Ponzi scheme

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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

.; Madoff victims; and specific agencies, funds, and individuals arbitrage and, 38–41, 52 arrest of, 12–16, 19–22, 209, 211, 216–17, 222 assets of, frozen and sold, 230, 238, 245, 305, 316–18 audits of, 149–50, 254–55 automation and, 42–49, 103 Avellino & Bienes and, 50–56, 77–78, 102 bail and, 18–20, 224–27, 237–39, 252 bankruptcy problems exposed by arrest of, 327 Bayou scandal and, 147–49 Bear Stearns and, 186–87 beginning of fraud by, xxiii, 29–30, 41, 81, 85–86, 90–94, 113, 225, 251–52, 271, 274, 298, 333–35 brokerage firm founded by, and OTC market, 24–27, 34–36 cash crisis of 1962 and borrowing by, 24–30, 225, 335 cash crisis of 1987 and, xxiii, 84–87, 90–91, 335–36 cash crisis of 1992 and, 94–95 cash crisis of 2005–6 and near exposure of, 146–62 cash crisis of 2005–6 and recovery by, 166–67, 173–76 cash crisis of 2008 and lead-up to collapse of, 21, 193–209 cash flows of 1990s, 81, 90–94 cash flows of 2002, 132–33 cash flows of 2007, 182–83 cash withdrawal requests of 2008 and, 1, 183, 187–88, 190–93, 197, 200–209, 256 cash withdrawals of 1994–2003, 132–36 charities and, 3, 88, 110–11, 114, 183, 337 checks written before confession, 6, 18, 314 childhood and education of, xxii–xxiii, 24, 30–35 Cincinnati Stock Exchange and, 68, 76, 86 civil lawsuits by victims of, 299–302 clawback lawsuits and, 257–58, 266–67, 288, 294–95 Cohmad formed by, 70–75, 149 commission payments and, 117, 136, 151 confession of, xxi–xxii, 1–12, 207–9, 282 congressional hearings on, 267–68 death of parents and, 48 death of son Mark and, 323 derivatives and, 174–76 DiPascali and fraud of, 81–82, 207–9, 297–99 DTCC and, 119–20, 150–51, 159, 164, 245, 255, 272, 296 early investors and introducers and, 43, 57–69, 92, 100–102, 110–15, 148 economic weakness in 2007 and, 176–80 employee money managed by, 182 employee salaries and, 178–79 exclusivity and secrecy and, 59–60, 93, 116–17, 134 extramarital affair allegations and, 277, 288–89 Fairfield Greenwich and, 89–91, 104–10, 187–88, 190–93 falsification of records by, xxiii, 41, 99–100, 102–3, 117–20, 122–27, 129, 139–46, 150–51, 153, 158–59, 163–64, 179, 272–73, 296, 309–10 family illnesses and, 135–36 family of, and impact of crime, 278, 281–90 family of, and questions about knowledge of fraud, 281–84, 333, 337 family wealth and, 160–61, 178, 182, 258, 321, 334 father’s brokerage failure and, 31–32, 35–36 feeder fund fees and, 87, 117 feeder funds begun by father-in-law, 36–39, 41, 50 feeder funds begun by nonfamily members, 102, 104–6, 119–21, 123, 130–32 feelings of, for family, 272 feelings of, for victims, xx, xxii, 333 foreign funds and, 65, 74–75, 84, 166–71, 243–44, 335 French town house, 177, 194, 239, 274, 318 guilty plea of, 247–53, 326 hedge funds and, 87–88, 90–91, 104–5, 119, 123, 125–32, 136, 144–46, 171–73 house arrest of, and gifts to family, 229–30, 237–38 humanity of, xxi, 345–48 IRAs and, 126–27 Jewish connections and, 88–89, 111, 114, 212–15 lawsuits arising from, 295–97 lessons of, for investors and regulators, 339–47 Levy estate executor, 63, 148 Lipstick Building office of, 2, 71–72, 81, 90, 103, 112, 120 loans by, to family and staff, 179, 181, 189–90 London office opened by, 48, 68–69, 82 losses of, and final account statements, 256 losses of, and length of fraud, 279 losses of, and number of victims, 211–16 lying by, xxii–xviii Manhattan penthouse of, 18, 80–81, 274, 280–81, 305, 316 market making and, 40–41, 80, 82–84, 136, 199, 245 Markopolos accusations and, 122–25, 153–59, 162–66 marries Ruth Alpern, 33–35, 47 modern market shaped by, xxiv Montauk beach house, 18, 69, 193, 226, 274, 305, 316 NASDAQ and, 80, 84, 86–87, 107–8 options trading not reported, 142 Palm Beach home and, 18, 109, 114, 183–84, 226, 274, 305 pension funds and, 127–32 Philoctetes speech of 2007, 179–80 Picower and, 63–65, 132–36, 161–62, 333 Picower settlement and, 330–31 Ponzi scheme of, and legitimate firm, 136, 152–53, 160, 251 Ponzi scheme of, described to federal prosecutors, 225–27 Ponzi scheme of, enabled by Wall Street, xxiv Ponzi scheme of, seductiveness of, 339–40 Ponzi scheme of, size of, xxiii, 117, 180, 247, 260 prison interviews of, xvii–xx, xxii, 333–38, 344–345 reason for not fleeing, xxiii–xxiv, 339 relationship with brother, Peter, 48–50, 292–95 relationship with wife, Ruth, 288, 337–38 relationship with sons, xx, 285, 333, 338 returns of, 25, 38, 50–51, 53–54, 56, 67, 76, 80, 93–94, 112–13, 296 Roslyn house of, 47, 69–71, 167 SEC failures exposed by arrest of, 227–30, 272 SEC inquiries of 1992–2005, 152–56, 162 SEC inspector Kotz interviews, 270–72 SEC investigation of 1992 and, 94–104, 335 SEC investigation of 2003 and, 139–40, 145–46 SEC investigation of 2005 and, 139–46 SEC investigation of late 2005–6 and, 153–60, 162–66 SEC investigations of, revealed in 2009, 302–3 SEC shutdown of Avellino & Bienes and, 102 sentencing of, 273, 275–80, 332–33 SIPC liquidation and, 219–22, 235–37, 260–61 small investors and, 171–73 sole responsibility claim of, 225, 252 Sorkin as lawyer for, and conflict issue, 242–43 split-strike conversion strategy and, 74–76, 84–85, 94, 106, 112 suspicions of, 113, 117–29, 131–32, 134–35, 138, 141–44, 150–51, 176–77, 185, 188–89, 203–4, 231, 318, 333 synthetic trades by, and taxes, 85 third market and, 82, 108 trading strength affirmed, 118 travels to France, 179, 194 trust and credibility of, 28, 41–42, 48, 61, 63, 66–68, 82, 86–87, 89–90, 93, 112, 138, 175–76, 214–15, 343, 347 victim compensation and, 338 wealth and lifestyle of, xx, 69–70, 80–82, 136–38, 177–79 yacht and slip of, 177, 179, 239, 305, 318 Madoff, Deborah (former daughter-in-law), 284 Madoff, Marion (sister-in-law), 47 Madoff, Mark (son), 43, 47, 69, 82–83, 136, 152, 178, 230, 276, 288 accusations vs., 281–91 father’s arrest and, 4–13, 19, 230, 324 lawsuits vs., 285–7, 294, 321, 324 loans to, 161, 189–90, 198 suicide of, 321–23, 345 wife changes last name, 285, 321 Madoff, Peter (brother) Cincinnati Stock Exchange and, 68 Cohmad and, 72 death of son and, 5, 135, 161 DiPascali and, 81 early life of, 31, 47 Engler and, 66 family redemption checks and, 335 gifts and loans to, 179, 181–82 hedge funds and, 178 lawsuits vs., 50, 292–95 London office and, 48, 69 Madoff confesses to, 5–8 Madoff’s arrest and, 14–15, 17, 22, 226, 230 Mark’s suicide and, 323 Palm Beach home of, 184 role of, in firm, 3, 47–50, 82, 86, 136, 152, 181 Madoff, Ralph (father), 30–31, 33, 35–36, 48 Madoff, Roger (nephew) illness and death of, 3, 5, 135, 161, 285 Madoff, Rose (grandmother), 30 Madoff, Ruth Alpern (wife), 186, 276, 335 accusations vs., 281–84, 286–91 assets forfeited by, 230, 237–38, 274–75, 280–81, 288, 316–18 charities and, 3, 183 children and, 43, 47 criminal charges not filed vs., 274 early life of, 33–34 early work for firm, 26 family illnesses and, 135–36 feelings of, for victims, 252, 278 firm Christmas party and, 11–12, 182 friendships and, 67, 114, 148 lawsuits vs., 288, 294, 338 Madoff’s arrest and, 13, 15–17, 19–20, 226, 229–30, 237, 275 Madoff’s confession and, 6–9, 18 mails jewelry to family, 230, 238 Manhattan penthouse and, 81 marries Madoff, 33–35 son Mark’s suicide and, 323 stands by husband after arrest, 332, 337–38 year before arrest and, 3–4, 179, 184, 193–94 Madoff, Shana (niece), 17, 47, 73, 135–36, 179, 237, 294, 302, 323 Madoff, Solomon David (grandfather), 30 Madoff, Sondra (sister), 30, 47 Madoff, Stephanie (daughter-in-law), 189, 285, 322–23 Madoff, Sylvia Muntner (mother), 30–31, 48 Madoff family foundation, 135–36, 340 Madoff Securities International, Ltd.

It was in this setting, he says, that his Ponzi scheme began. As long as most of his clients left their balances intact, “rolling over” their reported profits and making few if any withdrawals, he could pay out the occasional disbursement from the flood of new money coming in. It is the classic genesis of a Ponzi scheme on Wall Street. A money manager falls short of cash to cover some expense or placate some customer or deliver on some promise, and he steals a little money from client accounts. The rationale is always that he will be able to pay off his theft before it is detected. Perhaps this occasionally happens—those are the Ponzi schemes we never learn about. More typically, the sum of stolen money grows much faster than the honest profits do, and the Ponzi scheme rolls on towards certain destruction.

He later recalled that, in his first telephone conversation with Cheung, he questioned her inadequate knowledge of derivatives and dismissed some of her earlier successful accounting fraud cases. He said later that she seemed “offended” by this. In fact, his questions were totally irrelevant: No knowledge of derivatives is required to investigate a Ponzi scheme. If it’s truly a Ponzi scheme, there are no derivatives; there’s just a liar with a bank account. In fact, Cheung’s previous experience might have been more relevant, since accounting fraud investigations sometimes involve verifying whether the assets shown on the balance sheet actually exist, the precise question a Ponzi scheme investigation must answer. If Cheung had known more about Ponzi schemes, she would have known how to deal with Markopolos’s arrogant and misguided questions. But she didn’t. And if Markopolos had known more about dealing with people, he never would have asked those offensive questions in the first place.


