250. Markopolos gives a graphic account of the conversation from his perspective: No One Would Listen, Kindle location 2585 and following. See also Suh’s testimony on this subject: Kotz, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, p. 251. 30.

But the deterrence effects of prosecuting whole corporations are far weaker: since penalties against organizations are spread across all their stakeholders; whereas penalties against individuals are targeted to those directly responsible. The Madoff case gives a second, much more detailed glimpse into the workings of the SEC, and as we will see, possibly, into the consequences of budgetary deficiency. It is now common knowledge how the great phisher-for-phools Bernard Madoff duped wealthy investors into a Ponzi scheme. Every month the investors would receive a statement showing how their Madoff-held assets had grown in value: with remarkable regularity. An investment quant from Whitman, Massachusetts, Harry Markopolos, followed up on this and presented his suspicions to the SEC Boston regional office. He claimed that Madoff’s high, and smooth, returns (between 1 and 2 percent per month) defied the laws of finance.22 Madoff said that he accomplished the smoothing by an investment strategy called a “collar.”

Accessed March 15, 2015. http://knowledge.wharton.upenn.edu/article/goldman-sachs-and-abacus-2007-ac1-a-look-beyond-the-numbers/. Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. New York: William Morrow, 1992. Kotler, Philip, and Gary Armstrong. Principles of Marketing. 14th ed. Upper Saddle River, NJ: Prentice Hall, 2010. Kotz, David. Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme. Report of Investigation Case No. OIG-509. US Securities and Exchange Commission, Office of Inspector General. 2011. Accessed May 29, 2015. https://www.sec.gov/news/studies/2009/oig-509.pdf. Krasnova, Hanna, Helena Wenninger, Thomas Widjaja, and Peter Buxmann. “Envy on Facebook: A Hidden Threat to Users’ Life Satisfaction?” Wirtschaftsinformatik Proceedings 2013. Paper 92. http://aisel.aisnet.org/wi2013/92.


pages: 104 words: 30,990

The Centrist Manifesto by Charles Wheelan

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Bernie Madoff, Bretton Woods, centre right, clean water, creative destruction, David Brooks, delayed gratification, demand response, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, obamacare, profit maximization, Ralph Nader, rent-seeking, Report Card for America’s Infrastructure, Ronald Reagan, Ronald Reagan: Tear down this wall, stem cell, the scientific method, transcontinental railway, Walter Mischel

While markets are powerful forces for good, they still need adult supervision. Why would you put money in a 401(k) retirement account or buy life insurance if there were no legal assurances that the firms selling those products would not simply walk off with your money? Or to put it slightly differently, when you are stashing away hundreds of thousands of dollars for college tuitions and retirement, who scares you more: Bernie Madoff or the government officials who regulate the financial markets? As any introductory economics book would point out, good government is not the enemy of capitalism; it is a precondition. The Democrats have a natural empathy for the truly disadvantaged. Every one of the world’s major faiths has a core belief built around the notion that society has an obligation to help those who are in need.


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, hedonic treadmill, IKEA effect, Jean Tirole, job satisfaction, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, Shai Danziger, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

Everyone nodded and laughed, appreciating his enthusiastic, non-buttoned-down approach. “Is anybody here rich?” he asked. “I know I am, but you college students aren’t. No, you are all poor. But that’s going to change through the power of CHEATING! Let’s do it!” He then recited the names of some infamous cheaters, from Genghis Khan through the present, including a dozen CEOs, Alex Rodriguez, Bernie Madoff, Martha Stewart, and more. “You all want to be like them,” he exhorted. “You want to have power and money! And all that can be yours through cheating. Pay attention, and I will give you the secret!” With that inspiring introduction, it was now time for a group exercise. He asked the students to close their eyes and take three deep, cleansing breaths. “Imagine you have cheated and gotten your first ten million dollars,” he said.

This first study showed that creativity and dishonesty are correlated, but that doesn’t necessarily mean that creativity is directly linked to dishonesty. For example, what if a third factor such as intelligence was the factor linked to both creativity and dishonesty? The link among intelligence, creativity, and dishonesty seems especially plausible when one considers how clever people such as the Ponzi schemer Bernie Madoff or the famous check forger Frank Abagnale (the author of Catch Me If You Can) must have been to fool so many people. And so our next step was to carry out an experiment in which we checked to see whether creativity or intelligence was a better predictor of dishonesty. Again, picture yourself as one of our participants. This time, the testing starts before you even set foot in the lab. A week earlier, you sit down at your home computer and complete an online survey, which includes questions to assess your creativity and also measure your intelligence.

Maybe it was his sickness, my fear of catching something in general, sleep deprivation, or just the random and amusing nature of free associations that made me wonder about the similarity between the germs my seatmate and I were passing back and forth and the recent spread of corporate dishonesty. As I’ve mentioned, the collapse of Enron spiked my interest in the phenomenon of corporate cheating —and my interest continued to grow following the wave of scandals at Kmart, WorldCom, Tyco, Halliburton, Bristol-Myers Squibb, Freddie Mac, Fannie Mae, the financial crisis of 2008, and, of course, Bernard L. Madoff Investment Securities. From the sidelines, it seemed that the frequency of financial scandals was increasing. Was this due to improvements in the detection of dishonest and illegal behavior? Was it due to a deteriorating moral compass and an actual increase in dishonesty? Or was there also an infectious element to dishonesty that was getting a stronger hold on the corporate world? Meanwhile, as my sniffling neighbor’s pile of used tissues grew, I began wondering whether someone could become infected with an “immorality bug.”


Small Change: Why Business Won't Save the World by Michael Edwards

Bernie Madoff, clean water, corporate governance, corporate social responsibility, different worldview, high net worth, invisible hand, knowledge economy, light touch regulation, Mahatma Gandhi, Mark Shuttleworth, market bubble, microcredit, Nelson Mandela, New Journalism, Ponzi scheme, profit motive, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Silicon Valley startup, Social Responsibility of Business Is to Increase Its Profits, The Fortune at the Bottom of the Pyramid, The Spirit Level, The Wealth of Nations by Adam Smith, transaction costs

On these grounds, maybe community organizers should go work for Lehman Brothers. Come to think of it, that’s not such a bad idea: It might have saved us from the colossal mismanagement and risk taking by banks and hedge funds that led to the financial crisis — companies that were so successful and well managed that, like Lehman Brothers and its foundation, they collapsed overnight, leaving hundreds of nonprofits to face financial ruin — or it might have spared us Bernard Madoff with his massive Ponzi scheme, who defrauded Jewish charities of huge amounts of money and caused whole philanthropies like the JEHT Foundation to vanish without a trace.9 “In investment banking, it is taken for granted that decisions about how to use capital are based on rigorous research into performance,” say Bishop and Green in their love poem to irrational exuberance 5 philanthrocapitalism; or as we now know, such decisions could be based on raw speculation at everyone else’s expense.

Philanthrocapitalists sometimes paint reliance on donations, grants, and membership contributions as a weakness for nonprofits, but it can be a source of strength because it connects them to their constituencies and the public — as long as their revenue streams are sufficiently diverse to weather the inevitable storms along the way. In many cases, this would be a safer bet than pulling in more revenue from commercial capital providers with all the risks that that entails — for example, from the Lehman Brothers Foundation or Bernard Madoff ’s “management” of investments by nonprofits. “Nonprofits must understand that the desire to earn income and the desire to use business practices to promote social change are two different and almost entirely incompatible objectives. . . . Don’t mix your models,” warns the Seedco Policy Center in New York.44 Introducing the different logics of civil society and the market into the same organization can have a negative effect by confusing the bottom line still further, complicating accountability and stimulating mission drift.


pages: 338 words: 104,684

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, Bretton Woods, business cycle, capital controls, central bank independence, collective bargaining, COVID-19, Covid-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, Gini coefficient, global reserve currency, global supply chain, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, mortgage debt, Naomi Klein, new economy, New Urbanism, Nixon shock, obamacare, open economy, Paul Samuelson, Ponzi scheme, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

Not just to prevent senseless cuts to programs that support tens of millions of Americans but also to have a more enlightened debate about the full range of things we could accomplish if we weren’t so afraid. The debt isn’t the reason we can’t have nice things. Our broken thinking is. To fix our broken thinking, we need to overcome more than just an aversion to big numbers with the word debt attached. We need to beat back every destructive myth that hobbles our thinking. China, Greece, and Bernie Madoff I doubt the woman who placed that bumper sticker on her SUV was simply nervous about the size of the US Treasury market—that is, the national debt. Chances are, she had other concerns. Maybe she’d heard presidential candidate Barack Obama complain that the US was borrowing from China and “driving up our national debt, that we are going to have to pay off.” The debt clock on West 43rd Street doesn’t just provide a real-time record of the outstanding total.

If the government never pays it down, then it has to keep finding new buyers for its bonds.12 It seems risky. As Margaret Thatcher famously quipped, the problem is that “eventually you run out of other people’s money.” To some people, finding new investors to purchase a never-ending mountain of government debt can start to look like a fraudulent pyramid scheme.13 The kind run by the notorious huckster Bernie Madoff. It isn’t. Madoff was defrauding investors. The United States Treasury is not. As Alan Greenspan explained in an appearance on NBC’s Meet the Press, investors face “zero probability of default” when it comes to US Treasuries.14 And here we should distinguish between voluntary and involuntary default. Greenspan’s statement referred to the latter. His point was that the US could not end up like Greece, desiring to make scheduled payments to bondholders but lacking the authority to instruct its central bank to clear the payments.


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People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

That’s why so many countries and religions have laws and precepts preventing usury, and why the more humane wealthier societies try to do what they can to prevent people from being in these extreme positions where they can be so exploited by others. More generally, there is and should be concern when there is too great an asymmetry in bargaining power. Critics of regulation contend that our legal system is enough of a deterrent to exploitation, that the example of convicted criminals like Bernie Madoff who took advantage of others is sufficient. That is not the case: we need regulations to make it more difficult for the bad behavior to happen in the first place. It is better to prevent these actions than to clean up the mess after they occur because the damage can never be fully repaired—as the Madoff example itself makes abundantly clear. So too, we should have regulations to prevent predatory behavior, like the for-profit colleges that take advantage of individuals’ natural desires to get ahead, but do not deliver anything of value; or the predatory lending that marked the pre-crisis mortgage market or that marks payday lending today.

by Paul Krugman, New York Review of Books, July 10, 2014; “More Talk, More Action,” The Economist, Oct. 17, 2015)—reinforces the view that it was a rescue in which the financial sector’s interests were placed at the top, and the rest of the country’s interests below. 3.Many of the ideas in this section are elaborated in my book Freefall. 4.I should note, our bankers were not alone: Trump demonstrated even worse behavior in his business dealings and in Trump University. Nor were the problems limited to the US. Some of the worst banking practices were found abroad. The extensive cheating by car companies as they pretended that their products were more environmentally sound than they were shows that moral turpitude was not limited to finance. Still, in the sheer dollar value of the fraudulent and dishonest activities, the financial sector wins out. The Bernie Madoff pyramid scheme alone represented some $65 billion missing from individuals’ accounts. And because the financial sector touches virtually every other sector of the economy, the financial sector spread the virus through much of the economy. 5.Thus, as the complex securities such as residential backed mortgage securities (RMBS) developed, for these securities containing thousands of mortgages to work, the originators and investments had to issue what could be viewed as equivalent to a money-back guarantee: banks had agreed to buy back any mortgages that were not as represented to those who had invested in or insured the securities.


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The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Towards the end of his investing career he mellowed and put less faith in speculative investments, writing: ‘As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about.’21 Perhaps the enormous losses banks incurred in the crisis, and the fines levied by regulators around the world, will bring a similar change of heart in banking. Banks and other financial intermediaries create wealth by providing valuable services to their customers. But there is always the risk that they create the illusion of wealth – in the extreme case of the fraudster Bernie Madoff and his funds there was quite a long period when the perception of wealth was substantially higher than the reality.22 More generally, many of the substantial bonuses that were paid as a result of trading in derivatives reflected not profits earned in the past year but the capitalised value of a stream of profits projected years into the future. Such accounting proved more destructive than creative.

Data are for end 2014. 7 Worldwide bank assets are the total assets of the largest 1000 banks in the world, as listed in the Banker Database. 8 The Banker Database, www.thebankerdatabase.com 9 The description ‘socially useless’ was used by Adair Turner, chairman of the Financial Services Authority in the UK from 2008 to 2013, in his Turner Report on the financial crisis in United Kingdom; The phrase ‘doing God’s work’ was used by the CEO of Goldman Sachs, Lloyd Blankfein, in an interview published in the Sunday Times, 8 November 2009. 10 Figures from the Banker Database, www.thebankerdatabase.com, as of end 2014. 11 Because for any bank total assets must equal total liabilities, leverage can be measured by the ratio of either assets or liabilities to equity capital. 12 Brennan, Haldane and Madouros (2010). 13 I prefer ‘too important to fail’ (TITF) to ‘too big to fail’ (TBTF) as a description of the problem, because a small bank can be significant if it is highly interconnected with other banks or if its failure would be a signal leading to contagion to other banks. 14 Wolf (2010). 15 Bank of England (2009). 16 Bank for International Settlements (BIS), Derivative Statistics 2015. 17 Abbey National demutualised in 1989 and has survived as part of Santander UK. 18 That attitude was brilliantly captured in the book Liar’s Poker by Michael Lewis (1989). 19 CCP Research Foundation estimates of conduct costs 2010–14, http://conductcosts.ccpresearchfoundation.com/conduct-costs-results. The estimate includes provisions made by banks of around $70 billion for future settlements of conduct cases relating to past behaviour. 20 Moggridge (1992), p. 95. 21 Keynes in a 1934 letter quoted by Chambers et al. (2014). 22 Bernie Madoff, former chairman of the NASDAQ stock exchange, for many years managed funds for private investors in which the money paid out was financed by new money coming in – what is known as a Ponzi scheme. He is estimated to have defrauded his investors of around $18 billion and in 2009 was sentenced to the maximum term in prison of 150 years. 23 Quoted in Alan Harrington, ‘The Tyranny of Forms’, Life in the Crystal Palace (Knopf, 1959). 24 This is not to say that accounting standards guarantee a fair and accurate description of the health of a bank (Dowd, 2015, Kerr, 2011). 25 The success of an investment in Berkshire Hathaway is in part the judgement of Warren Buffett and in part the fact that he does not operate his company as a hedge fund, which would typically charge an annual fee of 2 per cent of capital and 20 per cent of profits.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

This is no surprise, and, historically, crashes of this sort almost always uncover frauds and malfeasances of a type which had escaped everyone’s notice while prices were rising. Downturns put pressure on earnings, and companies which are less than wholly honest begin to creak at the seams; at the same time, the voices which have been warning that there is something funny about Charles Ponzi (in 1920), Ivar Kreuger the match king (in 1932), Bernie Ebbers (in 2002), or Bernard Madoff (in 2008) begin to gain a hearing. The decline in share prices rolls over a rock, and an unsettling variety of financial beasties emerge. In the case of the millennial dot-com bust, the creature which came crawling out from underneath the rock was a fraud so spectacular and so systematic and so magnificently, reekingly wrong that it was in its way almost a thing of beauty: Enron. To fully understand the impact that Enron had, you have to appreciate just how admired the company was in its prime.