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

An older woman who had been using the returns to care for her retarded brother had lost everything; she didn’t know where the two of them would live. A CPA on Long Island had lost both his and his wife’s retirement funds as well as their children’s college funds. “I just got those redemptions and kept investing more. After a while I never took anything out,” he said, casually defining the horror of a Ponzi scheme. There was nothing Ocrant could do but listen and sympathize. So while I talked about Madoff’s Ponzi scheme in the abstract, Mike Ocrant knew what a real Ponzi scheme smelled like, and he knew the human damage it did. To Ocrant, this just didn’t smell like a Ponzi scheme. He didn’t know exactly what it was, possibly front-running, but he just couldn’t believe the evidence. When he returned to New York he began his education, spending several hours on the phone with Frank, learning the language of options, and like any good reporter, trying to punch holes in our theory.

The very first thing the SEC employees who received my submission should have done is gone directly to the SEC database on their computers to see if the red flags I raised were comparable to information learned about other Ponzi schemes. Unfortunately, that would have been impossible because there is no existing SEC database like that. The SEC should build a strong online knowledge center for its staff. In this case when staffers keyed in “Ponzi” they would have been able to find diagnoses of past Ponzi schemes and several checklists teaching them what to look for, what questions to ask, and how to most efficiently solve such cases. A Ponzi scheme is actually one of the easiest fraud schemes to detect because there is no underlying investment product and no trading, while the assets are being diverted to pay offinvestors. Yet this case was assigned to SEC staffers who had absolutely no experience and little knowledge of Ponzi schemes, and they really had no place within the SEC to go to learn about them.

In 2003, Reed Slatkin, cofounder of Internet service provider EarthLink, was sentenced to 14 years in prison for a Ponzi scheme that swindled investors out of approximately $250 million. In 2008, a Minnesota businessman named Tom Petters was accused by the government of swindling investors out of as much as $3.5 billion. Neil and his co-workers at Benchmark Plus had determined earlier that Petters was likely to be a fraud. There were several reasons I believed almost right from the beginning that Madoff’s operation was a Ponzi scheme rather than front-running or even something more creative. We found out quickly that Madoff was continually on the prowl for new money—although obviously we had no idea of the full extent of that this early in our investigation—and by definition a Ponzi scheme requires a continuous flow of new money to pay old investors.


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

His was a useless, wasted, destructive life, but he gave his name to history. A Ponzi scheme is any financial adventure in which depositors can only be paid out by using the money of new investors. As long as the scheme is expanding, everything looks fine. 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.

Copyright Act of 1976, no part of this publication may be reproduced, distributed or transmitted in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. ‘I am not a champion of lost causes, but of causes not yet won.’ Norman Thomas, 1930 I wish my mum were still alive to enjoy and support Planet Ponzi. This book is for her; she’d have loved it. A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity. US Securities and Exchange Commission If the maintenance of public credit, then, be truly so important, the next enquiry which suggests itself is, by what means it is to be effected?

Naturally, I’m aware that my claim sounds implausible, but I hope it doesn’t strike readers as entirely implausible. After all, just a few years ago in 2008–9, part of the Ponzi scheme was laid bare for all to see in the shape of the subprime mortgage bust and the consequent banking crisis. That crisis was already the largest Ponzi scheme in history, so the track record is there. As for what’s happening today, this book will attempt a patient accounting of the scheme, its debts, its losses, its strategies of concealment. In particular, we’ll find ourselves, again and again, running across the following ingredients, key to any Ponzi scheme: exponentially increasing liabilities‌—‌or, in plain English, rapidly mounting debt; crappy, nonexistent, or inadequate assets; deceitful or nonexistent accounting; feeble, inert, or toothless regulators; a get-rich-quick culture, for preference salted with a whole array of inappropriate incentives; stupid, ignorant, lazy investors‌—‌the greedier, the better; and an astonishing capacity for self-delusion.


pages: 319 words: 106,772

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Andrei Shleifer, asset allocation, banking crisis, Benoit Mandelbrot, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, urban decay, Y2K

(Or, possibly, he or she may imagine that with luck, fantastic investment opportunities will be found later, thereby saving the scheme.) We know that Ponzi schemes have been successful in making their perpetrators rich, at least until they were apprehended. Charles Ponzi attracted 30,000 investors in 1920 and issued notes totaling $15,000,000, all within seven months.24 In a recent celebrated story, a former housewife, Raejean Bonham, set up an enormous Ponzi scheme on her own in the tiny town of Fox in rural Alaska. She promised to pay 50% returns in two months and enticed 1,200 investors in forty-two states to pay her a total of between $10 and $15 million between 1989 and 1995.25 A particularly dramatic story emerged in Albania in 1996 and 1997 when a number of Ponzi schemes promising fantastic rates of return enticed a good share of the people of that country. Seven Ponzi schemes accumulated some $2 billion, or 30% of Albania’s annual gross domestic product.26 Enthusiasm for the schemes was so intense that in the 1996 local elections members of the ruling government party included symbols of the Ponzi scheme funds on their campaign posters, apparently wanting to gain some credit for the new wealth sources.

That others have made a lot of money appears to many people as the most persuasive evidence in support of the investment story associated with the Ponzi scheme—evidence that outweighs even the most carefully reasoned argument against the story. AMP L IF ICATIO N ME CH ANISMS 67 Speculative Bubbles as Naturally Occurring Ponzi Processes It would appear, by extrapolation from examples like those given in the previous section, that speculative feedback loops that are in effect naturally occurring Ponzi schemes do arise from time to time without the contrivance of a fraudulent manager. Even if there is no manipulator fabricating false stories and deliberately deceiving investors in the aggregate stock market, tales about the market are everywhere. When prices go up a number of times, investors are rewarded sequentially by price movements in these markets, just as they are in Ponzi schemes. There are still many people (indeed, the stock brokerage and mutual fund industries as a whole) who benefit from telling stories that suggest that the market will go up further.

There are still many people (indeed, the stock brokerage and mutual fund industries as a whole) who benefit from telling stories that suggest that the market will go up further. There is no reason for these stories to be fraudulent; they need only emphasize the positive news and give less emphasis to the negative. The path of a naturally occurring Ponzi scheme—if we may call speculative bubbles that—will be more irregular and less dramatic, since there is no direct manipulation, but the path may sometimes resemble that of a Ponzi scheme when it is supported by naturally occurring stories. The extension from Ponzi schemes to naturally occurring speculative bubbles appears so natural that one must conclude, if there is to be debate about speculative bubbles, that the burden of proof is on skeptics to provide evidence as to why Ponzi-like speculative bubbles cannot occur. Many of the major finance textbooks today, which promote a view of financial markets as working rationally and efficiently, do not provide arguments as to why feedback loops supporting speculative bubbles cannot occur.


pages: 416 words: 106,532

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar

Airbnb, altcoin, asset allocation, asset-backed security, autonomous vehicles, bitcoin, blockchain, Blythe Masters, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial innovation, fixed income, George Gilder, Google Hangouts, high net worth, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, RAND corporation, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, Uber for X, Vanguard fund, WikiLeaks, Y2K

This chapter will focus on Ponzi schemes, misleading asset issuers, and the cornering of markets (also known as “pump and dump” schemes). As we’ve mentioned, those who lack an understanding of bitcoin and cryptoassets often express their disdain and ignorance with the proclamation, “It’s just a Ponzi scheme.” So let’s start there. PONZI SCHEMES Ponzi schemes, also referred to as pyramid schemes, are the most dangerous type of misleading asset. While it got its name from Charles Ponzi, an Italian who lived from 1882 to 1949, it existed before he was born; he just made it famous. The idea is simple: new investors pay old investors. As long as there are enough new investors, old investors will continue to be rewarded handsomely. For example, if an operator of a Ponzi scheme offered 20 percent returns into perpetuity, some investors would be duped into initially believing the operator.

The scheme falls apart when people realize no real value has been created, and everything is founded upon a scheme to dupe new investors into paying old investors. Tragically, investors often don’t realize they are duping one another, and it is the operator of the Ponzi scheme who makes out handsomely. Before we turn to cryptoassets, let’s look at how Ponzi schemes have played out in traditional assets. Many think of bonds as a safe investment with steady cash flows. If they are issued by a government, then they also have the full backing of that government. As we will soon see, bonds have not always been safe, and in what has been labeled the first emerging market boom, many bonds turned out to be Ponzi schemes.1 For about a century after the equity bubbles brought on by the Mississippi Company2 and South Sea Schemes3 (we’ll cover the shady dealings of these companies in the next section), British investors stuck close to government-issued bonds.4 During the Napoleonic Wars from 1803 to 1815, the British government issued over 400 million pounds of bonds, providing plenty of opportunity to bond investors.

In fact, many longtime advocates of the space warn people not to invest more money than they’re willing to lose. Any good Ponzi operator would never say as much. How to Spot a Ponzi Scheme Disguised as a Cryptoasset The Ponzi scheme is a specific and easily identifiably structure that isn’t applicable to Bitcoin but could be to some phony cryptoassets. While a truly innovative cryptoasset and its associated architecture requires a heroic coding effort from talented developers, because the software is open source, it can be downloaded and duplicated. From there, a new cryptoasset can be issued wrapped in slick marketing. If the innovative investor doesn’t do proper due diligence on the underlying code or read other trusted sources who have, then it’s possible to fall victim to a Ponzi scheme. A new cryptoasset called OneCoin was met with much interest due to its promise of providing a guaranteed return to investors.


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

Recode, 19 September 2014. [76] “Manhattan U.S. Attorney And FBI Assistant Director Announce Securities And Wire Fraud Charges Against Texas Man For Running Bitcoin Ponzi Scheme”. Department of Justice, U.S. Attorney’s Office, Southern District of New York (press release), 6 November 2014. [77] Nate Raymond. “Texan gets one-and-a-half years in prison for running bitcoin Ponzi scheme”. Reuters, 21 July 2016. [78] Justin O’Connell. “Lawyer Reveals Details About the Man Behind Bitcoin’s $4.5 Million Ponzi Scheme”. Motherboard, 18 December 2015. [79] Wikipedia: Dunning-Kruger effect. From which another name for bitcoins, “Dunning-Krugerrands.” [80] “Risk of Bitcoin Hacks and Losses Is Very Real”. Reuters, 29 August 2016. [81] Kyt Dotson. “Third Largest Bitcoin Exchange Bitomat Lost Their Wallet, Over 17,000 Bitcoins Missing”.

It can be difficult to distinguish malice from incompetence. The general problem is that you don’t know who or where these people are, and they routinely just disappear with everyone’s money. Scams common to the cryptocurrency world include:59 Ponzi schemes: in which early investors are paid using money from later ones. 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!

(archive) [69] Vitalik Buterin. “Ponzi schemes: The Danger of High Interest Savings Funds”. Bitcoin Magazine, 31 May 2012. (archive) [70] Adrianne Jeffries. “Suspected multi-million dollar Bitcoin pyramid scheme shuts down, investors revolt”. The Verge, 27 August 2012. [71] yochdog. “The pirate speaks”. Bitcointalk.org Bitcoin Forum > Economy > Marketplace > Lending, 17 September 2012. (archive) [72] Killhamster. “pirateat40: It became Bill Cosby coins”. Buttcoin Foundation, 5 March 2014. (archive) [73] Jason Siebert. “SEC v. SHAVERS”. 21 July 2014. (archive) [74] Securities and Exchange Commission v. Shavers et al, U.S. District Court, Eastern District of Texas, No. 13-00416. [75] Jonathan Stempel. “Judge Awards $40.7 Million in SEC Case Over Bitcoin Ponzi Scheme”. Recode, 19 September 2014


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

Is There a Similarity Between Carry Bubbles and Ponzi Schemes? There is a clear similarity between the dynamic described in our description of carry bubbles and that of a Ponzi scheme. For example, the idea that the new carry bubble, created out of the carry crash, tends to be larger than the preceding carry bubble, is similar to the case of a Ponzi scheme that suffers a run. 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.

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. During the Lehman global crash, funds were being withdrawn from hedge funds, and Madoff’s Ponzi scheme, which with its vast notional size had already been in difficulty for some time, was unable to attract the inflows necessary to meet the demand for withdrawals. But imagine that Madoff, who was once a pillar of the Wall Street community, had been able to go to the government and the Carry, Financial Bubbles, and the Business Cycle 141 Federal Reserve and secure a bailout.

This pattern of growth and collapse, or near collapse, calling forth government and central bank support in this hypothetical case—which then appears successful when the new cycle of scheme growth is triggered—is recognizably similar to the carry regime pattern of bubbles and crashes. Ponzi schemes that are relatively large and long lasting usually have four main characteristics: (1) The funds supposedly standing to the credit of participants, or investors, are not backed by assets of equivalent value, when the value of assets is considered fundamentally in terms of the future flow of goods and services that they can lay claim to or produce. (2) The scheme will collapse once withdrawals exceed new inflows for any significant length of time. (3) The scheme is generally endorsed, or seemingly endorsed, by the government, or someone in authority, or someone who is highly respected. (4) The “fees” taken by the promoters, or insiders, are high relative to the funds committed. As with the concept of carry, participation (as an “investor”) in a Ponzi scheme can be rational from the perspective of the participant, even if not for the economy as a whole.


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The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

accounting loophole / creative accounting, affirmative action, Andrei Shleifer, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, margin call, market bubble, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, short selling, The Market for Lemons, transaction costs

Nevertheless, he gave the industry the ability to grow massively, and he took no action to stop the large number of S&Ls that began to grow rapidly. The results were, predictably, disastrous. THE ADC PONZI SCHEME The proposed net worth rule restricted growth by increasing capital requirements for faster growing S&Ls. Gray proposed to reverse the Bank Board’s prior policy, five-year averaging, which reduced the capital requirement for fast growers. Gray acted because of the tendency of fast growers to become the worst failures. The agency did not understand the acquisition, development, and construction (ADC) Ponzi scheme fully when it drafted the rule. This was ironic because the rule struck the control frauds’ Achilles’ heel and proved the most critical act of reregulation. A Ponzi scheme operates by growing rapidly and using a portion of the new money brought in to pay off the old investors while the fraudster pockets the remainder.

They transact with each other or with “straws” on what appears to be an arm’s-length basis, but is really a fraud that massively overvalues assets in order to create fictitious income and hide real losses. Control frauds grow rapidly (Black 1993d). The worst control frauds are Ponzi schemes, named after Carlo Ponzi, an early American fraud. A Ponzi must bring in new money continuously to pay off old investors, and the fraudster pockets a percentage of the take. The record “income” that the accounting fraud produces makes it possible for the Ponzi scheme to grow. S&Ls made superb control frauds because deposit insurance permitted even insolvent S&Ls to grow. The high-tech bubble of the 1990s allowed similarly massive growth. Control frauds are predators. They spot and attack human and regulatory weaknesses. The CEO moves the company to the best spot for accounting fraud and weak regulation.

Surely, it is in the interest of control frauds to make profitable loans so they can stay in business and continue to loot the corporation? Most people (fortunately) do not think like white-collar criminals. Control frauds operate by different, perverse rules that harm society, but that does not mean they are irrational. A Ponzi scheme invariably collapses, but that does not mean that the fraud fails: the corrupt CEO can make a great deal of money looting the company. The purported profitability of the Ponzi schemes, combined with deposit insurance, meant that S&Ls could grow rapidly for several years before they collapsed. Such CEOs did not have the option of making money honestly, as my discussion about the inability to grow out of your problem illustrated. ADC accounting frauds created fictitious income that allowed CEOs to convert firm assets to personal use through normal and seemingly legitimate corporate mechanisms: raises, bonuses, stock options, and perks.6 The worst real estate developers agreed to pay the highest interest rates because they had much to gain.


pages: 263 words: 84,410

Tulipomania: The Story of the World's Most Coveted Flower & the Extraordinary Passions It Aroused by Mike Dash

fixed income, Ponzi scheme, random walk, South Sea Bubble, spice trade, trade route, tulip mania

The hyacinth trade Krelage, Bloemenspeculatie in Nederland, pp. 142–96, and Krelage, Drie Eeuwen Bloembollenexport, pp. 13, 645–55; Garber, “Tulip-mania,” pp. 553–54; Bulgatz, Ponzi Schemes, pp. 109–14. A $4,000 bottle of Coca-Cola Pendergrast, For God, Country, p. 211. The history of the tulip to the present day Krelage, Drie Eeuwen Bloembollen-export, pp. 15–18. Craze for dahlias Bulgatz, Ponzi Schemes, pp. 108–09. During this episode there was even talk of the propagation of blue dahlias—as much a botanical impossibility as the black tulip. Craze for gladioli Posthumus, “Tulip Mania in Holland,” p. 148. Chinese spider lily mania Malkiel, Random Walk down Wall Street, pp. 82–83. Florida land boom Bulgatz, Ponzi Schemes, pp. 46–75. BIBLIOGRAPHY Unpublished Material Municipal Archives, Haarlem Notarial registers, vols. 120–50 Burial registers, vols. 70–76 Index to Heerenboek Manuscript entitled Aanteekeningen van C.

Many of the short accounts of the subject are based on badly flawed popular studies, most notably Charles Mackay’s entertaining but misleading Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (Ware: Wordsworth Editions, 1995), which remains in print today despite having originally appeared in 1841. (Much more reliable, though still dependent on secondary sources, is the fairly extensive modern reanalysis by Joseph Bulgatz, published in Ponzi Schemes, Invaders from Mars and More Extraordinary Popular Delusions and the Madness of Crowds [New York: Harmony, 1992], which has, however, attracted very little attention.) Apart from contemporary pamphlets, collected by E. H. Krelage in De Pamfletten van den Tulpenwindhandel 1636–1637 (The Hague: Martinus Nijhoff, 1942), the most valuable Dutch sources are the solicitors’ acts, which still exist for most of the cities caught up in the mania and record not only some of the (comparatively rare) legal agreements for the purchase of tulip bulbs but also the proceedings brought as a result of the collapse of prices in 1637.

Cleanliness Deursen, Plain Lives, pp. 19, 41; Zumthor, Daily Life in Rembrandt’s Holland, pp. 137–39, 169; Brereton, Travels in Holland, p. 68. Population Israel, Dutch Republic, p. 328. Baudartius and the pressure of overpopulation Deursen, Plain Lives, pp. 3–4, 8. Spread of the fashion for gardening in the Netherlands Cotterell, Amsterdam, pp. 88, 131; Brereton, Travels in Holland, p. 38; Mundy, Travels of Peter Mundy, vol. 4, p. 75; Segal, Tulips Portrayed, p. 8; Bulgatz, Ponzi Schemes, p. 86. Dutch savings Temple, Observations, p. 102. The gambling impulse Deursen, Plain Lives, pp. 67–68, 105–06; Schama, Embarrassment of Riches, pp. 306–07, 347; Zumthor, Daily Life in Rembrandt’s Holland, p. 76. Chapter 10. Boom The course of the mania is set out best in E. H. Krelage, Bloemenspeculatie in Nederland: De Tulpomanie van 1636–37 en de Hyacintenhandel 1720–36 (Amsterdam, 1942).


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

Bernie Madoff was using a strategy like this: discreetly advertise your great results to attract a stream of new investors, and use that new money, flowing in by the millions, to pay out returns to your existing customers. For this strategy, you do not need to be a genius, working the market night and day; you don’t need to make any trades at all. You just need to keep taking in new money so you have enough to pay off investors who want to cash out. All the rest, you keep. There is a name for this strategy, and it is called a Ponzi scheme, named for the Italian-American Charles Ponzi, who ran a short-lived version of such a racket in 1920 in Boston, conning a flood of new investors. A Ponzi scheme involves no trades and no investments. It is a pure sham. And that is what Harry figured Bernie Madoff was doing. THE CASSANDRA MOMENT At Rampart Investment Management, Markopolos, Casey, and Chelo were fascinated by the scam. Unfortunately, however, their bosses were not interested in debunking Madoff’s success; they wanted to imitate it.

Yeshiva University lost over $100 million. Elie Wiesel’s Foundation for Humanity lost $15 million, everything it had; Wiesel and his wife lost millions more personally.19 When it was all said and done, the collapse of Madoff’s Ponzi scheme brought crippling financial losses to more than 13,500 victims. The shock waves widened far beyond the individual account holders. When philanthropists and foundations took a hit, so did the hospitals, museums, and charities they supported. Thanks to his network of feeder funds, Madoff had built the first truly worldwide Ponzi scheme, with victims in Latin America, China, Japan, Korea, Singapore, and Dubai. Europe was especially hard hit by L’affaire Madoff, as it came to be called in Geneva and Paris. The middleman between Madoff and many of his European clients was Access International, which lost about $1.4 billion, including $55 million belonging to Thierry de la Villehuchet.

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.


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

Or, even if curiosity did not motivate them, why did the simple realities of key man risk not spur them—for was it wise to continue having a man of seventy running a portion of this ostensibly very lucrative business no one else in the firm understood? Shedding light on this question are Bernie Madoff’s own contentions that it should have been abundantly obvious to the SEC that he was running a Ponzi scheme. Madoff said, “I was astonished. They never even looked at my stock records.” He also noted that investigators did not check with the Depository Trust Company. “If you’re looking at a Ponzi scheme, it’s the first thing you do,” said Madoff.4 If Madoff believed that the commission, charged with overseeing thousands of firms, should have had no difficulty in ascertaining that a fraud was underway at his company, then surely his two sons, who spent their entire workweeks directing a part of the firm, had to have figured it out.