Now the country is in one of the worst recessions to hit a developed economy in modern times, one which is likely to get worse: if 25 percent of your gross national product and 13 percent of your employment come from house building, and house building stops, it’s time to switch metaphors: Celtic Dodo? Celtic Zeppelin? Celtic Zombie? Celtic Car Crash? The undrinkable Galway water was a classic funny smell. In fact, it’s noticeable how often people who speak of or report these things refer to things smelling off or funny. The exact phrase was used to me by a man who turned down an invitation from Bernard Madoff to participate in his hedge fund. This man worked for a big investment bank, which offered clients the chance to participate in a fund-of-funds service: in other words, it offered a fund which consisted of a investments in several different hedge funds. For the banker, this should have been a win-win, because he had clients who were clamoring to join in Madoff’s funds—which were famous for their consistency, returning a steady 10 to 12 percent in all years and all weather—and the inflow of money would in turn generate a steady income in fees.

That was the regime at the body which was supposed to be regulating the banks. Just as President Bush’s Environmental Protection Agency and Consumer Product Safety Commission seemed to have been captured by the very interests they were supposed to be regulating, so it was at the SEC. Much of this doctrinaire laissez-faire involved the nonenforcement of the rules which already existed. An activist SEC, for instance, would never have allowed Bernard Madoff to run his Ponzi scheme; the very consistency of his returns—the funny smell alluded to above—would have been enough to draw their close attention to his accounts. In 2005, a professional investor named Harry Markopolos, a mild-mannered Boston accountant, wrote a twenty-one-page letter to the SEC, pointing out the high probability that Madoff’s fund was a Ponzi scheme. The only alternative explanation Markopolos could come up with wasn’t that Madoff was legit; it was that he was doing something called “front running,” using private information gleaned from his stockbroking operation to make profits for his other funds.


pages: 319 words: 103,707

Against Everything: Essays by Mark Greif

1960s counterculture, back-to-the-land, Bernie Madoff, citizen journalism, collateralized debt obligation, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Desert Island Discs, Donald Trump, income inequality, informal economy, Joan Didion, Norman Mailer, Ponzi scheme, postindustrial economy, Ronald Reagan, technoutopianism, telemarketer, trickle-down economics, upwardly mobile, white flight

On the 26th of January, eight babies were born by cesarean section. They ranged in size from one pound, twelve ounces, to two pounds, nine ounces. Only seven had been noted on ultrasound. The eighth, emerging as a minuscule hand clinging to the ob-gyn’s latex glove, amazed the delivery room. I think Octomom deserves another glance, in the midst of our compulsive forgetfulness, as the central actor in perhaps the only non–Bernard Madoff, ostensibly nonfinancial story to stir the boiling pitch of the nation’s passions in those historic months of September 2008 to March 2009, when American news outlets were trying to cope with the greatest financial collapse since the Great Depression. (Also enacting their own greatest moral collapse since their collusion in the 2003 Iraq War, at a rare moment when different messengers might really have led American society on a different path into history.)

If you remember Edward Liddy—the closest we ever came to seeing a visible individual in a position of responsibility on TV for more than one night’s broadcast—testifying to Congress as head of AIG in March 2009, you’ll remember that it was compulsory for the press to identify him as not the chief of the company in its bad old days. He was someone who must not be blamed, even as he argued for the $173 billion in tax revenues sucked out of government to prop up his new employer. The press didn’t follow up this sentence with the logical next one, naming the chief of AIG in the period for which someone should be blamed. Who was the old chief?*1 But Octomom, Octomom! And Bernard Madoff. Is it in very bad taste to point out that the two villains we gained by name in the months of deepening recession, in early 2009, were a woman and a Jew? Suleman and Madoff. That is to say, at the moment when American capitalism tottered under the mistakes, bad bets, lies, overconfidence, cupidity, and evil of its financial firms, the press groped at traditional scapegoats—and it left one blinking, dumbfounded.

Admittedly the anchors and editors had first stumbled around in a mode of semi-investigation for some months, September to December, seemingly unsure of whom to feature on the broadcasts, whom to wait for outside Wall Street offices (if anyone—I don’t remember this happening much), so near to their own television headquarters, or which bankers to sic TV investigative teams on (none, as I recall). Then they followed the lineups of congressional hearings from Barney Frank’s House Financial Services Committee, relying on the same live C-Span the rest of us were watching (but without the level of analysis mustered on any week’s Monday Night Football), increasingly uncomfortable, it seemed, with anything that might be fomenting “class war.” Luckily, Bernard Madoff took over the headlines in December 2008, and this fixation on one Jewish banker could not be anti-Semitism, because his prominent Jewish victims also wanted his head. Indeed, we had the sorry spectacle of Elie Wiesel, conscience of humanity, investor with Madoff, becoming the spokesman for vengefulness. “I would like him to be in a solitary cell,” Wiesel said, “with only a screen, and on that screen for at least five years of his life, every day and every night, there should be pictures of his victims, one after the other after the other, all the time a voice saying, ‘Look what you have done to this old lady, look what you have done to that child, look what you have done,’ nothing else.”


pages: 219 words: 61,720

American Made: Why Making Things Will Return Us to Greatness by Dan Dimicco

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American energy revolution, American Society of Civil Engineers: Report Card, Bakken shale, barriers to entry, Bernie Madoff, carbon footprint, clean water, crony capitalism, currency manipulation / currency intervention, David Ricardo: comparative advantage, decarbonisation, fear of failure, full employment, Google Glasses, hydraulic fracturing, invisible hand, job automation, knowledge economy, laissez-faire capitalism, Loma Prieta earthquake, low earth orbit, manufacturing employment, oil shale / tar sands, Ponzi scheme, profit motive, Report Card for America’s Infrastructure, Ronald Reagan, Silicon Valley, smart grid, smart meter, sovereign wealth fund, The Wealth of Nations by Adam Smith, too big to fail, uranium enrichment, Washington Consensus, Works Progress Administration

We’ve always had economic ups and downs, of course. But when you look at the expansions and recessions since 1970, you find deep and lasting damage to the economy. You find a pattern of well-paying jobs disappearing, to never return, and millions of manufacturing jobs being replaced with service industry jobs or financial industry jobs. You find greed, you find cheating and fraud and a wholesale abandonment of ethics. You find Bernie Madoff and Ken Lay and Dennis Kozlowski. You find bubbles that burst with disastrous consequences. The housing bubble, like every other debt-driven bubble before it, was a giant Ponzi scheme. In reality, for every year that housing prices ballooned, and people found more elaborate ways of packaging financial service “products” that nobody really understood, we lost more ground. You can manage wealth, certainly.


The Psychopath Inside: A Neuroscientist's Personal Journey Into the Dark Side of the Brain by James Fallon

Bernie Madoff, epigenetics, Everything should be made as simple as possible, meta analysis, meta-analysis, personalized medicine, phenotype, Rubik’s Cube, selective serotonin reuptake inhibitor (SSRI), stem cell, theory of mind

We also need individuals with narcissism, because to have the energy to be a leader you’ve got to be full of yourself. Who the hell else would want to be a president or CEO if they really knew what it involved? You need heavy egotism and a lot of glibness and a bit of bullshit to aspire to that kind of work and to do it well. Robert Hare, the man behind the psychopath checklist, sees psychopathy at work in the finance and banking and investment community, perhaps in some people like Bernie Madoff. (A strong study showing greater psychopathy in business hasn’t been done, but the hypothesis is reasonable.) It could be argued that the only reason these money-managing swindlers exist is that the general public wants to make that quick and easy buck and, while lacking their own combination of high risk and knowledge, use hired guns like Madoff and other investment mavens to do their dirty work for them.


pages: 274 words: 66,721

Double Entry: How the Merchants of Venice Shaped the Modern World - and How Their Invention Could Make or Break the Planet by Jane Gleeson-White

Affordable Care Act / Obamacare, Bernie Madoff, Black Swan, British Empire, business cycle, carbon footprint, corporate governance, credit crunch, double entry bookkeeping, full employment, Gordon Gekko, income inequality, invention of movable type, invention of writing, Islamic Golden Age, Johann Wolfgang von Goethe, Johannes Kepler, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, means of production, Naomi Klein, Nelson Mandela, Ponzi scheme, shareholder value, Silicon Valley, Simon Kuznets, source of truth, spice trade, spinning jenny, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, traveling salesman, upwardly mobile

Economist Basil Yamey argues that this was accounting’s formative moment: ‘Indeed, it might be claimed that the joint stock company was responsible for the transformation of book-keeping into accounting and for the profession of accountancy.’ When railway companies faltered in the late 1840s, struggling to return 10 per cent on investments, many began to fiddle their books. For example, they treated costs as capital investments rather than as expenses, thereby inflating their profits; and used fresh investments instead of profits to pay out dividends (a strategy now known as a Ponzi scheme, made infamous most recently by Bernie Madoff in 2009). The most notorious perpetrator of deceptive railway accounting was the ‘Railway King’, George Hudson (1800–71), who by 1844 controlled over 1600 kilometres of railway in Britain. Hudson overstated his profits and used shareholder investments to pay dividends. When he was eventually exposed by a group of outraged investors, he fled England to escape lawsuits against him for outstanding sums amounting to almost £600,000, a fortune at the time.


pages: 259 words: 67,261

Rethinking Narcissism: The Bad---And Surprising Good---About Feeling Special by Dr. Craig Malkin

Bernie Madoff, greed is good, helicopter parent, longitudinal study, meta analysis, meta-analysis, Ronald Reagan, theory of mind

While people at 0 assiduously avoid the spotlight, those at the far right either scramble for it or silently long for it. In their minds, they cease to exist if people aren’t acknowledging their importance. They’re addicted to attention, and like most addicts, they’d do anything to get their high, so even authentic love takes a backseat. At 10 our humanity collapses under the weight of empty posturing and arrogance. Think of Bernie Madoff, who swindled hundreds of millions of dollars from his clients and who, when caught, scoffed at the “incompetence” of the investigators for not asking the right questions. Even as he faced life in prison, he still managed to feel superior. Being at 1 or 9 isn’t much better. People at 9 are still in the territory of dark narcissism; they can live without elbowing their way into the spotlight, but it pains them to do so—so much so that they need professional help to break the habit.


pages: 486 words: 148,485

Being Wrong: Adventures in the Margin of Error by Kathryn Schulz

affirmative action, anti-communist, banking crisis, Bernie Madoff, car-free, Cass Sunstein, cognitive dissonance, colonial rule, conceptual framework, cosmological constant, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, desegregation, Johann Wolfgang von Goethe, lake wobegon effect, longitudinal study, mandatory minimum, Pierre-Simon Laplace, Ronald Reagan, six sigma, stem cell, Steven Pinker, Tenerife airport disaster, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, trade route

We get stuck there when we are really wrong about really big things—beliefs so important and far-reaching that we can neither easily replace them nor easily live without them. If our trivial beliefs sometimes burst as lightly as bubbles—just a quick pop of surprise and they’re gone—these gigantic beliefs collapse like stars, leaving only us and a black hole behind. If you mortgaged your family’s future on your faith in Bernie Madoff; if you hitched your whole wagon to a doctrine or a deity you no longer believe in; if you were wrong about someone you loved and the kind of life you thought the two of you would live together; if you have betrayed your own principles in any of the countless dark ways we can surprise ourselves over the course of a lifetime: if any of this or anything like this has happened to you, then you have suffered in the space of pure wrongness.

(In fact, they could not have been, since profound faith is, in the end, a necessarily private commitment.) Nor could they fairly claim to have been kept in the dark, either. Millerism wasn’t one of those religious sects based on secret arcana known only unto high priests; broad dissemination of its tenets and the calculations used to justify them was both the means and the message of the movement. Nor, finally, had the Millerites been defrauded. William Miller was no Bernie Madoff, and his followers, unlike Madoff’s clients, hadn’t been intentionally deceived. They had simply placed their faith in an expert who turned out to be wrong. In that respect, they deserve our sympathy, at least up to a point. As we’ve seen, all societies function on the basis of distributed expertise, and all of us rely on others in areas where our own knowledge falls short. Still, those of us in free countries choose our leaders, and we have the obligation to do so with care.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, transfer pricing, wealth creators, white picket fence, women in the workforce, zero-sum game

Luxembourg was key to the Elf Affair, Europe’s biggest corruption scandal since the Second World War, which involved the French state oil company Elf Aquitaine serving as a giant offshore slush fund pumping secret finance to all the main French political parties and to the intelligence services, and supplying bribes on behalf of French businesses all around the world, from Venezuela to Germany to Taiwan. The global fraudster Bernie Madoff ran some of his largest scams out of Luxembourg. In fact, almost any large-scale financial and political scandal in western Europe since the 1960s has had a colourful Luxembourg chapter. And things haven’t changed that much: as a Financial Times analysis put it in 2017, ‘Luxembourg sometimes resembles a criminal enterprise with a country attached.’2 If anyone can be called the architect of the modern tax haven of Luxembourg, it’s the man who served as finance minister from 1989, then prime minister from 1995 to 2013 and now president of the European Commission, Jean-Claude Juncker.