Almost comically, the House Appropriations Committee substantially scaled back the budget request for fiscal year 2012 and provided only the same amount of money as it had in fiscal year 2011, despite the new challenges presented by Dodd-Frank. Most puzzling of all, however, were some of the reasons cited by the committee for the decision, including that it “remains concerned with the SEC’s track record in dealing with Ponzi schemes.”165 The solution to the commission’s inability to properly identify and prosecute more cases of Ponzi schemes clearly was not to leave it even more bereft of resources than before. The decisions to reduce the resources of the SEC are seemingly politically motivated attempts to limit the agency’s reach. After all, legislators are wrong to cite the size of the federal deficit as a reason to curtail the SEC’s budget so substantially, because the SEC’s collection of fees and fines is greater than its own budget.166 Fraud, Market Manipulation, and Insider Trading 195 The SEC is hardly a perfect organization.

Fraud, Market Manipulation, and Insider Trading Ibid., 83. Darby, “In Ponzi We Trust.” Ibid. Straney, Securities Fraud, 83. Ponzi v. Fessenden, 258 U.S. 254 (1922). Erin Skarda, “William Miller, the Original Schemer,” Time, March 7, 2012, http://content.time.com/time/specials/packages/article/0,288 04,2104982_2104983_2104992,00.html. “A Century of Ponzi Schemes,” DealBook (blog), New York Times, December 15, 2008, http://dealbook.nytimes.com/2008/12/15/a-century-of -ponzi-schemes. Skarda, “William Miller.” Darby, “In Ponzi We Trust.” John Steele Gordon, “Pyramid Schemes Are as American as Apple Pie,” Wall Street Journal, December 17, 2008, http://online.wsj.com/news /articles/SB122948144507313073. Ibid. Ibid. Ibid. Ibid. Ibid. “The Match King,” Economist, December 19, 2007, http://www.economist .com/node/10278667.


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The Glass Hotel by Emily St. John Mandel

Bernie Madoff, big-box store, discrete time, East Village, high net worth, McMansion, Panamax, Pepto Bismol, Ponzi scheme, sovereign wealth fund, white picket fence, Y2K

He was sitting behind his desk, Claire crying on the sofa, Harvey staring into space, while Vincent fidgeted around with a coat and shopping bag and then sat and stared at him until he finally had to tell her: “Vincent,” he said, “do you know what a Ponzi scheme is?” “Yes,” Vincent said. Claire, from the sofa, still crying: “How do you know what a Ponzi scheme is, Vincent? Did he tell you? Did you know about this? I swear to god, if you knew about this, if he told you…” “Of course he didn’t tell me,” Vincent said. “I know what a Ponzi scheme is because I’m not a fucking idiot.” He thought, That’s my girl. * * * — In the counterlife, he walks through a hotel corridor—wide and silent with modernist sconces, the corridor of the hotel on Palm Jumeirah—and takes the stairs this time, walking slowly through the cool air.

“I think we should all bear in mind,” Harvey said, “that there’s a pretty good chance anything we say in this room today will eventually be repeated in a courtroom.” He spoke very calmly, staring at a painting of Jonathan’s yacht on the opposite wall. He seemed curiously detached from the scene. “Just tell her,” Claire said. “Careful, now,” Harvey said in that same tone of disinterest. After a pained interval of silence, Jonathan settled on a question. “Vincent,” he said, “do you know what a Ponzi scheme is?” PART THREE 10 THE OFFICE CHORUS December 2008 1 We had crossed a line, that much was obvious, but it was difficult to say later exactly where that line had been. Or perhaps we’d all had different lines, or crossed the same line at different times. Simone, the new receptionist, didn’t even know the line was there until the day before Alkaitis was arrested, which is to say the day of the 2008 holiday party, when Enrico came around to our desks in the late morning and told us that Alkaitis wanted us assembled in the seventeenth-floor conference room at one o’clock.

We shuffled our papers, or stared fixedly at our notes, or stared into space and imagined leaving the country (Oskar), or looked out the window and made firm, actionable plans to leave the country (Enrico), or looked out the window and decided fatalistically that it was too late to go anywhere (Harvey), or indulged in the fantastical notion that somehow everything would work itself out (Joelle). Ron glanced around, confused. He often seemed confused, the rest of us had noticed that about him, and it seemed he actually didn’t know what we did here, which was baffling in retrospect: what did he think we were doing, if not running a Ponzi scheme? When we talked among ourselves about the Arrangement, as we’d come to refer to it, what exactly did he think we were discussing? Still, there it was. He looked around in the silence, cleared his throat, and said, “Well, we have so much trading activity with the London office already, though.” The silence that followed this remark was, if possible, even worse than the silence that had preceded it.


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

This pattern suggests a rising tide makes fraudulent activity a more acceptable corporate risk-taking behavior, but a sinking boat has the opposite effect. What about scams like Madoff ’s Ponzi scheme? Researchers Stephen Deason, Shivaram Rajgopal, and Gregory B. Waymire found a very similar pattern in the number of Ponzi schemes prosecuted by the SEC between 1988 and 2012 (see figure 10.6). There was an upward trend during the bull market of the late 1990s, a decline in the aftermath of the Internet bust of 2001–2002, and another increase as the market climbed. After the financial crisis and the subsequent stock market decline between 2008 and 2009, however, the number of Ponzi schemes fell sharply.44 In fact, Deason, Rajgopol, and Waymire estimated there was a correlation of 47.9 percent between the S&P 500 quarterly return and the number of SEC-prosecuted Ponzi schemes per quarter. Why are Ponzi schemes so popular during economic booms compared to economic busts?

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. His wealth management fund showed steady returns over time on paper, returns that in retrospect were much too smooth to be real. In reality, they were a form of financial science fiction. Madoff ’s fund was, in his words, “a giant Ponzi scheme,” a con game that requires a flow of money from the newly defrauded to pay off older obligations.

“There’s no hard and fast rule about field work but . . . field work cannot go on indefinitely because people have a hunch,” one NERO assistant director later testified.30 Markopolos’s 2005 complaint reached NERO with the strong endorsement of the SEC’s Boston office.31 However, the fruitless earlier examination of claims against Madoff biased the NERO examiners against Markopolos’s claim.32 The examiners quickly discounted Markopolos’s idea that Madoff was running a Ponzi scheme. The staff attorney involved with the examination wrote at the beginning of the investigation that there wasn’t “any real reason to suspect some kind of wrongdoing . . . all we suspect is disclosure problems” (emphasis in the original).33 The Office of Investigations was harsh in its verdict: “As a result of this initial failure, the Enforcement staff never really conducted an adequate and thorough investigation of Markopolos’s claim that Madoff was operating a Ponzi scheme.”34 The Madoff debacle, which I’ve streamlined, was only one of many events that caused the internal culture of the SEC to fall under scrutiny. An extensive study of the SEC in 2012 and 2013 by the Government Accountability Office (GAO) found systemic problems throughout its organizational culture: Based on analysis of views from Securities and Exchange Commission (SEC) employees and previous studies from GAO, SEC, and third parties, GAO determined that SEC’s organizational culture is not constructive and could hinder its ability to effectively fulfi ll its mission.


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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

— Dan Guterman See notes on this chapter Contents Prologue: The Outguessing Machine Part One: The Randomness Experiment 1 The Zenith Broadcast 2 How to Outguess Rock, Paper, Scissors 3 How to Outguess Multiple-Choice Tests 4 How to Outguess the Lottery 5 How to Outguess Tennis Serves 6 How to Outguess Football Penalty Kicks 7 How to Outguess Card Games 8 How to Outguess Passwords 9 How to Outguess Crowd-Sourced Ratings 10 How to Outguess Fake Numbers 11 How to Outguess Manipulated Numbers 12 How to Outguess Ponzi Schemes Part Two: The Hot Hand Theory 13 In the Zone 14 How to Outguess Football Bets 15 How to Outguess Oscar Pools 16 How to Outguess Big Data 17 How to Outguess Retail Prices 18 How to Outguess Property Prices 19 How to Outguess the Unpredictable 20 How to Outguess the Stock Market Epilogue: Fortune’s Wheel Acknowledgments Notes Bibliography Index Prologue The Outguessing Machine The outguessing machine began with a messy laboratory accident.

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. It never haunted Mark again. Mark’s lucky streak resumed, lasting until the awful day nine years later when he and his brother turned in their father for running the largest Ponzi scheme in history. Two years after that, the unrelenting scandal drove Mark to end his once-perfect life. It seems such a simple thing to predict the random walks that determine our fates. It’s not, and one reason is that our intuitions about close-to-random sequences often fail us. Misprediction can be the stuff of tragedy. In recent decades psychologists have explored a subject that, on first encounter, sounds incredibly abstract: human perceptions of randomness.

• When there is an incentive to fall under a round number, manipulators produce more second digits of 9 and fewer of 0. This is common with expense accounts. • Digit analysis cannot “prove” anything by itself. Its value is in flagging data meriting investigation by a good auditor. Be skeptical of claims (of election fraud, say) based on first-digit Benford tests. 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.


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

Marino dealt with the problem by sending the accounts late on a Friday, on the assumption that by Monday morning they would be buried under a pile of stuff that arrived over the weekend and would never get any real scrutiny. This shows a pretty good understanding of the brokerage business.* The second of Marino’s insights, however, was a work of genius. A fraudulent hedge fund, unlike traditional Ponzi schemes, could go on indefinitely. The mechanics of a Ponzi scheme work by using new inflows to cover investor withdrawals, and since the returns promised to investors compound over time, the fraud needs to keep finding new victims at an ever increasing rate. But what if there aren’t any withdrawals? A hedge fund with good (reported) performance won’t get many requests from investors for their money back – they want to keep it in the fund if it’s doing well.

As an audit report on the SEC came in (the valuation of which was pointlessly disputed by Ponzi), it finally became indisputable that there had never been anything like enough assets to pay the bonds back with 50 per cent interest, and Ponzi was taken away by a US marshal. Ponzi is ill-served as a fraudster by his eponym. He was a considerably more sophisticated operator than the epigones and wannabes behind most modern ‘Ponzi’ schemes. He was aware from the earliest stages of his scheme that he was only buying time and was relying on his ability to find another idea, as brilliant as the postal scheme but not as impossible to execute. He was decades ahead of his time in understanding that ‘assets controlled’ is more important to a wholly dishonest actor than ‘assets owned’. But Charles Ponzi is not like Laszlo Biro or Rudolf Diesel; he did not invent the investment scam, or even the idea of targeting affinity groups.

But of course, if they did so, this would increase the demand on his resources of ready cash. And any attempt to alleviate the cash drain by selling more bonds was just increasing the size of the underlying problem. The mathematics of compound interest, particularly at 50 per cent every ninety days, was too much for him. Despite his claims to the contrary, the possibility of escape never looks to have been better than theoretical. And this is the essence of the ‘Ponzi scheme’ – the single feature that unites all subsequent frauds bearing the name of Charles Ponzi is the attempt to defeat the runaway nature of fraud by raising new money faster than you pay out old. Pyramid schemes The modern ‘pyramid scheme’ is a rough pile of rocks compared to the Venetian palazzo of Ponzi’s original template. There is little of the design, hardly any of the flair and a virtual certainty of collapse in the most predictable way possible, rather than Ponzi’s elegant dance of risks and intrigue.


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

One investor’s track record showed gains every month back to 1979, annualizing at 20 percent, and I was told the record was similar stretching into the late 1960s. The scheme had already been operating for more than twenty years! Having shown that Madoff was posting made-up trades to my client’s accounts, and that he was apparently doing so to several other investors with whom I spoke, I had the smoking gun that proved fraud. I warned people in my network, forecasting an ever-expanding Ponzi scheme that one day would end disastrously. Ponzi schemes take profits to investors. They use the money the investors put in but eventually need more, which they get by recruiting new investors. These new investors also have to be paid, leading the Ponzi operators to sign up still more. The longer it went undetected the bigger it would grow and the worse it would be when it collapsed. At this time Madoff was a major figure in the securities industry, serving as chairman of NASDAQ, running one of the largest “third market” (off the exchanges) stock trading firms in the country, consulted by government, and routinely checked out by the SEC.

Though he didn’t establish that the individual trades were faked, even without that smoking gun his arguments were overwhelmingly persuasive. For the next ten years Markopoulos attempted to get the SEC to investigate, but it brushed him aside repeatedly, cleared Madoff after superficial investigations, and quashed a request from the Boston office, prompted by Markopoulos, to investigate Madoff Investment as a possible Ponzi scheme. In a remarkable 477-page document, “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme—Public Version,” August 31, 2009, Report No. OIG-509, the SEC investigates and documents its own repeated failures, beginning in 1992 and continuing until Madoff confessed in 2008, to follow up on obvious clues, pointed complaints, and clear violations of securities laws. Yet the SEC continued to destroy documents through at least July 2010, relating not only to Madoff, but to major financial institutions like Goldman Sachs and Bank of America, as well as SAC Capital Advisors, during a continuing investigation of the latter.

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.


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

By all outward appearances, he could afford it: seventy lawyers worked in his firm, which had offices in Florida, New York, and Venezuela. But Rothstein’s millions actually came from a $1.2 billion Ponzi scheme he’d been running since 2005. In April of 2009, Bradley Edwards joined Rothstein’s firm. The lawyer brought his papers along, and Rothstein showed those pertaining to Epstein to potential investors. In exchange for a lump sum up front, Rothstein said, investors would receive a far larger chunk of money later, which Epstein would pay in future settlements. Edwards and Rothstein both say that Edwards had no knowledge whatsoever of the Ponzi scheme. (Prosecutors, and the Florida Bar, agree.) Edwards left as soon as he caught wind of the scheme, in November of 2009. But the few months he spent in Rothstein’s company gave Dershowitz the opening he needed to pry open Virginia Roberts’s accusations.

Bradley Edwards In December of 2009, Jeffrey Epstein filed suit, under Florida’s RICO act, against Scott Rothstein, the jailed Ponzi king; Bradley Edwards, the lawyer who’d worked, briefly, in Rothstein’s law firm, RRA, and represented several of Epstein’s victims; and one of those victims, an individual referred to in the lawsuit as “L.M.” “Upon information and belief,” the suit stated, “EDWARDS knew or should have known that ROTHSTEIN was utilizing RRA as a front for the massive Ponzi scheme and/or were selling an alleged interest or investment in the Civil Actions (and other claims) involving Epstein.” The suit also claimed that, “By using Civil Actions against EPSTEIN as ‘bait’ and fabricating settlements regarding same, ROTHSTEIN and others were able to lure investors into ROTHSTEIN’S lair and bilked them of millions of dollars which, in turn, was used to fund the litigation against EPSTEIN for the sole purpose of continuing the massive Ponzi scheme.” Moreover, the suit claimed, L.M. had “testified she never had sex with Epstein; worked at numerous strip clubs; is an admitted prostitute and call girl; has a history of illegal drug use (pot, painkillers, Xanax, Ecstasy); and continually asserted the 5th Amendment during her depositions in order to avoid answering relevant but problem questions for her.”

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. It was a classic Ponzi scheme—one of the biggest in history—and Hoffenberg ended up spending nineteen years in a federal prison. Why was Epstein not implicated in the case? All that Hoffenberg will say when asked is: “Ask Robert Gold.” Another source suggests that Gold, the former federal prosecutor who had helped Epstein recover Ana Obregón’s money, kept the US attorney away from Epstein until there were only a few weeks left before the statute of limitations ran out.


pages: 289 words: 22,394

Virus of the Mind by Richard Brodie

cognitive dissonance, Douglas Hofstadter, Gödel, Escher, Bach, joint-stock company, New Journalism, phenotype, Ponzi scheme, profit motive, publish or perish, Ralph Waldo Emerson, Richard Feynman, Stephen Hawking, Steven Levy

The pyramid then splits in two, with the two players in the row of two each becoming hosts eligible to make $4,000. Such a deal! Pyramid schemes rely on the same button-pushing memes that the Ponzi scheme does and add in the powerful force of evangelism. Since infected people have a stake in enrolling new players in the pyramid virus, the illusion of reward doesn’t need to be as great as with the Ponzi scheme. Rather than simply attracting new investors, there is now an army of recruiters intentionally infecting people with the pyramid virus. Although the pyramid virus’s spreading mechanism is different from the Ponzi scheme’s, the two institutions fall apart for the same reason. Dependent on exponential growth, they quickly 198 Designer Viruses (How to Start a Cult) exhaust the supply of players. The initiator of the pyramid needs to enroll only 14 people to make his $4,000; after ten pyramid splittings, new recruits to the row of eight would need to enroll 14,336 new players, for a total investment of $14,336,000, in order for all of them to cash out.

Ponzi’s scheme was simple: as long as his base of investors kept growing, he could pay off early investors with the cash pumped in by later ones. When the newspaper story broke and people stopped investing, Ponzi was found to owe $7 million and have only $4 million in assets. The later investors were out of luck. *An entertaining exploration of Ponzi’s original scheme and several other interesting virus-like phenomena appear in Joseph Bulgatz’s book Ponzi Schemes, Invaders from Mars, & More Extraordinary Popular Delusions and the Madness of Crowds (Harmony Books, 1992). 197 virus of the mind The mind virus in the Ponzi scheme, though, had nothing to do with the scheme itself. It was the spreading of the strategy-meme Invest with Ponzi. Bundled with powerful button-pushing window of opportunity and reward memes—a Get rich quick meme—Ponzi’s scheme attracted so much attention that it spread quickly throughout the general public in Massachusetts and neighboring states.

It depends upon the intentions and the skill of their creators—and on the memes those creators are infected with! I would expect to see many profit-motivated viruses, many power-motivated ones, and perhaps a few motivated by someone’s vision of a better future for humanity. Profit Viruses Profit-motivated designer viruses, many of which are completely legal and aboveboard today, have their shady origins in the crooked Ponzi scheme.* Charles Ponzi was an Italian immigrant who opened a business in Boston in 1919 called the Securities Exchange Company. He offered to repay people’s investments in 90 days with 50 percent interest: an investment of $10 would bring $15 in three months. His story was that he bought international postal reply coupons in Europe and, due to currency fluctuations, redeemed them in the United States at a profit.


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

Geoffrey Fattah, “Utah County Is Hotbed for White-Collar Crimes,” Deseret News, December 6, 2001, https://www.deseretnews.com/article/878209/Utah-County-is-hotbed-for-white-collar-crimes.html. 39. Bourree Lam, “Why Is Utah the First State to Have a White-Collar Crime Registry?,” The Atlantic, March 29, 2016, https://www.theatlantic.com/business/archive/2016/03/utah-white-collar-crime/475896; Greg Smith and Associates, “Utah No. 5 on FBI List for Ponzi Schemes,” https://www.bestutahlawyer.com/Articles/Utah-No-5-on-FBI-List-for-Ponzi-Schemes. 40. Smith and Associates, “Utah No. 5”; State of Utah, “White Collar Crime Offender Registry,” https://www.utfraud.com/Home/Registry. 41. Email interview with author. 42. Ibid. 43. Ibid. 44. Ibid. 45. Dahl, “6 Facts on the Thin Line.” 46. Telephone interview with author. 47. George K. Simon Jr., In Sheep’s Clothing: Understanding and Dealing with Manipulative People (Little Rock, AR: Parkhurst Brothers, 2010). 48.

“Yes, I did,” he said, his eyes cold and unblinking. “You moved everything out, the bed, the couch, all your clothes—only to bring it all back a few weeks later?” “Yes,” he said. I think he believed it himself. CAN YOU LOVE someone who has one foot in one world and one foot in another? I can’t. And ultimately, does it make a difference if the lies are to hide an illegitimate child, a dominatrix habit, an addiction to opioids, or a Ponzi scheme? It’s the same thing: a person with a hidden world, who looks you straight in the eye and vehemently denies your accusations. Who tells you the sky is plaid and makes you think there’s something wrong with you for believing it’s blue. I composed one final email: Hi there, I’ve written a bunch of emails and tossed them, so I’ll keep this brief. If you ever want to tell me the truth about things, I would be most happy to hear.

How to make sense of their lives. How to trust again. They were grateful that someone had shed light on the subject and, more importantly, not blamed them for being taken for such a ride. But secret lives are all around us, especially in today’s culture. Flip on the TV or surf the web and tales of gross betrayal will assault you: The respected Wall Street financier operating a billion-dollar Ponzi scheme. The friendly neighbor with three women imprisoned in his basement. A beloved comedian known as “America’s Dad” accused of drugging and sexually assaulting dozens of women.2 Married, anti-gay, family values–spouting politicians who solicit men in airport bathrooms. Political and environmental activists who are romantically involved with female group members, and sometimes have children with them—only to be revealed years later as undercover police officers spying for the state.3 While leading a double life sounds like the stomping ground of psychopaths, moles, and covert agents with indeterminate dialects, plenty of “normal” people in appearance and affect keep canyon-sized secrets from those in their immediate orbits.


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

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. Even if you know, or suspect, a Ponzi scheme, you might hope to get out in time, with a profit. I’ll be gone, you’ll be gone. Ponzi and Madoff went to prison because they lied. But the new economy bubble of 1999–2000 was a – perhaps legal – Ponzi scheme. Early investors made large profits, but it was later investors, attracted by the prospect of similar gains, who provided the funds that made these profits possible.

Warren Buffett famously said of these structures that ‘it is impossible to default on a promise to pay nothing’.24 The Ponzi scheme is closely related to the martingale. This approach to thinking yourself rich is named after Charles Ponzi, who told investors (correctly) in the 1920s that international reply coupons, used by the world’s postal authorities, were mispriced. Profits could be earned by buying in one country and selling in another. Sadly the supply of coupons was insufficient to meet the demand of investors. So Ponzi resorted to fraud. 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.