Luxembourg has the world’s second-largest mutual funds sector after the United States, but a courts system ‘the size of a small provincial town’ as one lawyer put it. They can’t possibly police the financial oceans that roil through here – and they don’t want to; competitive policing of finance is after all, part of the point.8 Many of the funds that channelled European investors’ savings into Bernie Madoff’s giant Ponzi scheme were run out of Luxembourg, and ‘the whole set-up violated European law,’ said Erik Bomans, a partner in Deminor, a financial recovery firm representing some 3,000 defrauded Madoff investors. ‘There were no control mechanisms, no yearly due diligence, nothing, nothing, nothing,’ Bomans told me. ‘He could basically do what he wanted.’ The Big Four accounting firms didn’t raise any objections, and the captured regulator, riddled with conflicts of interest, didn’t blink at Madoff’s outrageous schemes.


pages: 154 words: 47,880

The System: Who Rigged It, How We Fix It by Robert B. Reich

affirmative action, Affordable Care Act / Obamacare, Bernie Madoff, Bernie Sanders, business cycle, clean water, collective bargaining, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, crony capitalism, cryptocurrency, Donald Trump, ending welfare as we know it, financial deregulation, Gordon Gekko, immigration reform, income inequality, Jeff Bezos, job automation, London Whale, Long Term Capital Management, market fundamentalism, mass incarceration, mortgage debt, Occupy movement, Ponzi scheme, race to the bottom, Robert Bork, Ronald Reagan, shareholder value, too big to fail, trickle-down economics, union organizing, women in the workforce, working poor, zero-sum game

* * * — Although JPMorgan has been deep in legal hot water, those problems and consequential fines have had no effect on Dimon’s pay. In the bank’s 2013 quarterly report, its list of legal imbroglios ran to nine pages of small print: improper energy trading, fraud in collecting credit card debt, misrepresenting the quality of mortgages in securities sold to investors, misleading credit card customers, bribing officials in foreign countries to buy certain securities, illegally foreclosing on mortgages, covering up Bernie Madoff’s Ponzi scheme, manipulating the foreign exchange market. That year the bank paid out more than $20 billion to settle the claims but still made a profit of $17.9 billion. So JPMorgan’s board voted to boost Dimon’s pay to $20 million, a 74 percent increase over the year before, which came out to about $1 million for every billion dollars JPMorgan had been fined for illegal activities. In fact, Dimon’s star actually rose at the bank when, due to his personal connections, he negotiated with the government directly.


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

addicted to oil, Bay Area Rapid Transit, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, Kickstarter, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, money: store of value / unit of account / medium of exchange, offshore financial centre, P = NP, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs, WikiLeaks

Plus, don’t you deserve some trifling office supplies, after all those years of loyalty to the firm? It’s not like you’re walking off with a company car. With the stolen Cokes, the rationale is even easier: if there are any what’s-mine-is-yours communities left on Earth, they are college dormitories. These findings help us to understand the thinking—or lack thereof—that goes on in the minds of villains like Bernie Madoff, the architects of the Enron scam, and even bankers who sell legal but toxic assets. Ariely ventures that these people, and millions like them, wouldn’t mug an old lady on the street, and he’s probably right. Fuzzy up the transaction, though, and it brings out the worst in us. “We need to recognize that once cash is a step away,” writes Ariely, “we will cheat by a factor bigger than we could ever imagine.”


pages: 283 words: 77,272

With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald

Ayatollah Khomeini, banking crisis, Bernie Madoff, Clive Stafford Smith, collateralized debt obligation, Corrections Corporation of America, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, deskilling, financial deregulation, full employment, high net worth, income inequality, Julian Assange, mandatory minimum, nuremberg principles, Ponzi scheme, Project for a New American Century, rolodex, Ronald Reagan, too big to fail, Washington Consensus, WikiLeaks

Over the past several decades, we have witnessed numerous examples of serious lawbreaking on the part of our most powerful political and financial leaders with no consequences of any kind. It is no exaggeration to state that the current consensus among journalists and politicians is that except in the most blatant and sensationalistic cases (typically ones in which other powerful factions are aggrieved—a Bernie Madoff here, a Rod Blagojevich there), criminal prosecutions are simply not appropriate for the country’s elites. Courtrooms, indictments, and prisons are there for ordinary Americans, not for the ruling classes, and virtually never for our highest political leaders. The central promise of the American founding—that all would stand equal before the rule of law no matter what other political and economic inequality was allowed—has been abandoned.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, Kenneth Rogoff, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

In slightly worse scenarios we would probably want to own fixed assets such as a house or property, and there would still be value somewhere in the broadly diversified rational portfolio as the whole world probably did not go bust all at once. In an even worse scenario than this where property rights are out the window we would probably want to own high-value, yet easy to hide and transfer, goods like gold or jewellery. And in complete mayhem we want to own shelter, security, food and water. And indeed guns and ammo. Avoiding fraud While different from the broader kind of calamity discussed above, for some people Bernie Madoff and other fraudsters like him have become their personal equivalent. Whole books have been written about how to avoid investing with the next Madoff, and rightly so. Madoff is the epitome of the worst the world of finance has to offer. He was stealing from people whose confidence he had gained, and left many people bankrupt while he was living the high life. A couple of former investors of mine were hurt by the Madoff debacle.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Atul Gawande, backtesting, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

But understand that in trying to protect every penny of your profit, you actually prevent yourself from making the big profits. Loss I began to realize that the big money must necessarily be in the big swing. Jesse Livermore You are going to have ups and downs in your trading account. Losses are a part of the trading game. You say you want no losses? You want positive returns every month? Well, you could have had your money with the Ponzi-scheme of Bernard Madoff, but we all know how that turned out! Life equals having losses and you’re going to have losses with trend following. “You can’t make money if you are not willing to lose. It’s like breathing in, but not being willing to breathe out.”36 If you don’t have losses, you are not taking risks. If you don’t risk, you won’t ever win big. Losses aren’t the problem. It’s how you deal with them. Ignore losses with no plan and they will come back to haunt you and your account size.

On Saturday, February 25, 1995, Mike Killian, who almost singlehandedly built Barings Far East customer brokerage business over the past seven years, was awakened at 4:30 a.m. in his Portland, Ore., home. It was Fred Hochenberger from the Barings Hong Kong office. “Are you sitting down?” Hochenberger asked a sleepy Killian. “No, I’m lying down.” It is not unusual to see people frame market wins and losses as a morality tale. These types of questions are designed to absolve the guilt of the market losers for their bad strategies (i.e. Amaranth, Bear Stearns, Bernard Madoff, etc.). The market is no place for political excuses or social engineering. No law changes human nature. If you don’t like losing, examine the strategy of the winners. The performance histories of trend followers during the 2008 market crash, 2000–2002 stock market bubble, the 1998 LongTerm Capital Management (LTCM) crisis, the Asian contagion, the Barings Bank bust in 1995, and the German firm Metallgesellschaft’s collapse in 1993, answer that all important question: “Who won?”

Daniel Goleman8 There are a number of behaviors that almost guarantee losses in the markets. These behaviors, the antithesis of the way trend followers operate, include: • Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others than take the time to learn for themselves. People are lazy when it comes to the education needed for trading. Think about Bernard Madoff. People just wanted to believe. • Impatience: People have an insatiable need for action. It might be the adrenaline rush they’re after—their “gambler’s high.” Trading is about patience and objective decision making, not action addiction. • No objectivity: We are unable to disengage emotionally from the market. We “marry” our positions. • Greed: Traders try to pick tops or bottoms in the hope they’ll be able to “time” their trades to maximize profits.


pages: 442 words: 135,006

ZeroZeroZero by Roberto Saviano

Berlin Wall, Bernie Madoff, call centre, credit crunch, double entry bookkeeping, Fall of the Berlin Wall, illegal immigration, Julian Assange, London Interbank Offered Rate, Mikhail Gorbachev, new economy, open borders, planetary scale, Ponzi scheme, Ronald Reagan, Skype, Steve Jobs, uranium enrichment, WikiLeaks

Martin stirred up troubled waters, he dirtied his hands with numbers in order to reactivate the American banking system’s protections. A single lightning bolt in a cloudless sky. But there are thunder and lightning on the horizon. Controls grew very rigid after September 11, but with the financial crisis that exploded in the midst of Martin’s investigation, the climate changed. Hence the verdicts that send the megaswindler Bernie Madoff to prison for 150 years, and the French trader Jérôme Kerviel for 5, along with repaying Société Générale nearly €5 billion, the amount he’d burned through. These men, who often describe themselves as sacrificial lambs of the system, nevertheless caused enormous harm to individuals, companies, and society as a whole. But the narco-dollars that flow into coffers don’t seem to cause any damage; in fact, they provide that life-giving oxygen known as liquidity.


pages: 165 words: 50,798

Intertwingled: Information Changes Everything by Peter Morville

A Pattern Language, Airbnb, Albert Einstein, Arthur Eddington, augmented reality, Bernie Madoff, Black Swan, business process, Cass Sunstein, cognitive dissonance, collective bargaining, disruptive innovation, index card, information retrieval, Internet of things, Isaac Newton, iterative process, Jane Jacobs, John Markoff, Lean Startup, Lyft, minimum viable product, Mother of all demos, Nelson Mandela, Paul Graham, peer-to-peer, RFID, Richard Thaler, ride hailing / ride sharing, Schrödinger's Cat, self-driving car, semantic web, sharing economy, Silicon Valley, Silicon Valley startup, source of truth, Steve Jobs, Stewart Brand, Ted Nelson, The Death and Life of Great American Cities, the scientific method, The Wisdom of Crowds, theory of mind, uber lyft, urban planning, urban sprawl, Vannevar Bush, zero-sum game

But, more often than we know (or want to know), doctors truly don’t know what they’re doing. Our understanding of the complex systems that bind us together into billions of unique mixtures of mind-body-environment is limited. We’re lost in the wilderness in the dark with a tiny flashlight. But we hate feeling helpless and want a quick fix, so we place our trust in the doctor. We’re not good at assigning trust. Bernie Madoff knew that well. We let what we want shift what we know. I do this all the time with the weather. I know the forecast isn’t exact but want to ride my bike, so I try threading the needle between storms and end up soaked to the bone. Sadly, our trust in doctors is even more misplaced, since malpractice isn’t as random as a butterfly flapping its wings. With respect to our long-term health, a doctor doesn’t have skin in the game.


pages: 181 words: 50,196

The Rich and the Rest of Us by Tavis Smiley

affirmative action, Affordable Care Act / Obamacare, back-to-the-land, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Corrections Corporation of America, Credit Default Swap, death of newspapers, deindustrialization, ending welfare as we know it, F. W. de Klerk, fixed income, full employment, housing crisis, Howard Zinn, income inequality, job automation, liberation theology, Mahatma Gandhi, mass incarceration, mega-rich, Nelson Mandela, new economy, obamacare, Occupy movement, plutocrats, Plutocrats, profit motive, Ralph Waldo Emerson, Ronald Reagan, shareholder value, Silicon Valley, Steve Jobs, traffic fines, trickle-down economics, War on Poverty, We are the 99%, white flight, women in the workforce, working poor

Keller’s and Mandela’s stories prove that, yes, one unbound imagination, one individual, can become the inspiration for millions, as Orman said. But Ehrenreich’s point, that the movement to end poverty will more than likely be a “leaderless” movement, is a powerful reflection of the times that we live in. Revolution in the information age demands a new model. There are no exemptions in the body politic; everybody has been hit by various forms of financial distress—from retirees fleeced by Bernie Madoff, to auto workers in Detroit, retirees in Florida, and municipal workers in Wisconsin. Poverty in the 21st century has taught us many lessons—but first and foremost, we have discovered that poverty is an equal opportunity employer and that we are all vulnerable to unpredictable economic maelstroms. Like all powerful social movements, this effort won’t be led by a single person, but it will be advanced by a single message.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, global pandemic, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, Sam Peltzman, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, US Airways Flight 1549

A 2007 Slate article explains that of the missing children in one recent year, “203,900 were family abductions, 58,200 were nonfamily abductions, and only 115 were ‘stereotypical kidnappings,’ defined in one study as ‘a nonfamily abduction perpetrated by a slight acquaintance or stranger in which a child is detained overnight, transported at least 50 miles, held for ransom, or abducted with the intent to keep the child permanently, or killed.’” So the next time your brain insists on fearing strangers, try to tell it to cool out a bit. It’s not that you necessarily need to insist that it fear your friends and family instead—unless, of course, you are friends with someone like Bernie Madoff. Let’s not forget that the greatest financial fraud in history was committed primarily among friends. And with friends like that, who needs strangers? CHAPTER 6 If You’re Not Cheating, You’re Not Trying ©iStock.com/mstay “Cheating may or may not be human nature,” we wrote in the first chapter of Freakonomics, “but it is certainly a prominent feature in just about every human endeavor.


pages: 365 words: 88,125

23 Things They Don't Tell You About Capitalism by Ha-Joon Chang

"Robert Solow", affirmative action, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, borderless world, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, deskilling, ending welfare as we know it, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, full employment, German hyperinflation, Gini coefficient, hiring and firing, Hyman Minsky, income inequality, income per capita, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, microcredit, Myron Scholes, North Sea oil, offshore financial centre, old-boy network, post-industrial society, price stability, profit maximization, profit motive, purchasing power parity, rent control, shareholder value, short selling, Skype, structural adjustment programs, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, Toyota Production System, trade liberalization, trickle-down economics, women in the workforce, working poor, zero-sum game

Self-interest will protect people only when they know what is going on and how to deal with it. There are many stories coming out of the 2008 financial crisis that show how the supposedly smartest people did not truly understand what they were doing. We are not talking about the Hollywood big shots, such as Steven Spielberg and John Malkovich, or the legendary baseball pitcher Sandy Koufax, depositing their money with the fraudster Bernie Madoff. While these people are among the world’s best in what they do, they may not necessarily understand finance. We are talking about the expert fund managers, top bankers (including some of the world’s largest banks, such as the British HSBC and the Spanish Santander), and world-class colleges (New York University and Bard College, which had access to some of the world’s most reputed economics faculty members) falling for the same trick by Madoff.


pages: 177 words: 54,421

Ego Is the Enemy by Ryan Holiday

activist fund / activist shareholder / activist investor, Airbnb, Ben Horowitz, Berlin Wall, Bernie Madoff, Burning Man, delayed gratification, Google Glasses, Jeff Bezos, Joan Didion, Lao Tzu, Paul Graham, Ponzi scheme, Ralph Waldo Emerson, Richard Feynman, side project, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, Upton Sinclair

A genuinely good and loyal individual, he was not cut out for the dirty world of Washington, and it made quick work of him. He left office a maligned and controversial figure after two exhausting terms, almost surprised by how poorly it had gone. After the presidency, Grant invested almost every penny he had to create a financial brokerage house with a controversial investor named Ferdinand Ward. Ward, a Bernie Madoff of his day, turned it into a Ponzi scheme, and publicly bankrupted Grant. As Sherman wrote with sympathy and understanding of his friend, Grant had “aimed to rival the millionaires, who would have given their all to have won any of his battles.” Grant had accomplished so much, but to him, it wasn’t enough. He couldn’t decide what was important—what actually mattered—to him. That’s how it seems to go: we’re never happy with what we have, we want what others have too.