Securities with no intrinsic value were bought and sold repeatedly by people whose motive for buying was knowledge of the profits that had already been made in such stocks and the expectation (fulfilled in many cases) that they would make similar profits by selling these stocks on at higher prices still. Eventually, as in all Ponzi schemes, the supply of fresh buyers ran out, the bubble burst and the share prices of internet stocks collapsed. The boundaries between scam, deception, self-deception and mistake are fuzzy. In the new economy bubble some early-stage investors made money, but most stayed on in the hope of making still more. Even highly intelligent people overestimate their ability to time the correction of market mispricing. Legendary investors such as Julian Robertson and George Soros misjudged the new economy bubble and damaged their reputations. Warren Buffett stayed resolutely on the sidelines, and was derided for his failure to ‘get it’. Isaac Newton famously lost money in the South Sea Bubble, an early Ponzi scheme. As the new economy bubble expanded, I asked myself often, ‘Do people in financial conglomerates selling products really believe these things, or are they cynical in their deception?’


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

TO CONCENTRATE OR NOT TO CONCENTRATE The common thread running through all of the debate on regulatory structure is the question of how many regulators should be doing how many things. There is some logic to creating a structure that is highly specialized and dispersed, with one and only one regulator for each sector. That regulator would be highly specialized and knowledgeable. But if it fails in its role, there is no Plan B. Criticisms of the SEC for its hidebound inability to listen to warnings about a Ponzi scheme big enough to make the Fortune 500, or of the legion of banking regulators for their failure to spot fraudulent mortgage activity, are not simply criticisms of the specific agencies. They also lay the foundation for the argument that redundancy and even overlap should be built into the structure. To many, the thought of deliberately building overlap into the system is not a matter of prudence, but one of institutionalized waste.

The most common and least ominous for the targeted firm is the cyclical examination, so named to reflect the fact that the examination is routine in nature and conducted on a (riskbased) periodic basis, usually every two to three years. Firms with a high number of customer complaints, those that fared poorly in previous examinations, and those whose business puts them in frequent contact with retail and unsophisticated investors are likely to find themselves inspected more often than others. As such, a firm like Madoff Investment Securities, which did not have a high number of customer complaints (Ponzi schemes rarely do, since everyone is happy until the music stops), dealt primarily with wealthy investors, and had not had particularly bad previous inspection results, may fly under OCIE’s radar for years at a time. The second type of examination is the cause examination. These occur when the OCIE staff have reason to believe that specific violations of federal securities laws are occurring or have already occurred.

With respect to the conduct of investigations, the lead attorney leads the investigation and determines the tactics, but the Branch Chief manages the broader strategy (i.e., what violations are to be investigated and when the investigation is complete). Understanding the workload of the SEC staff and the administrative processes involved in examinations and investigations provides important insight into how the SEC managed to miss a multibillion-dollar Ponzi scheme in spite of the fact that outsiders, and some of its own staff, had raised concerns. If you’ve ever watched a TV crime show, you’ve likely seen a cop (along with C12 06/16/2010 112 11:24:23 & Page 112 Nice Law, Now Go Do It: Regulators and Compliance Officers his partner or dog) working on one case at a time, which he or she or they solve within one hour minus time for commercials. It doesn’t happen that way, and it doesn’t work that way for SEC staff, either.


pages: 296 words: 86,610

The Bitcoin Guidebook: How to Obtain, Invest, and Spend the World's First Decentralized Cryptocurrency by Ian Demartino

3D printing, AltaVista, altcoin, bitcoin, blockchain, buy low sell high, capital controls, cloud computing, corporate governance, crowdsourcing, cryptocurrency, distributed ledger, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, Firefox, forensic accounting, global village, GnuPG, Google Earth, Haight Ashbury, Jacob Appelbaum, Kevin Kelly, Kickstarter, litecoin, M-Pesa, Marc Andreessen, Marshall McLuhan, Oculus Rift, peer-to-peer, peer-to-peer lending, Ponzi scheme, prediction markets, QR code, ransomware, Ross Ulbricht, Satoshi Nakamoto, self-driving car, Skype, smart contracts, Steven Levy, the medium is the message, underbanked, WikiLeaks, Zimmermann PGP

With a business such as an online casino, that might be reasonable; in 99 percent of other cases it is not and the company should be avoided. The most important thing to remember is that if it sounds like a scam, it probably is. Be wary of anyone who promises you instant or unrealistic returns on your investment. The basics of Ponzi schemes work in cryptocurrency just as well as in any other business. If older investors are being paid with the capital from new investments, you are dealing with a Ponzi scheme. People will claim all sorts of things to make it seem as if revenue is coming from elsewhere, so you have to do your own research and dig deep into anything at which you are going to throw any money. The offenders listed below hail from all over the Bitcoin spectrum. Many had been considered pillars of the community before they went down.

It is possible for cloud-mining companies to use the blockchain to prove they are actually mining and paying those profits to customers, but some don’t. If the company does not prove it has the hashing power it says it has, don’t go anywhere near it. Without that evidence, it is impossible to know whether what you are investing in is an actual mining operation and not a Ponzi scheme. Cloud-mining companies have been caught paying off older investors with new customers’ purchases, which is the very definition of a Ponzi scheme.2 Some people contend that cloud mining doesn’t make sense. If mining is more profitable than the fees gathered from customers, the reasonable question to ask is, why wouldn’t the companies instead mine with that hardware themselves rather than pass those profits on to customers? Cloud-mining companies often say they use the money as start-up capital, but few, if any, have ever shown evidence to support this claim.

E-gold was mentioned in a 2005 article in the New York Times about online criminals selling stolen credit cards. According to the article, they were using E-gold as their preferred method of payment because of its global reach and anonymous accounts.6 By this time, E-gold had become the second-largest online payment service, second only to the rapidly growing PayPal. It wasn’t just card thieves who were attracted to E-gold. Ponzi schemes were common with E-gold. Jackson worked with authorities and complied with government requests for information on user accounts—as it turned out, E-gold was not very anonymous if Jackson wanted to reveal a user’s identity. But the Secret Service, which was investigating the stolen credit card numbers, decided not to work with Jackson and sought to bring E-gold into the regulated space along with the likes of MoneyGram and Western Union.


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

“My team and I tried our best to get the SEC to investigate and shut down the Madoff Ponzi scheme with repeated and credible warnings to the SEC that started in May 2000,” Markopolos testified to a rapt audience. Markopolos said that he and a few colleagues put together charts and graphs, ran computer models, and poked around in Europe, where Madoff was raising the bulk of his money: “We knew then that we had provided enough red flags and mathematical proofs to the SEC for them where they should have been able to shut him down right then and there at under $7 billion.” When the SEC did nothing, Markopolos came back in October 2001. Then again in 2005, 2007, and 2008. Each time he got nowhere. Reading slowly from his notes, Markopolos described years of frustration. I gift-wrapped and delivered the largest Ponzi scheme in history to them, and somehow they couldn’t be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority.

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. The Cubans plan a deliberate murderous attack on U.S. citizens flying in international airspace.

“I came to the conclusion that we didn’t understand what he was doing,” Broder would say later. “We had no idea how he was making his money. The volume numbers that he suggested he was doing [were] not supported by any evidence we could find.” Renaissance had doubts. So did Renaissance sell off its stake in Madoff? Not quite. They cut their stake in half. They hedged their bets. Five years later, after Madoff had been exposed as a fraud—the mastermind of the biggest Ponzi scheme in history—federal investigators sat down with Nat Simons and asked him to explain why. “I never, as the manager, entertained the thought that it was truly fraudulent,” Simons said. He was willing to admit that he didn’t understand what Madoff was up to, and that Madoff smelled a little funny. But he wasn’t willing to believe that he was an out-and-out liar. Simons had doubts, but not enough doubts.


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

The typical Ponzi schemer is a charming con man who dangles promises of instant wealth before suckers. The more moderate the returns promised by the Ponzi schemer, the longer the scheme can survive the loss of capital caused by the schemer's paying his investors their promised returns out of principal that is not earning what has been promised. Some journalists, confusing Ponzi schemes with pyramid schemes, have described the housing and credit bubbles as Ponzi schemes. That is inaccurate. The essence of a Ponzi scheme is deception. The investor thinks that the promised high return on his investment will come from the promoter's putting the investment to work, not that his investment will be used to pay other investors in order to keep the scheme going. There need be no deception in a pyramid scheme, as where a person pays a fee to become a retail seller of a manufacturer's product and is promised a share of the fee of any other retail seller whom he recruits.

But it seems that some of the funds of funds invested in Madoffs Ponzi scheme without performing the kind of "due diligence" that their customers had been led to expect. If the confidence of the investment community in the vigilance of the funds of funds is shaken, this will cause additional requests by customers of hedge funds to withdraw their money. But the aspect of the Madoff scandal that I want to emphasize is the light it sheds on a philosophy of government that contributed to the depression. This fascinating swindle of apparently unprecedented scope had been going on for decades, yet it had not been detected by the Securities and Exchange Commission, even though, beginning eight years ago, a money manager named Harry Markopolos had bombarded the commission with accusations that Madoff was operating a Ponzi scheme. In this common type of fraud, the investor usually is promised a ridiculously high return on his investment—10 percent a month would not be unusual.

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.


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

I vowed to stay until we had secured mortgage relief,” he told a reporter for the local paper. “That was what initially kept me here.” Working as the victims’ financial sleuth, manager, and problem-solver, Curran (along with two other adult children of Jones’s victims, Ginny Nelles and Joey Davis) discovered that this was one tightly interwoven social group. It was also an aging and fragile one. By July 2010, one year after Earl Jones’s Ponzi scheme was revealed, three of Jones’s elderly victims had died, one had been diagnosed with breast cancer, five had lost their homes, and another eleven were about to lose theirs as the one-year grace period negotiated with their banks expired. 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 then there were his own expenses, such as mortgages on four condos, including one in Boca Raton and another on a golf course in Mont-Tremblant, a Quebec ski resort. There was also a condo in Maine that he’d bought for his intellectually handicapped daughter, Kimberly. There were private school fees, cars, and cruises, too, all bankrolled by his clients’ nest eggs. He had been running a Madoff-like Ponzi scheme built on his own community’s life savings. Coughlan was on holiday with her family in Maine in early July 2009 when she got a call from her bank. Her checks were bouncing. Soon other members of her social set were discovering that their money was mysteriously inaccessible. With a trip to New York planned, forty-two-year-old Ginny Nelles—whose late father had been a close friend of Jones’s—discovered that the money she wanted to withdraw from her account with “Uncle Earl” was out of reach, just when she needed it for a family holiday.

The money was ostensibly invested in her account with Earl to give her an immediate high rate of return; Wendy wanted to share this income with her children and grandchildren. On Jones’s advice and against the diversification mantra of most financial planners, she collapsed all her accounts in other banks in order to consolidate her money with him. I met with Ginny Nelles in November 2009, five months after Earl Jones’s Ponzi scheme had been exposed. Her mother was about to lose her house and had no source of income. Ginny and her brother would likely never recover their inheritances from their father, much less their own savings. And this blow had struck after grave health crises for both Ginny and her brother. Yet little of this psychological wear and tear was evident at first glance. Ginny was poised and articulate, crisply dressed in a white blouse and pearls, her highlighted blond hair neatly tied back.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, zero-sum game

A few critics (primarily advocates of gold-backed currency) have called fractional reserve banking a kind of Ponzi scheme, and there is some truth to the claim.5 As long as the real economy of goods and services within a nation is growing, an expanding money supply seems justifiable, arguably necessary. However, units of currency are essentially claims on labor and natural resources — and as those claims multiply (with the growth of the money supply), and as resources deplete, eventually the remaining resources will be insufficient to satisfy all of the existing monetary claims. Those claims will lose value, perhaps dramatically and suddenly. When this happens, paper and electronic currency systems based on money creation through fractional reserve banking will produce results somewhat similar to those of a collapsing Ponzi scheme: the vast majority of those involved will lose much or all of what they thought they had.

There are plenty of historic examples of currency failures, so this would not be a unique occurrence.18 Some who come to understand that government deficit spending is unsustainable immediately conclude that the sky is falling and doom is imminent. It is disquieting, after all, to realize for the first time that the world economic system is a kind of Ponzi scheme that is only kept going by the confidence of its participants. But as long as deficit spending doesn’t exceed certain bounds, and as long as the economy resumes growth in the not-too-distant future, then the scheme can be sustained for quite some time. In fact, Ponzi schemes theoretically can continue forever — if the number of potential participants is infinite. The absolute size of government debt is not necessarily a critical factor, as long as future growth will be sufficient so that the proportion of debt relative to revenues remains the same.

., shareholders]; and if the loss is more than its owners can profitably sustain, the bank will have to close its doors.21 So, given their exposure via derivatives, bad real estate loans, and MBSs, the banks aren’t making new loans because they can’t take on more risk. The only way to reduce that risk is for government to guarantee the loans. Again, as long as the down-side of this business cycle is short, such a plan could work in principle. But whether it actually will work in the current situation is problematic. As noted above, Ponzi schemes can theoretically go on forever, as long as the number of new investors is infinite. Yet in the real world the number of potential investors is always finite. There are limits. And when those limits are hit, Ponzi schemes can unravel very quickly. All Loaned Up and Nowhere to Go These are the four categories of debt. Over the short term, there is no room for growth of debt in the household or corporate sectors. Within the financial sector, there is little room for growth in productive lending. The shadow banks can still write more derivative contracts, but that doesn’t do anything to help the real economy and just spreads risk throughout the system.


pages: 304 words: 91,566

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption by Ben Mezrich

"side hustle", airport security, Albert Einstein, bank run, Ben Horowitz, bitcoin, blockchain, Burning Man, buttonwood tree, cryptocurrency, East Village, El Camino Real, Elon Musk, family office, fault tolerance, fiat currency, financial innovation, game design, Isaac Newton, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, new economy, offshore financial centre, paypal mafia, peer-to-peer, Peter Thiel, Ponzi scheme, QR code, Ronald Reagan, Ross Ulbricht, Sand Hill Road, Satoshi Nakamoto, Schrödinger's Cat, self-driving car, side project, Silicon Valley, Skype, smart contracts, South of Market, San Francisco, Steve Jobs, transaction costs, zero-sum game

They’d also reached out by email to former professors at Harvard and Oxford, where they’d earned MBA degrees, to get more academic opinions on this new virtual currency. None of the professors they’d contacted—some of them among the most elite economics professors in the world—had ever heard of Bitcoin. When the twins had explained what they had learned so far, some responded in a knee-jerk way, labeling Bitcoin as some sort of scam or Ponzi scheme. But when Cameron pressed them on those notions, the professors couldn’t exactly say what the scam was, or why it was a Ponzi scheme. Settling their SUV just below the speed limit, Cameron hit the button to unmute the conversation. “The party is just getting started,” blurted a voice, words coming so fast they threatened to run right into each other. “The market cap of the entire Bitcoin economy is only about a hundred and forty million. That’s million, with an m.

“Your quote is great,” Cameron said, and then read it out loud. “ ‘We have elected to put our money and faith in a mathematical framework that is free of politics and human error.’ ” “Now you finally sound like Men of Harvard,” Tyler’s father joked. “You got a great quote in too, Cameron. ‘People say it’s a Ponzi scheme, it’s a bubble. People really don’t want to take it seriously. At some point that narrative will shift to “virtual currencies are here to stay.” We’re in the early days.’ ” “Nice,” Tyler agreed. “The haters can take that and stuff it where it belongs.” Calling Bitcoin a Ponzi scheme, or equating it to the Dutch tulip bubble of the seventeenth century, were favorite criticisms of the virtual currency. They would never deny there were a lot of growing pains ahead: the Bitcoin market was volatile, still trying to recover from the crash caused by Mt.

But before they could decide on whether or not they wanted to invest in a Bitcoin company, Cameron and his brother were going to have to better understand what Bitcoin was in the first place. What made it good, viable money? What made it better than gold? What was money anyway? “Okay, but gold has some intrinsic value,” Tyler said. “It’s used in jewelry, and in transistors.” “But what about cash?” Charlie responded. “It hasn’t been backed by gold since the 1970s, and the government can print as much of it as it wants. Talk about a Ponzi scheme. No intrinsic value there.” “Cash has intrinsic value,” Cameron responded. “If you were freezing on top of a mountain and all you had was cash, you could burn it to keep warm.” “Ah, the Cliffhanger maneuver,” Azar’s voice came through the car’s speakers. “Love that movie.” “The intrinsic value of gold is overrated,” emerged another voice over the line. Cameron glanced at Tyler. The new voice belonged to Erik Voorhees, Charlie’s head of marketing.


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

The Irish Property Council has counted twenty-nine suicides by property developers since the crash—in a country where suicide often goes unreported and undercounted. “I said to all the guys, ‘Always take money off the table.’ Not many of them took money off the table,” says Dermont Desmond, an Irish billionaire who made his fortune from software in the early 1990s, and so counts as old money. The Irish nouveau riche may have created a Ponzi scheme, but it was a Ponzi scheme in which they themselves believed. So, too, for that matter, did some large number of ordinary Irish citizens who bought houses for fantastic sums. Ireland’s 87 percent rate of homeownership is the highest in the world. There’s no such thing as a nonrecourse mortgage in Ireland: the guy who pays too much for his house is not allowed simply to hand the keys to the bank and walk away.

The stocks of the three main Irish banks, Anglo Irish, AIB, and Bank of Ireland, had fallen by between a fifth and a half in a single trading session, and a run on Irish bank deposits had started. The Irish government was about to guarantee all the obligations of the six biggest Irish banks. The most plausible explanation for all of this was Morgan Kelly’s narrative: that the Irish economy had become a giant Ponzi scheme, and the country was effectively bankrupt. But it was so starkly at odds with the story peddled by Irish government officials and senior Irish bankers—that the banks merely had a “liquidity” problem and that Anglo Irish was “fundamentally sound”—that the two could not be reconciled. The government had a report newly thrown together by Merrill Lynch, which declared that “all of the Irish banks are profitable and well-capitalized.”

He had read Morgan Kelly’s newspaper articles and even paid Kelly a visit in his University College office. To Ingram’s eyes there appeared to be a vast difference between what the Irish banks were saying and what they were doing. To get at it he ignored what they were saying and went looking for knowledgeable insiders in the commercial property market. He interviewed them, as a journalist might. On March 13, 2008, six months before the Irish real estate Ponzi scheme collapsed, Ingram published a report in which he simply quoted verbatim what market insiders had told him about various banks’ lending to commercial real estate developers. The Irish banks were making far riskier loans in Ireland than they were in Britain, but even in Britain, the report revealed, they were the nuttiest lenders around: in that category, Anglo Irish, Bank of Ireland, and AIB came, in that order, first, second, and third.


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

Bernie Madoff managed the largest Ponzi scheme in American history; at the time of the collapse in December 2008 the liabilities were reported to be $50 billion or $64 billion – although the most recent estimates suggest that the losses will probably be in the range of $20 billion to $25 billion. (One measurement problem is deciding whether the losses should include only the amounts of the initial deposits that individuals made with Madoff, or whether these losses should also include the ‘investment income’ that they had earned over the years. Another involves whether the cash withdrawn from the accounts should be included.) Madoff had run the scheme for twenty years, so he may hold the world’s record for both the largest and the most long-lived Ponzi scheme. Every Ponzi scheme has a ‘story’ – an explanation for why the firm earns such high returns.

In contrast many of the buyers of petroleum were concerned that the disruptions in oil supplies due to actions of the cartel and the war in the Persian Gulf would lead to shortages and increases in prices. Ponzi finance, chain letters, pyramid schemes, manias, and bubbles Ponzi finance, chain letters, bubbles, pyramid schemes, finance, and manias are somewhat overlapping terms for non-sustainable patterns of financial behavior, in that asset prices today are not consistent with asset prices at distant future dates. The Ponzi schemes generally involve promises to pay an interest rate of 30 or 40 or 50 percent a month; the entrepreneurs that develop these schemes always claim they have discovered a new secret formula so they can earn these high rates of return. They make the promised interest payments for the first few months with the money received from their new customers attracted by the promised high rates of return. But by the fourth or fifth month the money received from these new customers is less than the monies promised the first sets of customers and the entrepreneurs go to Brazil or jail or both.

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.


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.”

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.” He said he bought options to cut off extraordinary losses and balanced this with sales of options that cut off extraordinary gains.23 While such a strategy would have smoothed earnings, Markopolos saw that it would be much too costly for Madoff to make the high returns he credited to his investors. A Ponzi scheme was further suggested, since to practice such a collar, it would be necessary for Madoff to make more options trades than on the entire US market.24 Despite their cogency, Markopolos’s suspicions were met with resistance at the SEC. His first complaints to the SEC office in Boston in 2000 and 2001 quickly died.25 But Markopolos persisted, and the New York regional office, with jurisdiction over Madoff, decided to conduct an investigation in November 2005.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

"Robert Solow", accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

.: 348) It would be foolish to deny that we have a similar weakness in modern capitalist society: our tendency to be sucked into Ponzi schemes by a banking sector that profits from rising debt. As I explain in the next chapter, when lending is undertaken for investment or consumption, debt tends not to get out of hand. But when borrowing is undertaken to speculate on asset prices, debt tends to grow more rapidly than income. This growth causes a false boom while it is happening, but results in a collapse once debt growth terminates – as it has done now. Though borrowers can be blamed for having euphoric expectations of unsustainable capital gains, in reality the real blame for Ponzi schemes lies with their financiers – the banks and the finance sector in general – rather than the borrowers. That was blindingly obvious during the Subprime Bubble in the USA, where many firms willfully wrote loans when they knew – or should have known – that borrowers could not repay them.