End the Fed by Ron Paul

affirmative action, Bernie Madoff, Bernie Sanders, Bretton Woods, business cycle, crony capitalism, currency manipulation / currency intervention, fiat currency, Fractional reserve banking, hiring and firing, housing crisis, illegal immigration, invisible hand, Khyber Pass, Long Term Capital Management, market bubble, means of production, moral hazard, Ponzi scheme, price mechanism, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, too big to fail, tulip mania, Y2K

One attempt is to keep prices from dropping; the other is to keep prices from rising. In doing either, they are eliminating the most important mechanism needed to adjust supply and demand and rejuvenate markets. This represents a grave danger. When interventionists interfere too much with free-market pricing, we move toward a socialist system that in the twentieth century was proven to be unworkable. The Bernie Madoff fraud case received plenty of attention, and rightly so. Adequate antifraud laws are on the books, and fraud is something every state is capable of handling. The fraud involved in the Enron scandal was prosecuted under Texas state law. Yet the consensus was that there weren’t enough SEC regulations controlling these sorts of things, even though it was active traders, not regulators, who first discovered the problem.


Poking a Dead Frog: Conversations With Today's Top Comedy Writers by Mike Sacks

Bernie Madoff, Columbine, hive mind, index card, iterative process, Norman Mailer, period drama, Ponzi scheme, pre–internet, Saturday Night Live, Upton Sinclair

We thought it was really obvious, but when people saw that movie, they didn’t really pick up on what we were doing. What do you think they missed? I remember people were blindsided by what we were saying. I was like, “Did you see the movie? The villain is from The Center for American Capitalism. The whole movie is about how chasing small-time drug crimes is meaningless. The real crimes, like the Bernie Madoff situation, are always taking place behind the scenes.” That was the whole premise for the movie. And I was amazed when no one picked up on it. To me it was glaring. Will Ferrell’s character in The Other Guys is interesting. As opposed to the rest of the characters in the film, he did, in fact, have the guts to take on those in power. He was a bit strange, a bit of a nerd, and yet he was in no way meek.

He would chase little movements around on the lawn, digging bizarre little holes. His hearing was incredible. He’d hear things that no other dogs, or people, could hear. The Ferrell character in The Other Guys is like that. He almost had an Asperger’s quality to him. I remember learning about this financial analyst [Harry Markopolos] who uncovered, years before anyone else—way back in 2000—the Bernie Madoff crimes. He knew what Madoff was doing was a Ponzi scheme. He went to the SEC and even The Wall Street Journal. Neither did a thing. Meanwhile, Madoff was making comments about this guy, really dismissive comments: “This guy is a joke. Everyone on Wall Street laughs at that guy.” Well, guess what? The guy was right, and he had the guts to stand before everyone and say as much. When you put that type of heroism on the right rail, it’s unstoppable.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"Robert Solow", Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

In this neoliberal perspective, there is also a natural stratification in what classes of law are applicable to different scofflaws: “the criminal law is designed primarily for the nonaffluent; the affluent are kept in line, for the most part, by tort law.”110 In other words, economic competition imposes natural order on the rich, because they have so much to lose. The poor need to be kept in line by a strong state, because they have so little to lose. Hence, the spectacle of (as yet) no major financial figure outside of Bernie Madoff and Raj Rajnarathan going to jail because of the crisis, while thousands of families behind on their mortgages are turfed out into the street by the constabulary, is a direct consequence of this neoliberal precept. [13] The neoliberals have struggled from the outset to have their political/economic theories do dual service as a moral code. First and foremost, it would appear that the thought collective worshipped at the altar of a deity without restraints: “individual freedom, which it is most appropriate to regard as a moral principle of political action.

General-interest magazines, from Business Week to The Economist to the New York Times, which had hitherto volunteered as cheerleaders for the economics profession without encouragement, turned openly hostile in 2008, hectoring whole schools of thought for their failures, grasping randomly for “new paradigms,” rooting around for sixth-round draft picks and telegenic wicked rebels to replace their prior stable of catallactic pundits. Lusting for scapegoats, journalists initially scoured the landscape for miscreants like Bernie Madoff, Dick Fuld, and Joseph Cassano; and then instinctively turned to find their counterparts inside the economics profession. There was even an online ballot for receipt of the Ignoble (or “Dynamite”) Prize, to be awarded to three economists deemed to have contributed the most to the global financial collapse. (The winners were Alan Greenspan, Milton Friedman, and Larry Summers.) Of course, there existed no equivalent of the Justice Department or the Securities and Exchange Commission to actually police the economists, just as there was no phalanx of gumshoes and DAs to do the hard investigative work; and thus it dawned upon some that (unlike medicine, and even sociology) there was not even a professional code of ethics to which bona fide economists were enjoined to subscribe.


pages: 171 words: 57,379

Navel Gazing: True Tales of Bodies, Mostly Mine (But Also My Mom's, Which I Know Sounds Weird) by Michael Ian Black

Bernie Madoff, double helix, Minecraft, pre–internet

Nobody’s uncles are ever “lost.” They are either at home building model railroad sets or in jail for touching their nieces. Besides, the idea that a relative of mine would leave behind any kind of worthwhile estate was ridiculous. Other than my gangland namesake, my family has never had much money. If they had, it either would have been squandered on dubious business opportunities or invested with Bernie Madoff or something. To die with more assets than liabilities is as exotic a concept to my family as crunking. When I called the man on the phone a liar, he sighed. “That’s what everybody says when I call, but it’s true. You have a great-uncle on your father’s side who recently died.” He then detailed a fair amount of information to me about myself and my family, and told me he would be sending me a form so I could claim my inheritance.


pages: 332 words: 91,780

Starstruck: The Business of Celebrity by Currid

"Robert Solow", barriers to entry, Bernie Madoff, Donald Trump, income inequality, index card, industrial cluster, Mark Zuckerberg, Metcalfe’s law, natural language processing, place-making, Ponzi scheme, post-industrial society, prediction markets, Renaissance Technologies, Richard Florida, Robert Metcalfe, rolodex, shareholder value, Silicon Valley, slashdot, transaction costs, upwardly mobile, urban decay, Vilfredo Pareto, winner-take-all economy

Contrast this with sports, and to a greater extent with Hollywood, where an audience and visual persona is part of a star’s dossier of success.21 Financial celebrity emerges at times, but it is usually predicated on two conditions: when someone has done something really bad or when someone has actively created a persona that transcends his or her talent. Financial celebrities tend to be cultivated through notoriety. The 1991 Salomon Brothers’ outrage when trader Paul Mozer was found to be submitting false bids to buy U.S. Treasury Department bonds or the $50 billion Ponzi scheme that Bernie Madoff was busted for in 2009 were some of the most speculated about and discussed scandals of their time. Madoff’s private life was endlessly dissected in Vanity Fair and even Tatler, including a tell-all by his secretary and an examination of his privileged (and now broke) social circle. But again, the collective public interest was directly linked to extraordinary circumstances. Consider the other type of famous financier.


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, MITM: man-in-the-middle, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

But if we think about future decades, we should instead harvest only a portion of the forest now, and we should periodically replant where we have cut. We should do this not because we love trees necessarily but because we care about the next generation’s needs. Sustainability is a hard-nosed approach to thinking about the future, like the difference between a steady investment and a get-rich-quick scheme. Warren Buffett is sustainable; Bernie Madoff is not. Sustainability is also related to GDP measurement. GDP tells us how well we did last year and may give us a limited sense of the short-term future. But it doesn’t say anything about the long term. It doesn’t tell us whether a country’s citizens are consuming too much of their current wealth, or whether there are enough natural resources and human capital for future decades. It doesn’t predict how long a country’s transportation and technology infrastructure will last, or whether its next generation of workers will be sufficiently educated and trained.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Those who woke up to reality early enough might have managed to sell their tickets to the even more gullible without incurring any significant financial loss (although, with eBay not properly established until 1995, finding the even more gullible might not have been particularly easy). Someone, however, would eventually have to take a loss: the tickets, after all, were claims on something destined never to materialize. Selling tickets to Mars would have been a fraudulent act. We have plenty of laws to prevent that sort of thing happening. Bernie Madoff, the disgraced investor, sits behind bars for his own version of fraud. Fraudulent acts are acts of deliberate deception, where one 35 4099.indd 35 29/03/13 2:23 PM When the Money Runs Out party sets out to rip off others. What happens, however, if all parties share a roughly similar view of the future, which then turns out to be hopelessly wrong, a collective delusion perhaps based on an inappropriate extrapolation of past trends?


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

When the ratio of borrowed to equity capital reaches 35 to 1 —Bear Stearns' ratio when it collapsed (and UBS's reached 50 to 1) —a mere 3 percent fall in the value of the firm's assets will plunge the firm into insolvency. The government was doing nothing to prick the bubble and too little to keep leverage within safe bounds. The longer the world economy went without a depression, the worse the collapse would be when it finally, inevitably, came. Warren Buffett is reported to have said that you don't know who's swimming naked until the tide goes out. The receding stock market tide exposed Bernard Madoff, who is said to have confessed to having pulled off the biggest Ponzi scheme in history. The scheme would have lasted longer and the losses to investors would have been greater had the stock market crash been postponed. The crash reduced the value of Madoff's hedge fund, but more important (because the fund probably had little in the way of assets), the general economic collapse caused requests for redemptions of investments in hedge funds and other investment funds to soar, and Madoff could not honor his investors' requests for redemption and as a result his scheme collapsed.

A plausible though probably erroneous case was made that consolidation would close gaps in the protection of the nation against terrorist attacks and other calamities. A similar but more compelling case can be made for consolidation of the multiplicity of federal agencies that regulate the financial system; and it is beginning to seem likely that there will be such a reorganization. If in the course of it the Securities and Exchange Commission is abolished as punishment for its inaction, Bernard Madoff and Christopher Cox can share the credit. But to reorganize in the midst of crisis, and likewise to regulate or reregulate in the midst of crisis, is a formula for chaos. The argument for doing either is that the ability to change the institutional structure of financial regulation will fade with time; the President's power is at its maximum now, and should be used, and doubtless will be.


pages: 716 words: 192,143

The Enlightened Capitalists by James O'Toole

activist fund / activist shareholder / activist investor, anti-communist, Ayatollah Khomeini, Bernie Madoff, British Empire, business cycle, business process, California gold rush, carbon footprint, City Beautiful movement, collective bargaining, corporate governance, corporate social responsibility, Credit Default Swap, crowdsourcing, cryptocurrency, desegregation, Donald Trump, double entry bookkeeping, end world poverty, equal pay for equal work, Frederick Winslow Taylor, full employment, garden city movement, germ theory of disease, glass ceiling, God and Mammon, greed is good, hiring and firing, income inequality, indoor plumbing, inventory management, invisible hand, James Hargreaves, job satisfaction, joint-stock company, Kickstarter, knowledge worker, Lao Tzu, longitudinal study, Louis Pasteur, Lyft, means of production, Menlo Park, North Sea oil, passive investing, Ponzi scheme, profit maximization, profit motive, Ralph Waldo Emerson, rolodex, Ronald Reagan, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Socratic dialogue, sovereign wealth fund, spinning jenny, Steve Jobs, Steve Wozniak, stocks for the long run, stocks for the long term, The Fortune at the Bottom of the Pyramid, The Wealth of Nations by Adam Smith, Tim Cook: Apple, traveling salesman, Uber and Lyft, uber lyft, union organizing, Vanguard fund, white flight, women in the workforce, young professional

Typically, most business biographies have either been portraits of larger-than-life executives whose accomplishments are inflated and failures swept under the rug, or of robber barons, rogues, and fabulously wealthy tycoons whose practices were shady at best. In contrast, this look backward entails neither the heroic hagiography found in too many current business biographies nor the Enron/WorldCom/Bernie Madoff brand of corporate crime stories popular of late. Nor will I focus on the behavior of contemporary business executives; as one who wrote a glowing account of the practices of Enron’s leaders just months before their criminal shenanigans were revealed, I am living proof of the foolishness of prematurely judging executive performance. Instead, I endeavor to depict these idealistic capitalists as objectively as I can, examining the careers of deceased or long-retired men and women who, like all other humans, had flaws as well as virtues.

It is evident why the public is concerned about finance industry ethics: In 2007, the excesses of “Wall Street” put the mortgages of millions of homeowners at risk, and led to foreclosures for tens of thousands. Understandably, the public is deeply worried that it could happen again. But financial shenanigans are not limited to risky mortgages, credit default swaps, and derivatives, or even to such blatantly unethical actions as the millions of false customer accounts fabricated at Wells Fargo. The Enron scandal, followed by Bernie Madoff’s Ponzi scheme, has highlighted the fact that more ethical misbehavior occurs in finance than in any other industry or in any other aspect of corporate management. Significantly, because financial ethics is one arena where the public interest and the interests of investors are often in sync—and because nothing is more important than money—it is safe to predict continuing public demand for greater accountability and transparency from bank executives and corporate financial officers.


100 Baggers: Stocks That Return 100-To-1 and How to Find Them by Christopher W Mayer

bank run, Bernie Madoff, business cycle, buy and hold, cloud computing, disintermediation, Dissolution of the Soviet Union, dumpster diving, Edward Thorp, hindsight bias, housing crisis, index fund, Jeff Bezos, market bubble, Network effects, new economy, oil shock, passive investing, peak oil, shareholder value, Silicon Valley, Stanford marshmallow experiment, Steve Jobs, survivorship bias, The Great Moderation, The Wisdom of Crowds

CHAPTER 6: THE KEY TO 100-BAGGERS If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result. — Charlie Munger Jason Donville at Donville Kent Asset Management poses an interesting hypothetical. He says, imagine you invested in a fund 15 years ago whose fund manager delivered the returns shown in the nearby table, “Stellar returns.” At first you might think you’ve found the next Bernie Madoff, who also delivered incredibly steady returns for a long time—by making them up. But this isn’t Madoff. This is real. This manager really exists. His name is Gerry Solloway. And he is the CEO of a Canadian consumer-finance company called Home Capital Group (HCG). These returns, though, are not returns on a fund. What the table on the next page shows you is the return on equity for Home Capital in each of the 15 years from 1998 through 2012.


pages: 561 words: 157,589

WTF?: What's the Future and Why It's Up to Us by Tim O'Reilly

4chan, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, Amazon Mechanical Turk, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, barriers to entry, basic income, Bernie Madoff, Bernie Sanders, Bill Joy: nanobots, bitcoin, blockchain, Bretton Woods, Brewster Kahle, British Empire, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, Captain Sullenberger Hudson, Chuck Templeton: OpenTable:, Clayton Christensen, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, computer vision, corporate governance, corporate raider, creative destruction, crowdsourcing, Danny Hillis, data acquisition, deskilling, DevOps, Donald Davies, Donald Trump, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Filter Bubble, Firefox, Flash crash, full employment, future of work, George Akerlof, gig economy, glass ceiling, Google Glasses, Gordon Gekko, gravity well, greed is good, Guido van Rossum, High speed trading, hiring and firing, Home mortgage interest deduction, Hyperloop, income inequality, index fund, informal economy, information asymmetry, Internet Archive, Internet of things, invention of movable type, invisible hand, iterative process, Jaron Lanier, Jeff Bezos, jitney, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Khan Academy, Kickstarter, knowledge worker, Kodak vs Instagram, Lao Tzu, Larry Wall, Lean Startup, Leonard Kleinrock, Lyft, Marc Andreessen, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, McMansion, microbiome, microservices, minimum viable product, mortgage tax deduction, move fast and break things, move fast and break things, Network effects, new economy, Nicholas Carr, obamacare, Oculus Rift, packet switching, PageRank, pattern recognition, Paul Buchheit, peer-to-peer, peer-to-peer model, Ponzi scheme, race to the bottom, Ralph Nader, randomized controlled trial, RFC: Request For Comment, Richard Feynman, Richard Stallman, ride hailing / ride sharing, Robert Gordon, Robert Metcalfe, Ronald Coase, Sam Altman, school choice, Second Machine Age, secular stagnation, self-driving car, SETI@home, shareholder value, Silicon Valley, Silicon Valley startup, skunkworks, Skype, smart contracts, Snapchat, Social Responsibility of Business Is to Increase Its Profits, social web, software as a service, software patent, spectrum auction, speech recognition, Stephen Hawking, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, strong AI, TaskRabbit, telepresence, the built environment, The Future of Employment, the map is not the territory, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Davenport, transaction costs, transcontinental railway, transportation-network company, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, ubercab, universal basic income, US Airways Flight 1549, VA Linux, Watson beat the top human players on Jeopardy!, We are the 99%, web application, Whole Earth Catalog, winner-take-all economy, women in the workforce, Y Combinator, yellow journalism, zero-sum game, Zipcar

Just as companies like Google, Facebook, Apple, Amazon, and Microsoft build regulatory mechanisms to manage their platforms, government exists as a platform to ensure the success of our society, and that platform needs to be well regulated. As the near collapse of the world economy in 2008 demonstrated, it is clear that regulatory agencies haven’t been able to keep up with the constant “innovations” of the financial sector pursuing profit without regard to the consequences. There are some promising signs. For example, in the wake of Ponzi schemes like those of Bernie Madoff and Allen Stanford, the SEC instituted algorithmic models that flag for investigation hedge funds whose results meaningfully outperform those of peers using the same stated investment methods. But once flagged, enforcement still goes into a long loop of investigation and negotiation, with problems dealt with on a haphazard, case-by-case basis. By contrast, when Google discovers that a new kind of spam is damaging search results, they can quickly change the rules to limit the effect of those bad actors.

Enriching investors, if it happens, will be a by-product of what he does, not his goal. He is harnessing all the power of money and technology to do something that today is impossible. The name of his company—Grail—is a conscious testament to the difficulty of the task. Jeff is wrestling with the angel. 2. CREATE MORE VALUE THAN YOU CAPTURE. It’s pretty easy to see that a financial fraud like Bernie Madoff wasn’t following this rule, and neither were the titans of Wall Street who ended up giving out billions of dollars in bonuses to themselves while wrecking the world economy. But most businesses that prosper do create value for their communities and their customers as well as themselves, and the most successful businesses do so in part by creating a self-reinforcing value loop with and for others.


J.K. Lasser's New Tax Law Simplified: Tax Relief From the HIRE Act, Health Care Reform, and More by Barbara Weltman

Affordable Care Act / Obamacare, Bernie Madoff, employer provided health coverage, estate planning, Home mortgage interest deduction, mortgage debt, Ponzi scheme

Thus, the election cannot be made on an amended return (which, by definition, is filed after the due date of the return for the year in question). Investment Losses in Ponzi Schemes The Bernard Madoff Ponzi scheme and other similar financial frauds in 2008 left thousands of investors without their money and with uncertainty about how to handle their losses for tax purposes. Unfortunately for investors, more financial schemes are being uncovered every day. The IRS has created a safe harbor for affected investors under which they can treat losses as a theft loss and claim a deduction. The safe harbor avoids problems of proof of how much income reported in prior years was fictitious or a return of capital. Who qualifies? The safe harbor can be used only by an investor in a taxable account if the lead figure, such as Bernard Madoff, has been charged federally or under state law with fraud, embezzlement, or a similar crime and the investor invested solely with such lead figure (and not through a fund or other entity).


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

asset-backed security, Bernie Madoff, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game

We signed every memo ‘Hank, John and John.’ ” But increasingly over time, the other executives at Goldman grew resentful and referred to them as the “owner’s sons.” Resentment continued to build not only after the Internet IPO scandals but also after Goldman’s dot-com initiatives—such as investments in Wit Capital and a number of electronic trading platforms, including Primex Trading, a joint venture among several Wall Street firms and Bernie Madoff’s securities firm—soured and as it became clear that the Spear, Leeds acquisition was basically a bust. “In doing things like that they were hopeful when we were executing,” said one Paulson loyalist about Thornton and Thain, “but when we were dealing with a mess they weren’t around.” As it became clear that Paulson was sticking around, he encouraged both men to use one of Goldman’s supply of “management coaches,” who could help them think through how to adapt to the new situation, and to begin to take on more and more operating responsibilities, to help relieve some of the burden on Paulson.

But then the SEC stopped responding to S&C and to Goldman, which tried again to contact the SEC during the first quarter of 2010 to see if a settlement could be reached. The next communication from the SEC came with the filing of the complaint on April 16, which happened to be the same day the SEC inspector general issued a critical report about the SEC’s bungling of its investigation into the Ponzi scheme perpetrated by Bernard Madoff. The news media—understandably—focused on the fraud charges against Goldman, rather than the SEC’s poor handling of the Madoff case, a fact Goldman noted in its communications with journalists. When Goldman eventually responded to the SEC’s complaint, it denied all allegations. “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman said initially.


pages: 348 words: 97,277

The Truth Machine: The Blockchain and the Future of Everything by Paul Vigna, Michael J. Casey

3D printing, additive manufacturing, Airbnb, altcoin, Amazon Web Services, barriers to entry, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, blood diamonds, Blythe Masters, business process, buy and hold, carbon footprint, cashless society, cloud computing, computer age, computerized trading, conceptual framework, Credit Default Swap, crowdsourcing, cryptocurrency, cyber-physical system, dematerialisation, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, failed state, fault tolerance, fiat currency, financial innovation, financial intermediation, global supply chain, Hernando de Soto, hive mind, informal economy, intangible asset, Internet of things, Joi Ito, Kickstarter, linked data, litecoin, longitudinal study, Lyft, M-Pesa, Marc Andreessen, market clearing, mobile money, money: store of value / unit of account / medium of exchange, Network effects, off grid, pets.com, prediction markets, pre–internet, price mechanism, profit maximization, profit motive, ransomware, rent-seeking, RFID, ride hailing / ride sharing, Ross Ulbricht, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, smart contracts, smart meter, Snapchat, social web, software is eating the world, supply-chain management, Ted Nelson, the market place, too big to fail, trade route, transaction costs, Travis Kalanick, Turing complete, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, universal basic income, web of trust, zero-sum game

(The concept of a “signature” in cryptography means something far more scientific than a handwritten scrawl; it entails combining two associated numbers, or “keys”—one publicly known, the other private—to mathematically prove that the entity making the signature is uniquely authorized to do so.) Grigg envisioned his triple-entry accounting as a software program that would run within, say, a large company or organization. But the third ledger, containing the sequence of all those signed receipts, could be verified publicly, and in real time. Any deviation from its time-stamped records would be an indication of a fraud. Picture a fraud like Bernie Madoff’s, in which Madoff was simply making up transactions and recording them in completely fictitious books, and you can see the value in a system that can verify accounts in real time. Before Grigg, in the 1990s, another visionary had also seen the potential power of a digital ledger. Nick Szabo was an early Cypherpunk* and developed some of the concepts that underlie Bitcoin, which is one reason why some suspect he is Satoshi Nakamoto.


pages: 202 words: 66,742

The Payoff by Jeff Connaughton

algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, plutocrats, Plutocrats, Ponzi scheme, risk tolerance, Robert Bork, short selling, Silicon Valley, too big to fail, two-sided market, young professional

I’m very worried that this is a prescription for another disaster. Schapiro took it all in. She responded by reiterating her pledge, which she’d made publicly in response to Ted’s letter, that the SEC would conduct a comprehensive review of market-structure issues and HFT. She added that she had many other issues on her plate. And indeed she had. America had just been through the biggest financial disaster in sixty years; Bernie Madoff’s Ponzi scheme had gone undetected by the SEC for years despite repeated warnings from whistleblowers; investors were rattled and worried that the SEC was toothless. Nevertheless, it was obvious to me that she only had one choice if history was to judge her well: she had to do something. Ted must have been thinking the same thing. Near the end of the meeting he told Schapiro, “I don’t believe you’re going to do anything about high-frequency trading.”


One More Thing: Stories and Other Stories by B. J. Novak

Bernie Madoff, carbon-based life, citation needed, dark matter, F. W. de Klerk, Nelson Mandela, Saturday Night Live

Finally, she told me that I was no longer the type of person she could trust with her ATM password, but that if it was this important to me, I could wait in the museum with the kids while she went across the street herself to withdraw two hundred dollars from her card, but that she needed me to know she would “never, ever forget what happened today.” I said yes, thank you, it was indeed this important to me. Fortunately, as I said, this story has a happy ending. Inside the secret room was a mind-blowingly elaborate, incredibly well-executed interactive holographic exhibit on the Bernie Madoff hedge fund scam of 2009. It was beyond amazing—just jaw-droppingly intricate and detailed and smart and interesting and well designed. The holograms actually interacted with you, putting you in the mindset of the people who got ripped off, and very compellingly conveyed the scope of the scam he pulled—did you know the numbers involved? Staggering. Anyway, all of us were absolutely fascinated.


pages: 232 words: 71,024

The Decline and Fall of IBM: End of an American Icon? by Robert X. Cringely

AltaVista, Bernie Madoff, business cycle, business process, cloud computing, commoditize, compound rate of return, corporate raider, full employment, if you build it, they will come, immigration reform, interchangeable parts, invention of the telephone, Khan Academy, knowledge worker, low skilled workers, Paul Graham, platform as a service, race to the bottom, remote working, Robert Metcalfe, Robert X Cringely, shareholder value, Silicon Valley, six sigma, software as a service, Steve Jobs, Toyota Production System, Watson beat the top human players on Jeopardy!, web application

It aims to rob the victim of thousands of dollars, often by getting him or her to empty out banking accounts and borrow from family members,” according to Wikipedia. By predicting earnings five years out, Palmisano effectively damped out quarterly earnings issues for IBM. Big Blue had more than reached its first five-year target of $10 per share by 2010, despite the worst recession in 70 years. Who then would bet that Palmisano couldn’t do it again? Bernie Ebbers, Dennis Kozlowski, Bernie Madoff, and Jeff Skilling all played versions of the long con. But maybe Sam Palmisano was different. Maybe Sam could actually do it. It is my opinion that at the beginning of his tenure, Palmisano believed that himself, trusting in the ingenuity and loyalty of the people of IBM. Remember IBM is a feudal culture where the sales organization is dominant. What matters to the IBM salesman are the parts of the company above him because he yearns for an eventual role in management—IBM nobility.


pages: 237 words: 66,545

The Money Tree: A Story About Finding the Fortune in Your Own Backyard by Chris Guillebeau

"side hustle", Bernie Madoff, Ethereum, financial independence, global village, hiring and firing, housing crisis, passive income, race to the bottom, rent-seeking, ride hailing / ride sharing, Steve Jobs, telemarketer

But I figure a lot more people will sign up tonight, so I might give a slightly higher number for media reports. On the phone with a journalist from Wall Street right now, wish me luck! * * * — “This Just In” Evening Wrap-Up Cheddar Media New York—Shares of the Chinese toymaker Real Action spiked to $127 today, in response to strong demand for its line of reality show contestant action figures. Rupert Howley, who pled guilty to the largest financial fraud scandal since Bernie Madoff, was released from prison after serving a sentence of three days. In startup news, early reports suggest that the social service Buzzard signed up more than ten thousand users in its first day. Kevin Quan, founder, CEO, and COO, claims that the company is “blown away” by the response. “We knew we were on to something big, but this is truly buzzworthy!” he said. The numbers could not be immediately verified. 11.


pages: 374 words: 114,600

The Quants by Scott Patterson

Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Blythe Masters, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, Kickstarter, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Robert Mercer, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

But only 20 P&G options in total had changed hands that day (this was well before the explosion in options trading that occurred over the following decade). Similar discrepancies appeared for trades on IBM, Disney, and Merck options, among others, Thorp’s research revealed. He told the firm that had made the investment to pull its money out of the fund, which was called Bernard L. Madoff Investment Securities. In late 2008, the fund, run by New York financier Bernard Madoff, was revealed as the greatest Ponzi scheme of all time, a massive fraud that had bilked investors out of tens of billions. Regulators had been repeatedly warned about the fund, but they never could determine whether its trading strategies were legitimate. While Thorp was taking a break from the investing game, the stage for the amazing rise of the quants had been set.

Gated mansions hunched in the Connecticut cold behind their rows of exotic shrubbery, bereft of their traditional lacings of Christmas glitz. Few of the high-powered occupants of those mansions felt much like celebrating. It was a glum holiday season in Greenwich, hedge fund capital of the world. Making matters worse, a multibillion-dollar money management firm run by a reclusive financier named Bernard Madoff had proved to be a massive Ponzi scheme, one that Ed Thorp had already unearthed in the early 1990s. The losses rippled throughout the industry like shock waves. A cloud of suspicion fell upon an industry already infamous for its paranoia and obsessive secrecy. Ground zero of Greenwich’s hedge fund scene was Two Greenwich Plaza, a nondescript four-story building beside the town’s train station that once had housed a hodgepodge of shippers, manufacturers, and stuffy family law firms.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

The most straightforward are slips, when through clumsiness or lack of attention you do something you simply didn’t mean to do. In 2005, a young Japanese trader tried to sell one share at a price of ¥600,000 and instead sold 600,000 shares at the bargain price of ¥1. Traders call these slips ‘fat finger errors’ and this one cost £200 million. Then there are violations, which involve someone deliberately doing the wrong thing. Bewildering accounting tricks like those employed at Enron, or the cruder fraud of Bernard Madoff, are violations, and the incentives for them are much greater in finance than in industry. Most insidious are mistakes. Mistakes are things you do on purpose, but with unintended consequences, because your mental model of the world is wrong. When the supervisors at Piper Alpha switched on a dismantled pump, they made a mistake in this sense. Switching on the pump was what they intended, and they followed all the correct procedures.

Shortly after the Equity Funding Corporation collapsed, Ray Dirks was rewarded for his efforts: the SEC prosecuted him for insider trading, a charge that would at the very least have ended his career. Dirks fought his case for ten years before eventually being cleared by the US Supreme Court. The SEC seems to have learned few lessons: when a former fund manager, Harry Markopolos, handed them a dossier of evidence that Bernard Madoff was running a gigantic fraud, he was ignored. (At least he was not prosecuted.) It is true that some whistleblowers have an axe to grind. Some are disgruntled former employees looking to make trouble. Mr Markopolos was Mr Madoff’s rival; Paul Moore had plenty of reasons to complain about HBOS, whether or not his complaints had merit. It is hard to know who to take seriously. But when billions are at stake, it is unwise to dismiss whistleblowers too casually.


pages: 407 words: 104,622

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution by Gregory Zuckerman

affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Andrew Wiles, automated trading system, backtesting, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, blockchain, Brownian motion, butter production in bangladesh, buy and hold, buy low sell high, Claude Shannon: information theory, computer age, computerized trading, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, Edward Thorp, Elon Musk, Emanuel Derman, endowment effect, Flash crash, George Gilder, Gordon Gekko, illegal immigration, index card, index fund, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, Loma Prieta earthquake, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, Mark Zuckerberg, More Guns, Less Crime, Myron Scholes, Naomi Klein, natural language processing, obamacare, p-value, pattern recognition, Peter Thiel, Ponzi scheme, prediction markets, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, Robert Mercer, Ronald Reagan, self-driving car, Sharpe ratio, Silicon Valley, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, Steve Jobs, stochastic process, the scientific method, Thomas Bayes, transaction costs, Turing machine

Picking up the next day’s Wall Street Journal, sheepish staffers read that analysts were attributing the price surge to fears of a poor wheat harvest, rather than Renaissance’s miscue. A bit later, Patterson helped roll out a new model to trade equity options, but it generated only modest profits, frustrating Simons. “Nick, your options system needs help,” Simons told him in a meeting. “It needs to be better.” Simons pointed to the huge, steady gains that another investor was making trading equity options at his growing firm, Bernard L. Madoff Investment Securities. “Look at what Madoff is doing,” Simons told Patterson. The criticism grated on Patterson, who gave Simons a tart retort: “Maybe you should hire Bernie.” (A few years later, Simons would become suspicious of Madoff’s extraordinary results and pull money he had invested in Madoff’s fund. In 2008, Madoff would acknowledge running history’s largest Ponzi scheme.) Nervous about the slipping returns, Simons proposed a new idea.

See Statistical arbitrage Archimedes (yacht), 267, 320 Armstrong, Neil, 170 Artin, Emil, 69 Asness, Clifford, 256–57 Association for Computing Machinery (ACM), 37 astrology, 121–22 autism, xviii, 268, 287, 323–24 Automated Proprietary Trading (APT), 131–32, 133 AWK, 233–34 Ax, Frances, 98 Ax, James, xi, 37, 68–69, 324 at Axcom Limited, 78–83 backgammon, 69, 76–77 background of, 68–69 at Berkeley, 68–69 Berlekamp and, 95–102 conspiracy theories of, 77–78, 99 at Cornell, 69, 70–71 death of, 103 focus on mathematics, 69–70 at Monemetrics, 51–52, 72–73 personality of, 68, 70, 71–72, 98–99 Simons and, 34, 68–69, 99–103, 107 at Stony Brook, 34, 71–72 trading models, 73, 74–75, 77–78, 81–86, 95–101, 107 Axcom Limited, 78–83 disbanding of, 118 trading models, 95–101, 107–18 Ax-Kochen theorem, 69, 70, 103 Bachelier, Louis, 128 backgammon, 69, 76–77 backtesting, 3 Bacon, Louis, 140 Baker House, 15–16 Baltimore City Fire and Police Employees’ Retirement System, 299–300 Bamberger, Gerry, 129–30 BankAmerica Corporation, 212 Bannon, Steve, 279, 280, 280n break with Mercers, 304 at Breitbart, 278–79, 299–300, 301–2 midterm elections of 2018, 304 presidential election of 2016, xviii, 281–82, 284–85, 288–90, 293, 294–95 Barclays Bank, 225, 259 bars, 143–44 Barton, Elizabeth, 272 basket options, 225–27 Baum, Julia Lieberman, 46, 48, 50, 62–63, 65 Baum, Leonard “Lenny,” xi, 45–46, 63–66 background of, 46 currency trading, 28–29, 49–53, 54–60, 62–64, 73 death of, 66 at Harvard, 46 at IDA, 25, 28–29, 46–49, 81 at Monemetrics, 45, 49–60, 63–65 move to Bermuda, 64–65 rift with Simons, 63–65 trading debacle of 1984, 65, 66 Baum, Morris, 46 Baum, Stefi, 48, 62, 63 Baum–Welch algorithm, 47–48, 174, 179 Bayes, Thomas, 174 Bayesian probability, 148, 174 Beane, Billy, 308 Beat the Dealer (Thorp), 127, 163 Beautiful Mind, A (Nasar), 90 behavioral economics, 152, 153 Bell Laboratories, 91–92 Belopolsky, Alexander, 233, 238, 241, 242, 252–54 Bent, Bruce, 173 Berkeley Quantitative, 118 Berkshire Hathaway, 265, 309, 333 Berlekamp, Elwyn, xi at Axcom, 94–97, 102–3, 105–18 background of, 87–90 at Bell Labs, 91–92 at Berkeley, 92–93, 95, 115, 118, 272 at Berkeley Quantitative, 118 death of, 118 at IDA, 93–94 Kelly formula and, 91–92, 96, 127 at MIT, 89–91 Simons and, 2–3, 4, 93–95, 109–10, 113–14, 116–18, 124 trading models and strategies, 2–3, 4, 95–98, 106–18, 317 Berlekamp, Jennifer Wilson, 92 Berlekamp, Waldo, 87–88 Berlin Wall, 164 Bermuda, 64–65, 254 Bernard L. Madoff Investment Securities, 198 betting algorithm, 144, 167 Bezos, Jeffrey, 134 Bezos, MacKenzie, 134 Big Bang, 324–25 Big Bang Theory, The (TV show), 254 Big Bounce, 325 black box investing, 137 Black Monday (1987), 97, 126, 256 Boesky, Ivan, 106 Bolton, John, 305 Bombieri, Enrico, 28 bond trading, 53, 55 bonuses, 200–201 Bookstaber, Richard, 314–15 Bossie, David, 284, 285, 289 Botlo, Michael, 154–55 Box, George, 245 Bozell, Brent, 304 Breakfast Club, The (movie), 183 breakout signals, 83–84 Breck’s (Newton, MA), 9–10 Breitbart, Andrew, 278 Breitbart News, 278, 280–81, 289–90, 295, 299–300, 301–2 Brexit, xviii, 280–81 Bridgewater Associates, 310 British pound, 40, 52, 79, 165 Brookhaven National Laboratory, 154 Brown, Aaron, 171 Brown, Henry, 172–73 Brown, Margaret, 176, 179–80, 229 Brown, Peter, xi background of, 172–73 education of, 187 at IBM, 5, 173–81, 187–88 Brown, Peter, at Renaissance client presentations, 249–50, 251 equity stake, 201 financial crisis and, 257–61 Magerman and, 181–82, 191–95, 241, 294, 296, 297, 299, 318 management, 208–9, 230–31, 232–33, 237, 241–43, 254–55, 275, 289–90, 319, 320 Mercer and political blowback, 296, 297, 299, 319 recruitment of, 169, 179–80 statistical-arbitrage trading system, 187–91, 193–95, 197–99, 204, 205–8, 213–14, 223, 224–27, 229–32, 255 tech bubble, 215–17 Brown University, 103 Buffett, Warren, xvi, 96, 161, 265, 309 Bush, John Ellis “Jeb,” 279 C++, 155, 191–92 Caddell, Patrick, 279–80 Café (movie), 270 Calhoun, Anthony, 299–300 California Institute of Technology, 53–54 Cambridge Analytica, 279, 280–81, 303 Cambridge Junior College, 22 Candide (Voltaire), 230 candlestick pattern, 122 Carlson, Tucker, 285 Carmona, René, 40, 81–86, 96, 98–99 Carnegie Mellon University, 173, 178 Celanese Corporation, 19 “Characteristic Forms and Geometric Invariants” (Chern and Simons), 38 Charlap, Leonard, 33, 36, 71–72, 141 Cheeger, Jeff, 39 Chern, Shiing-Shen, 17–18, 38 Chern–Simons theory, 17–18, 38 chess, 50, 147, 178 Chevron, 79 Chhabra, Ashvin, 308 Chicago Board of Trade, 113–14, 125 Christie, Chris, 285 Chrysler, 251 CIA (Central Intelligence Agency), 208 Citadel Investment Group, 256, 310–11 Citigroup, 123 Citizens United v.

* The 5 percent management fee had been determined in 1988, when Straus told Simons he needed about $800,000 to run the firm’s computer system and pay for other operational costs—a figure that amounted to 5 percent of the $16 million managed at the time. The fee seemed about right to Simons, who kept it as the firm grew. * Patterson had more reason for paranoia than even he realized; around the same time, another investor from Long Island, Bernard Madoff, was crafting history’s largest Ponzi scheme. * It wasn’t that the company had a problem hiring women. Like other trading firms, Renaissance didn’t receive many resumes from female scientists or mathematicians. It’s also the case that Simons and others didn’t go out of their way to recruit women or minorities. * When asked to comment, Bannon said there are “errors of fact” in this description of events surrounding the election and his interactions with the Mercers, though he wouldn’t specify the inaccuracies.


pages: 282 words: 26,931

The Five-Year Party: How Colleges Have Given Up on Educating Your Child and What You Can Do About It by Craig Brandon

Bernie Madoff, call centre, corporate raider, Donald Trump, en.wikipedia.org, Gordon Gekko, helicopter parent, impulse control, new economy, Ponzi scheme, Ralph Nader

The regional accreditation organizations that are supposed to evaluate the quality of education at our colleges and universities seem to have been soundly sleeping as the colleges dumbed down their programs, inflated grades, and turned themselves into entertainment centers. They are like Securities and Exchange Commission watchdogs, fiddling with forms while corporate raiders fleeced millions of Americans and Bernie Madoff set up his Ponzi schemes. There are six regional accreditation groups in the United States, but they all work pretty much the same way. Colleges apply for membership and then become a part of the organization. The college and individual departments submit regular self-study reports about changes they have made and problems they are experiencing. The accrediting groups develop a book-length statement of standards that they use as a guide when suggesting changes in college policies, courses, and programs.


pages: 300 words: 78,475

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream by Arianna Huffington

American Society of Civil Engineers: Report Card, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, extreme commuting, Exxon Valdez, full employment, greed is good, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, new economy, New Journalism, offshore financial centre, Ponzi scheme, post-work, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, single-payer health, smart grid, The Wealth of Nations by Adam Smith, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration

In fact, he can’t even understand his own home mortgage: “I know I can’t and I’ve tried,” Raines told a House committee. “To this day, I don’t know what it said.… It’s impossible for the average person to understand.” In other words, who could have known? But isn’t it interesting that the complexity and opacity of these things somehow always redounds to the benefit of those in charge? We saw a familiar insistence on ignoring all warnings in the Bernie Madoff scandal.147 “We have worked with Madoff for nearly twenty years,” said Jeffrey Tucker, a former federal regulator and the head of an investment firm that lost billions to Madoff. “We had no indication that we … were the victims of such a highly sophisticated, massive fraudulent scheme.” Who could have known? Well, financial fraud investigator Harry Markopolos, for one. Not only did he know, he did everything he could to make sure everybody else knew as well.148 In 1999, after researching Madoff’s methods, Markopolos wrote a letter to the SEC saying, “Madoff Securities is the world’s largest Ponzi Scheme.”


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, asset allocation, backtesting, barriers to entry, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fiat currency, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, High speed trading, housing crisis, index fund, joint-stock company, money market fund, moral hazard, Myron Scholes, passive investing, Ponzi scheme, price discovery process, random walk, risk tolerance, risk-adjusted returns, risk/return, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

Today there is little understanding of this distinction to the average consumer looking for advice. While there is much hype inside the industry, including champions of the fee-only model like the National Association of Personal Financial Advisors, it has never gained the attention it deserves. My take is that people ultimately don’t care about ethics as long as the job gets done. However, isn’t that what investors thought when Bernie Madoff offered a steady 10 percent return per year? In 1999, the SEC started to look at proposals from brokerage firms to end fee-based brokerage programs. What was at stake was if broker-dealers—otherwise known as brokerage firms that hire stockbrokers—would be able to claim exemption under the Advisers Act of 1940. Specifically, brokers wanted to be exempt from the fiduciary standards that RIAs had to abide by, including always placing the client’s interests ahead of his or her own.


pages: 202 words: 72,857

The Wealth Dragon Way: The Why, the When and the How to Become Infinitely Wealthy by John Lee

8-hour work day, Albert Einstein, barriers to entry, Bernie Madoff, butterfly effect, buy low sell high, California gold rush, Donald Trump, financial independence, high net worth, intangible asset, Kickstarter, Mark Zuckerberg, negative equity, passive income, payday loans, self-driving car, Snapchat, Stephen Hawking, Steve Jobs, stocks for the long run, stocks for the long term, Tony Hsieh, Y2K

The great father of modern economics, Adam Smith, said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” Do you really believe that people who offer to invest your money for you are concerned for your interests ahead of their own? Obviously their first priority is to make money for themselves. Did you feel sorry for Bernie Madoff's clients, or did you secretly think they were a little naive to trust him so implicitly with their money without asking too many questions about how he was allegedly getting such high profits from their investments? The Truth about Your Investments We've been told: Let a (so-called) financial expert invest your money for you. The undesirable truth is: When you hand your money over to other people they are going to make sure they make a profit before you do.


pages: 244 words: 79,044

Money Mavericks: Confessions of a Hedge Fund Manager by Lars Kroijer

activist fund / activist shareholder / activist investor, Bernie Madoff, capital asset pricing model, corporate raider, diversification, diversified portfolio, family office, fixed income, forensic accounting, Gordon Gekko, hiring and firing, implied volatility, index fund, intangible asset, Jeff Bezos, Just-in-time delivery, Long Term Capital Management, merger arbitrage, NetJets, new economy, Ponzi scheme, post-work, risk-adjusted returns, risk/return, shareholder value, Silicon Valley, six sigma, statistical arbitrage, Vanguard fund, zero-coupon bond

In this book I want to explain what it was like to run a hedge fund during a period when the industry went from relative obscurity to something everyone’s aunt or uncle would discuss. When I set out to write this book it was mainly because I felt the inner workings of the hedge funds were poorly understood by outsiders. Having grown from a small and mainly US investment activity to become a global trillion-dollar circus, the industry is often unfairly portrayed as a fee-charging gambling den populated by dart-throwing chancers and Bernie Madoff’s evil twin. This was nothing like the industry I had been a part of for a decade, and I recognised little of my time at Holte Capital in many of the accounts. The industry I had known largely involved highly intelligent people who were passionate about the world of investing. They would spend endless hours engaging in complex financial analysis to find angles from which their investors might profit.


pages: 459 words: 118,959

Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine S. Richard

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, banking crisis, Bernie Madoff, Blythe Masters, buy and hold, cognitive dissonance, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Long Term Capital Management, market bubble, money market fund, moral hazard, old-boy network, Ponzi scheme, profit motive, short selling, statistical model, white flight, zero-sum game

Rafael Mayer, an early investor in Pershing Square, says that Ackman’s drive to bring people around to his way of thinking can backfire. His impatience can make people feel a bit used, and his thoroughness can be seen as obsession, Mayer says. “Look at Markopolos,” Mayer says, referring to Harry Markopolos, the fund manager who tried for 10 years to warn the Securities and Exchange Commission in detailed letters and e-mails about Bernie Madoff’s Ponzi scheme. “Unfortunately, if you write long letters, people think you are crazy,” Mayer says. Even Ackman’s friends poked fun at his relentless pursuit of MBIA. For his 40th birthday, Ackman’s wife Karen threw him a party, inviting more than 100 family members and friends to the Blue Hill at Stone Barns restaurant in upstate New York. Former Gotham colleagues David Berkowitz and David Klafter composed a song in Ackman’s honor set to the tune of the 1936 hit “The Way You Look Tonight.”


pages: 429 words: 120,332

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens by Nicholas Shaxson

Asian financial crisis, asset-backed security, bank run, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, collapse of Lehman Brothers, computerized trading, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, Double Irish / Dutch Sandwich, failed state, financial deregulation, financial innovation, Fractional reserve banking, full employment, high net worth, income inequality, Kenneth Rogoff, laissez-faire capitalism, land reform, land value tax, light touch regulation, Long Term Capital Management, Martin Wolf, money market fund, New Journalism, Northern Rock, offshore financial centre, oil shock, old-boy network, out of africa, passive income, plutocrats, Plutocrats, Ponzi scheme, race to the bottom, regulatory arbitrage, reserve currency, Ronald Reagan, shareholder value, The Spirit Level, too big to fail, transfer pricing, Washington Consensus

When nobody can find out what a company’s true financial position is until after the money has evaporated, trickery and bamboozlement abound. Financial markets seized up in 2007 because nobody knew, or trusted, what the other players in the market were doing, or what they were worth, or what or where their risks were. It is no coincidence that so many of those involved in great financial trickery, like Enron, or the empire of the fraudster Bernie Madoff, or Sir Allen Stanford’s Stanford Bank, or Long Term Capital Management, or Lehman Brothers, or AIG, were so thoroughly entrenched offshore. The secrecy jurisdictions specialize in bamboozlement. Along with the secrecy, and a curmudgeonly reluctance to co-operate with foreign jurisdictions, the offshore system provides endless incentives for corporations—especially financial ones—to festoon their affairs across jurisdictions, usually a complex mix of onshore and offshore, to fox the regulators.


Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Gödel, Escher, Bach, hindsight bias, housing crisis, Ignaz Semmelweis: hand washing, illegal immigration, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, lateral thinking, loss aversion, Louis Pasteur, Lyft, mail merge, Mark Zuckerberg, meta analysis, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nuclear winter, offshore financial centre, p-value, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, survivorship bias, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, Vilfredo Pareto, wikimedia commons

For example, what are effective crime deterrents? Research shows that people are more deterred by the certainty they will be caught and convicted than by the specific punishment they might receive. If there is little chance of getting caught, some simply do not care what the punishment is. Further, most people are not even aware of the specific punishments they might face. Financial fraudster Bernie Madoff thought he was never going to be caught and probably never considered the possibility of a 150-year prison sentence. Additionally, there is evidence to suggest that not only does prison time not reduce repeat offenses, but there is actually a chance that it increases the probability of committing a crime again. The real solution to deterring crime is likely related to the root cause of why people commit specific types of crimes rather than to any particular punishment.


pages: 250 words: 87,722

Flash Boys: A Wall Street Revolt by Michael Lewis

automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, latency arbitrage, pattern recognition, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund

He places bets in the casino on every game and waits for other gamblers to take the other side of those bets. There’s no guarantee that anyone will do so; but if they do, he’s certain to win. In his investigation of the people who managed Credit Suisse’s dark pool, one of the first things Schwall noticed was the guy in charge of electronic trading: Josh Stampfli, who had joined Credit Suisse after seven years spent working for Bernie Madoff. (Madoff had pioneered the idea of paying brokers for the right to execute the brokers’ customers’ orders, which should have told people something but apparently did not.) This, of course, only heightened Schwall’s suspicions, and sent him digging around in old articles in trade journals about Credit Suisse’s dark pool.†† There he found references and allusions that made sense only if Credit Suisse had planned, right from the start, to be deeply involved with high-frequency trading firms.


pages: 237 words: 82,266

You Say Tomato, I Say Shut Up by Annabelle Gurwitch

Atul Gawande, Bernie Madoff, big-box store, Donald Trump, Donner party, Exxon Valdez, Joan Didion, Mahatma Gandhi, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Yogi Berra

“In the running of schools, businesses, in planning war, in caring for the sick and injured, negative thinking may be exactly what we need.” It isn’t a stretch to see that these same skills are exactly what are needed to run a family.* In fact, numerous credible sources see a direct correlation between a reliance on positive thinking, which lulls people into optimistic complacency and overconfidence, and lack of oversight, fueling everything from the housing downturn, the stock market debacle, and the Bernie Madoff scandal. If anything puts me in an early grave, I predict it will be the stress of dealing with the health-insurance industry, whose own mission statement appears to be: “Band together to make it as difficult as possible for people to receive the health care benefits they pay for.” By 1:30 a.m., we’d come as close to a marital mission statement as we’ve ever come: “Our shared vision is to realize our dream of divergent futures.”


pages: 280 words: 85,091

The Wisdom of Psychopaths: What Saints, Spies, and Serial Killers Can Teach Us About Success by Kevin Dutton

Asperger Syndrome, Bernie Madoff, business climate, corporate governance, corporate social responsibility, delayed gratification, epigenetics, Fellow of the Royal Society, G4S, impulse control, iterative process, John Nash: game theory, meta analysis, meta-analysis, Nicholas Carr, Norman Mailer, place-making, RAND corporation, Ronald Reagan, Steve Jobs, Steven Pinker, theory of mind, ultimatum game

Both plausible. But wrong. The answer, assuming you think like a psychopath, is this: because she was hoping the man would turn up again at her sister’s funeral. If this was the solution that you came up with … don’t panic. Actually, I lied. Of course it doesn’t mean you think like a psychopath. Like a great many things you stumble upon on the Internet, this tale contains about as much truth as Bernie Madoff’s profit-and-loss account. Sure, on the face of it, the woman’s strategy is certainly psychopathic, there’s no disputing that: cold, ruthless, emotionless, and myopically self-interested. But unfortunately, there’s a problem. When I gave this test to some real psychopaths—rapists, murderers, pedophiles, and armed robbers—who’d been properly diagnosed using standardized clinical procedures, guess what happened?


pages: 288 words: 81,253

Thinking in Bets by Annie Duke

banking crisis, Bernie Madoff, Cass Sunstein, cognitive bias, cognitive dissonance, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, en.wikipedia.org, endowment effect, Estimating the Reproducibility of Psychological Science, Filter Bubble, hindsight bias, Jean Tirole, John Nash: game theory, John von Neumann, loss aversion, market design, mutually assured destruction, Nate Silver, p-value, phenotype, prediction markets, Richard Feynman, ride hailing / ride sharing, Stanford marshmallow experiment, Stephen Hawking, Steven Pinker, the scientific method, The Signal and the Noise by Nate Silver, urban planning, Walter Mischel, Yogi Berra, zero-sum game

Offering paid vacation leave makes a job more attractive but, unlike offering free dining and exercise facilities, encourages them to spend time away from work. Hiring an employee, like offering a bet, is not a riskless choice. Betting on hiring the wrong person can have a huge cost (as the CEO who fired his president can attest). Recruitment costs can be substantial, and every job offer has an associated opportunity cost. This is the only person you can offer this opportunity. You might have dodged the cost of hiring Bernie Madoff, but you might have lost the benefit of hiring Bill Gates. The John Hennigan story seems so unusual because it started with a discussion about what Des Moines was like and ended with one of the people in the discussion moving there the next day. That happened, though, because when you are betting, you have to back up your belief by putting a price on it. You have to put your money where your mouth is.


pages: 306 words: 82,765

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb

availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, Brownian motion, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, David Graeber, disintermediation, Donald Trump, Edward Thorp, equity premium, financial independence, information asymmetry, invisible hand, knowledge economy, loss aversion, mandelbrot fractal, mental accounting, microbiome, moral hazard, Murray Gell-Mann, offshore financial centre, p-value, Paul Samuelson, Ponzi scheme, price mechanism, principal–agent problem, Ralph Nader, random walk, rent-seeking, Richard Feynman, Richard Thaler, Ronald Coase, Ronald Reagan, Rory Sutherland, Silicon Valley, Steven Pinker, stochastic process, survivorship bias, The Nature of the Firm, transaction costs, urban planning, Yogi Berra

The IYI has been wrong, historically, about Stalinism, Maoism, GMOs, Iraq, Libya, Syria, lobotomies, urban planning, low carbohydrate diets, gym machines, behaviorism, trans-fats, Freudianism, portfolio theory, linear regression, HFCS (High-Fructose Corn Syrup), Gaussianism, Salafism, dynamic stochastic equilibrium modeling, housing projects, marathon running, selfish genes, election-forecasting models, Bernie Madoff (pre-blowup), and p-values. But he is still convinced that his current position is right.fn1 NEVER GOTTEN DRUNK WITH RUSSIANS The IYI joins a club to get travel privileges; if he is a social scientist, he uses statistics without knowing how they are derived (like Steven Pinker and psycholophasters in general); when in the United Kingdom, he goes to literary festivals and eats cucumber sandwiches, taking small bites at a time; he drinks red wine with steak (never white); he used to believe that dietary fat was harmful and has now completely reversed himself (information in both cases is derived from the same source); he takes statins because his doctor told him to do so; he fails to understand ergodicity, and, when explained to him, he forgets about it soon after; he doesn’t use Yiddish words even when talking business; he studies grammar before speaking a language; he has a cousin who worked with someone who knows the Queen; he has never read Frédéric Dard, Libanius Antiochus, Michael Oakeshott, John Gray, Ammianus Marcellinus, Ibn Battuta, Saadia Gaon, or Joseph de Maistre; he has never gotten drunk with Russians; he never drinks to the point where he starts breaking glasses (or, preferably, chairs); he doesn’t even know the difference between Hecate and Hecuba (which in Brooklynese is “can’t tell sh**t from shinola”); he doesn’t know that there is no difference between “pseudointellectual” and “intellectual” in the absence of skin in the game; he has mentioned quantum mechanics at least twice in the past five years in conversations that had nothing to do with physics.


pages: 261 words: 81,802

The Trouble With Billionaires by Linda McQuaig

"Robert Solow", battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, British Empire, Build a better mousetrap, carried interest, collateralized debt obligation, computer age, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Douglas Engelbart, Douglas Engelbart, employer provided health coverage, financial deregulation, fixed income, full employment, George Akerlof, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invention of the wheel, invisible hand, Isaac Newton, Jacquard loom, Joseph-Marie Jacquard, laissez-faire capitalism, land tenure, lateral thinking, Mark Zuckerberg, market bubble, Martin Wolf, mega-rich, minimum wage unemployment, Mont Pelerin Society, Naomi Klein, neoliberal agenda, Northern Rock, offshore financial centre, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, pre–internet, price mechanism, purchasing power parity, RAND corporation, rent-seeking, rising living standards, road to serfdom, Ronald Reagan, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, trickle-down economics, Vanguard fund, very high income, wealth creators, women in the workforce

Weill, former head of Citigroup, whose extensive lobbying efforts helped kill the Glass–Steagall Act, thereby undermining regulatory supervision of financial markets and allowing Wall Street to turn itself into a giant casino. Indeed, much of Wall Street would fit in one way or another into this non-poster-boy category of billionaires. (And we haven’t even mentioned the likes of out-and-out billionaire crooks such as Bernie Madoff, who, in crossing the line into obvious criminality, have lost any claims to deserving their fortunes.) Of course, if contribution to society were the criterion for determining an individual’s compensation, the income parade would look very different. By most people’s standards, the giants reaching up into the clouds would be people such as nurses, doctors, teachers and social workers, while the bankers and hedge fund managers would find themselves among the dwarves.


pages: 268 words: 81,811

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History by Liam Vaughan

algorithmic trading, backtesting, bank run, barriers to entry, Bernie Madoff, Black Swan, Bob Geldof, centre right, collapse of Lehman Brothers, Donald Trump, Elliott wave, eurozone crisis, family office, Flash crash, high net worth, High speed trading, information asymmetry, Jeff Bezos, Kickstarter, margin call, market design, market microstructure, Nick Leeson, offshore financial centre, pattern recognition, Ponzi scheme, Ralph Nelson Elliott, Ronald Reagan, sovereign wealth fund, spectrum auction, Stephen Hawking, the market place, Tobin tax, tulip mania, yield curve, zero-sum game

As he later recounted to a friend: “I tried to get a broker’s deal with RCG,” the Rosenthal Collins Group, one of the biggest clearers in the United States. “They said, ‘How much do you make?’ and I said, ‘On a good day, nine hundred grand.’ They said, ‘That’s crazy.’ ” A week later, after Nav sent them his statements, RCG turned him down. When he asked why, they told him they didn’t think it was possible for a trader in his bedroom to make that much money. “They said they believe that it’s a Ponzi scheme,” Nav recounted. “They thought I was Bernie Madoff!” Nav hoped he’d found an alternative when Knight Capital agreed to take him on, but then the firm lost $460 million and he was left brokerless once again. Unable to trade and with few other interests, Nav returned to the proverbial garage to work on his trading machine. The layering algorithm he’d created in 2009 with help from Hadj at Trading Technologies had worked exactly as planned, firing blocks of sell orders into the market to drive prices lower that stayed far enough from the prevailing price to almost never be hit.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

"Robert Solow", Airbnb, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

Nor was it different from past entrepreneurship because it could raise capital to fund new enterprises. Merchants, explorers, and voyagers had done that for centuries, but the fortunes of the trade they created never spread widely in the economy. The premodern economic system was full of speculative capital and asset bubbles, such as the Dutch tulip mania in the 1600s or the French Mississippi finance bubble in the 1700s. All past ages have had their own financial sharks and Bernie Madoff-type hustlers. A defining characteristic of modern capitalist entrepreneurship, to follow economic historian Alexander Gerschenkron, was rather one of time: investments in big innovation needed far longer to generate expected economic gains. One of the factors separating past entrepreneurs from the new generation emerging after the modernization of entrepreneurship was the latter’s understanding of uncertainty as a necessary ingredient to build private and societal profits.42 The twentieth century witnessed ideological experiments with other economic systems, but capitalism, for all its faults, has stood the test of time.


pages: 827 words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business cycle, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, disruptive innovation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, global pandemic, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, plutocrats, Plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sam Altman, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

Skilling was anomaly personified, a bad apple and nothing more. And HBS has never claimed to have eliminated all bad apples from the world, only to be the best at teaching good apples how to stay that way. But to isolate the fraud like that misses the point entirely. Few people actually set out to commit fraud, and that includes Jeff Skilling. Except in the case of a truly talented con artist such as Bernie Madoff, the fraud almost always comes just before the very end, at the point when you’re flat out of new ideas but notice a couple of bad ones lying around. What’s more, the speed with which you can move from day one on the job to running out of new ideas has nothing to do with your ethical compass but rather everything else you bring to the job. It gets a little complicated in the details, but the following is a short summary of those things that Skilling brought to the company, which combined to then bring Enron to the point where he felt he had no choice but to commit fraud. 1.He deemphasized the distinctive capabilities of the company—knowing how to build power stations and the like—and promoted those that most anyone can do, such as negotiating, financing, lobbying, and trading.

Chairman of the Securities and Exchange Commission from 2005 through 2009, Cox later claimed that his agency had no power to keep the financial giants that became leveraged to the point of collapse from doing so, but that’s simply not true. At the very least, he could have demanded more disclosure out of the likes of Merrill Lynch and Lehman Brothers. Instead, he oversaw a dwindling SEC staff. He also missed Bernie Madoff’s towering fraud. Stan O’Neal (’78). The CEO of Merrill Lynch from 2003 to 2007, O’Neal is the perfect example of the big-bank CEO who threw caution to the wind in pursuit of profit. By mid-2006, just before the subprime dam broke, Merrill had $41 billion in subprime CDOs and mortgage bonds on its books.5 John Thain (’79). Thain followed O’Neal as CEO of Merrill, serving from 2007 to 2009. As the crisis unfolded, he threw huge piles of money at old friends from Goldman Sachs, and was fired after a surprise $15 billion loss shortly after the firm’s sale to Bank of America.


Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Albert Einstein, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, Lao Tzu, Long Term Capital Management, market bubble, market microstructure, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Sharpe ratio, systematic trading, the scientific method, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

If you are able to apply such an unsound principle, you can keep on averaging down by buying 200 at 44, then 400 at 41, 800 at 38, 1600 at 35, 3200 at 32, 6400 at 29, and so on.1 “Don’t frown, double down!” Not smart strategy. Losses are a part of the game. You want no losses? You want positive returns every month? It does not work that way, that is, not unless you were lucky enough to be invested in the Bernard Madoff Ponzi-scheme—which has resulted in assorted criminal convictions and a few suicides. Losses are not your problem. It’s how you react to them. Ignore losses with no plan, or try to double down on your losses to recoup, and those losses will come back like a Mack truck to run over your account. You can’t win if you are not willing to lose. It’s like breathing in, but not breathing out.2 Slow everything down.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, business cycle, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

The belief in future value is just as much an asset as a bar of gold is. John Kenneth Galbraith even pointed out that embezzlement creates capital, since both the embezzler (correctly) and the embezzlee (incorrectly) think they have the “bezzle,” and act and spend accordingly. One of the exacerbating factors in financial crises is the disappearance of this bezzle, as falling asset prices cause frauds to be revealed. Bernie Madoff is just the biggest in a long line. Whether capital is created honestly or dishonestly is important legally, but what matters to an economist is how the capital is allocated. If it is put to good use there is a net increase in wealth. That brings us to the second major function of financial markets, capital allocation. One of the silly things people who don’t understand finance like to say is Wall Street should stick to raising new capital for businesses and get rid of all that casino trading that just transfers money from one speculator to another without accomplishing any economic good.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

"Robert Solow", Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

In keeping interest rates too low for too long, Greenspan and Bernanke distorted the price signals that the market sends and created the conditions for an unprecedented housing bubble. Greed is another oft-mentioned factor; stupidity, a third. (How could those boneheads on Wall Street not have known that lending money to folks with no income, no jobs, and no assets—the infamous “NINJA” mortgage loans—was a bad idea?) In the wake of the revelations about Bernie Madoff and his multibillion-dollar Ponzi scheme, criminality is yet another thing to consider. At the risk of outraging some readers, I downplay character issues. Greed is ever present: it is what economists call a “primitive” of the capitalist model. Stupidity is equally ubiquitous, but I don’t think it played a big role here, and neither, with some obvious exceptions, did outright larceny. My perhaps controversial suggestion is that Chuck Prince, Stan O’Neal, John Thain, and the rest of the Wall Street executives whose financial blundering and multimillion-dollar pay packages have featured on the front pages during the past two years are neither sociopaths nor idiots nor felons.


pages: 510 words: 141,188

Bottle of Lies: The Inside Story of the Generic Drug Boom by Katherine Eban

Affordable Care Act / Obamacare, Bernie Madoff, global pandemic, Mahatma Gandhi, Nelson Mandela, offshore financial centre, old-boy network, Ponzi scheme, rolodex, Ronald Reagan, Skype, Upton Sinclair, urban planning

An event several weeks earlier, also organized by TAFEF, had helped Thakur feel more at home in a community he could rightfully call his own. For the first time in its history, TAFEF had invited all the whistleblowers it had helped over the years to spend a weekend together in the Florida Keys. About eighteen of them came. Some were unknown, while others were marquee names, like the financial sleuth Harry Markopolos, who had first alerted the Securities and Exchange Commission to Bernie Madoff’s Ponzi scheme. Cheryl Eckard, a former quality assurance manager at GlaxoSmithKline, helped host the event. She’d been granted $96 million, the largest whistleblower recovery ever, for exposing nonsterile manufacturing at a GSK plant in Puerto Rico. Patrick Burns, the acting executive director of Taxpayers Against Fraud, had been worried about getting whistleblowers together: “They don’t herd well,” he later said.


pages: 372 words: 92,477

The Fourth Revolution: The Global Race to Reinvent the State by John Micklethwait, Adrian Wooldridge

Admiral Zheng, affirmative action, Affordable Care Act / Obamacare, Asian financial crisis, assortative mating, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bernie Madoff, Boris Johnson, Bretton Woods, British Empire, cashless society, central bank independence, Chelsea Manning, circulation of elites, Clayton Christensen, Corn Laws, corporate governance, credit crunch, crony capitalism, Deng Xiaoping, Detroit bankruptcy, disintermediation, Edward Snowden, Etonian, failed state, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, income inequality, Khan Academy, Kickstarter, knowledge economy, Kodak vs Instagram, labor-force participation, laissez-faire capitalism, land reform, liberal capitalism, Martin Wolf, means of production, minimum wage unemployment, mittelstand, mobile money, Mont Pelerin Society, Nelson Mandela, night-watchman state, Norman Macrae, obamacare, oil shale / tar sands, old age dependency ratio, open economy, Parag Khanna, Peace of Westphalia, pension reform, pensions crisis, personalized medicine, Peter Thiel, plutocrats, Plutocrats, popular capitalism, profit maximization, rent control, rent-seeking, ride hailing / ride sharing, road to serfdom, Ronald Coase, Ronald Reagan, school choice, school vouchers, Silicon Valley, Skype, special economic zone, too big to fail, total factor productivity, War on Poverty, Washington Consensus, Winter of Discontent, working-age population, zero-sum game

These will have to support ever more old people: The old-age dependency ratio (the number of over-sixty-fives as a proportion of the number of twenty-to-sixty-four-year-olds) will rise from 28 percent to 58 percent—and that is assuming that the EU lets in more than a million young immigrants a year.9 Across the Atlantic, America continues to tax itself like a small-government country and spend like a big-government one while hiding its true liabilities by using tactics that would have made Bernie Madoff blush. With the baby boomers aging, the Congressional Budget Office reckons the bill for medical benefits alone will rise by 60 percent over the next decade—its deficit may be manageable now, but the United States faces a choice: Rein in those entitlements, raise taxes to extraordinary levels, or stagger from crisis to crisis. Every six months the International Monetary Fund publishes its fiscal monitor, in which Statistical Table 13a has the exciting title “Advanced Economies: Illustrative Adjustment Needs Based on Long-Term Debt Targets”; its final column makes a guess, once age-related spending has been factored in, about how much governments need to cut costs or raise revenues in order to bring down their debt to reasonable levels by 2030.


pages: 257 words: 90,857

Everything's Trash, but It's Okay by Phoebe Robinson

23andMe, Airbnb, Bernie Madoff, Bernie Sanders, crack epidemic, Donald Trump, double helix, Downton Abbey, Elon Musk, feminist movement, Firefox, Lyft, Mahatma Gandhi, Mark Zuckerberg, Rosa Parks, Silicon Valley, Silicon Valley startup, Tim Cook: Apple, uber lyft

It’s kind of like how people are constantly proclaiming how busy they are even though a lot of times we’re goofing off on social media or looking up our potential compatibility with someone based on our zodiac signs. Oh, right. I forgot. I’m the only person who has done this. Riiiiiiiiiiight. Look, whether you wanna fess up or not, I know a lot of you mofos are click-clackin’ on your laptops like you’re the court stenographer during the Bernie Madoff trial, all so you can see if it’s in the stars for you to splurge the extra five dollars to get you and your future boo’s names embroidered on his and hers towels from Bed Bath & Beyond. But you know what I’m talking about. In America, we pride ourselves on being busy and grinding all the time. But perhaps more importantly, we pride ourselves on documenting how busy we are, no matter how true that is or isn’t for us.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, transaction costs, two-sided market, value at risk, yield curve

Inherent psychological biases lead investors to make distorted risk assessments and ultimately irrational investment decisions when comparing hedge funds with traditional investments. 1 We use the fund of funds index rather than the composite index of individual funds to represent hedge fund performance because, as will be explained in Chapter 14, hedge fund indexes based on individual funds are significantly biased. 2 Bernie Madoff may have been even more prominent, but his was a Ponzi scheme rather than a hedge fund. Madoff simply made up performance results and never did any trading. Also, Madoff lacked all the normal structural checks of a hedge fund, such as an independent broker and administrator. 3 New York: Random House, 2000. This book was the source for the LTCM discussion in this section. 4 In 2003, President Levy Mwanawasa of Zambia banned the distribution of donated genetically modified food to his starving population.


pages: 284 words: 92,688

Disrupted: My Misadventure in the Start-Up Bubble by Dan Lyons

activist fund / activist shareholder / activist investor, Airbnb, Ben Horowitz, Bernie Madoff, bitcoin, call centre, cleantech, cloud computing, corporate governance, disruptive innovation, dumpster diving, fear of failure, Filter Bubble, Golden Gate Park, Google Glasses, Googley, Gordon Gekko, hiring and firing, Jeff Bezos, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, Menlo Park, minimum viable product, new economy, Paul Graham, pre–internet, quantitative easing, ride hailing / ride sharing, Rosa Parks, Sand Hill Road, sharing economy, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, Snapchat, software as a service, South of Market, San Francisco, Stanford prison experiment, Steve Ballmer, Steve Jobs, Steve Wozniak, telemarketer, tulip mania, uber lyft, Y Combinator, éminence grise

(The investor later walked back that comment, saying it was a “poor choice of words.”) Start-ups seem to believe it is okay for them to bend rules. Some, like Uber and Airbnb, have built their businesses by defying regulations. Then again, if laws are stupid, why follow them? In the World According to Start-ups, when tech companies cut corners it is for the greater good. These start-up founders are not like Gordon Gekko or Bernie Madoff, driven by greed and avarice; they are Rosa Parks and Martin Luther King Jr., engaging in civil disobedience. There’s also a sense among start-ups that it’s okay for them to break the rules because they’re underdogs competing against huge opponents; they’re David, firing his slingshot at Goliath. Another argument is that the big guys break just as many rules as the little guys. Everybody cheats, and only suckers drive inside the lines.


pages: 345 words: 92,849