But inevitably a crisis will result because the borrowing is adding to debt levels without increasing the capacity of the economy to service those debts. Though individuals can operate with a soft budget constraint while the price bubble lasts, the entire economy is stuck with the hard budget constraint that, in the long run, the debt must be serviced from income.12 If we are to prevent this process playing out yet again in the future, then we need to prevent the formation of Ponzi schemes in the first place. Unfortunately, the way that financial assets are currently defined contains the seeds of not one Ponzi scheme but two. Because shares currently have an indefinite lifespan, it is quite possible for someone to assert, as Henry Blodget did about Amazon in 1998, that a given company’s shares will go from $1 to $400 in a matter of a year (Blodget 2010). Faced with those hypothetical gains, ordinarily sane people are liable to succumb to the euphoria that produces them and be willing to borrow to speculate.

Rather than smoothly choosing between work and leisure, in a completely free market system they face the choice of either working or starving. In a market economy attenuated by the welfare state, this choice is less stark, but still present. A three-horse race This point will become clearer in later chapters, when I outline the monetary approach to economics that I take, in which bankers are treated as a separate social class to capitalists. The précis for now is that bankers’ incomes depend on the level of debt, and if a Ponzi scheme develops, then the level of debt can escalate dramatically. This then transfers income from both workers and capitalists to bankers, and to the detriment of society in general since it also normally results in a lower level of real investment. This issue might seem arcane now, but it has serious implications during a financial crisis, such as the one we are currently in. Neoclassical efforts to get out of such a crisis – once they’ve gotten over the shock of one actually happening, and revert to form after behaving like ‘born-again Keynesians’ when the crisis begins – invariably argue that wages have to fall to end the crisis, because high employment clearly indicates that wages are too high.


pages: 204 words: 67,922

Elsewhere, U.S.A: How We Got From the Company Man, Family Dinners, and the Affluent Society to the Home Office, BlackBerry Moms,and Economic Anxiety by Dalton Conley

assortative mating, call centre, clean water, commoditize, dematerialisation, demographic transition, Edward Glaeser, extreme commuting, feminist movement, financial independence, Firefox, Frank Levy and Richard Murnane: The New Division of Labor, Home mortgage interest deduction, income inequality, informal economy, Jane Jacobs, Joan Didion, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge economy, knowledge worker, labor-force participation, late capitalism, low skilled workers, manufacturing employment, mass immigration, McMansion, mortgage tax deduction, new economy, off grid, oil shock, PageRank, Ponzi scheme, positional goods, post-industrial society, post-materialism, principal–agent problem, recommendation engine, Richard Florida, rolodex, Ronald Reagan, Silicon Valley, Skype, statistical model, The Death and Life of Great American Cities, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, women in the workforce, Yom Kippur War

It could be the father of his child’s playmate in the sandbox who runs a hedge fund on his BlackBerry while changing dirty diapers. Or it could even be the kid herself, who has just the look Mrs. 2009 needs for her newest marketing campaign. Even when the Elsewhere class ostensibly go out purely to socialize, they find that they cannot stop themselves from glancing at their text messages, talking work, or making valuable introductions across the table. It all may be a Ponzi scheme, but it certainly is no shell game: In an information and service economy, much of what drives success is, in fact, social skills. This new merger between work and play can even be seen in the names of the giant corporations that now dominate our business world. Whereas in industrial capitalism the monikers of corporate behemoths attempted to connote nationalism, grandeur, and heaviness, in the new info-economy playfulness is paramount.

As long as demand for housing continued apace, then everyone’s housing values increased (or more specifically, those in white neighborhoods—but that’s another story).6 Today housing wealth represents over one third of all net worth for American households, and that figure is much higher for low- and moderate-income families.7 Likewise, construction jobs were created. In 2008, the home-building industry directly employed 7.5 million workers, up from 1.25 million in 1945.8 Welcome to the Ponzi scheme we call the American real estate market. But this all worked because it was a relatively closed system. Who was footing the bill for high wages for American workers? American consumers, that’s who. It was no big problem, since these were the same folks as the workers who were demanding and receiving higher wages—after they clocked out. Wealth, in other words, was shared fairly broadly. Hence the rosy, if overly simplistic, picture of William H.

Even at a national level, this relationship holds. If you live in a home you own—especially if you enjoy the security of owning it outright—you have less need for the government to take care of you with a strong social insurance and pension system.16 Rather, you are actually living in your own private piggybank. What’s more, it is the family home, more than the stock market, that keeps our inequality Ponzi scheme going and that drives government policy and private choices. The median size of new homes has increased to 2,500 square feet today, up by almost 50 percent since 1976. Likewise, the proportion of new homes with four or more bedrooms has doubled and the number with three or more bathrooms has tripled in just the last twenty years. These figures, and the debt burden that drives them, make the home mortgage interest deduction the most sacrosanct federal policy after social security17 As a result, cheap and easy credit has been a major reason why the United States recently dipped into negative savings for the first time since the Great Depression.18And though manufacturing of machinery and other durable goods has pretty much flown the coop (that’s the coop, not the co-op), new homes and renovations are about the only thing left that we actually physically construct ourselves.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

The tango of exuberance and despair can and does affect estimates of stock’s fundamental value. As the economist Robert Shiller has long argued quite persuasively, however, the fundamentals of a stock don’t change nearly as much or as rapidly as its price. Ponzi and the Irrational Discounting of the Future Before returning to other applications of these financial notions, it may be helpful to take a respite and examine an extreme case of undervaluing the future: pyramids, Ponzi schemes, and chain letters. These differ in their details and colorful storylines. A recent example in California took the form of all-women dinner parties whose new members contributed cash appetizers. Whatever their outward appearance, however, almost all these scams involve collecting money from an initial group of “investors” by promising them quick and extraordinary returns. The returns come from money contributed by a larger group of people.

Alas, the journey from “have-lots” to “have-nots” was all too frequently by way of “have-dots.” Maybe our genes are to blame. (They always seem to get the rap.) Natural selection probably favors organisms that respond to local or near-term events and ignore distant or future ones, which are discounted in somewhat the same way that future money is. Even the ravaging of the environment may be seen as a kind of global Ponzi scheme, the early “investors” doing well, later ones less well, until a catastrophe wipes out all gains. A quite different illustration of our short-sightedness comes courtesy of Robert Louis Stevenson’s “The Imp in the Bottle.” The story tells of a genie in a bottle able and willing to satisfy your every romantic whim and financial desire. You’re offered the opportunity to buy this bottle and its amazing denizen at a price of your choice.

Ebbers, Bernie acquisition appetite of arrogance of author emails offer of help Digex purchase down-home style of forced to sell WCOM stock fraud by pump and dump strategy and purchase of WorldCom stock by economics, human behavior and The Education of a Speculator (Niederhoffer) “efficient frontier” of portfolios (Markowitz) Efficient Market Hypothesis background of impact of accounting scandals on increased efficiency results in decreased predictability investors beliefs impacting moving averages and paradoxes of randomness and rationale for resistance and support levels and versions of Elliott, Ralph Nelson Ellison, Larry employee remuneration vs. CEO remuneration endowment effect Enron accounting practices margin calls on CEO Ken Lay environmental exploitation, as Ponzi scheme equity-risk premium Erdös, Paul Escher, M. C. European stock market euros benefits of standardizing European currencies euro-pound/pound-euro exchange rate expected excess return expected value. see also mean value covariance and formula for obtaining graphing against risk (Markowitz optimal portfolios) insurance company example “maximization of expected value,” mu (m) probability theory and exploitable opportunities, tendency to disappear Fama, Eugene Fibonacci numbers Elliott wave theory and golden ratio and fibre-optic cable fifty-two-week highs “flocking effect,” Internet Fooled by Randomness (Taleb) formulas Black-Scholes options compound interest expected value fractals Frank, Robert fraud. see also accounting scandals applying Benford’s Law to corporate fraud applying Benford’s law to income tax fraud Bernie Ebbers Salomon Smith Barney benefitting illegally from IPOs WCOM fraud wrongdoing of brokers at Merrill Lynch free market economy French, Ken Full House: The Spread of Excellence from Plato to Darwin (Gould) fund managers. see also stock brokers/analysts fundamental analysis determining fundamental value by discounting process evidence supporting present value and sequence complexity and trading rules and as sober investment strategy stock valuation with unexciting nature of future value P/E ratio as measure of future earnings expectations present value and gambler’s fallacy games gambling and probability game theory guessing games Monopoly Parrondo’s paradox St.


pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

3D printing, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, Ethereum, ethereum blockchain, fiat currency, fixed income, friendly fire, game design, Isaac Newton, Julian Assange, land value tax, litecoin, M-Pesa, mobile money, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, QR code, quantitative easing, railway mania, Ronald Reagan, Ross Ulbricht, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, War on Poverty, web application, WikiLeaks

E-gold was already under FBI investigation in 2005. By 2009, it had been shut down. Its founders faced all sorts of legal calamities – and are still dealing with the fall-out. I’ve no doubt seeing their fate is part of the reason Bitcoin’s founder so prizes his anonymity. Other companies with similar models to E-gold sprang up and failed in the Noughties – eBullion, Standard Reserve, INTGold and even a multi-million dollar Ponzi scheme that had no gold at all, OS-Gold. James Turk, founder of the gold storage facility Goldmoney, had also patented an e-gold payments system, but Goldmoney abandoned this in 2012 because of the cost of compliance. So, Digicash failed because it had an erratic man in charge and it went bust. E-gold failed because the FBI shut it down. For all their genius, the success of both systems was dependent on the companies that ran them – they had a central point of failure.

At the climax of the panic, it hit $266, only to collapse to $70 a week later. Over the next six months, the range was flat around $100. More organizations started accepting bitcoins. Venture capital began pouring into the sector, despite continuing criminal activity ranging from hacking to money laundering. One notorious organization – the Texas Bitcoin Savings and Trust – was accused of being a Ponzi scheme. In court, its founder Trendon Shavers tried to argue that bitcoins are not real money to sidestep misappropriation-of-funds charges, but the judge ruled that ‘Bitcoin is a currency or form of money.’ In August, Bitcoin was also ruled a unit of account by the German Federal Ministry of Finance. In October, after some three years of trying, the FBI finally managed to shut down the Silk Road and seized some 27,000 bitcoins.

A friend and I once got involved in a pyramid scheme in the late 1990s. You paid £3,000 to get your place on the pyramid. You then, if I remember right, had to find eight people beneath you each paying £3,000 to you, so you made £24,000. They then had to find eight more. Did I make money? Er, no. This scene reminded me of the meetings I went to then, with large wads of cash being passed about. It’s a pyramid scheme, a Ponzi scheme, a scam. Alarm bells are going off. Should I get rid of my coins here and now? Now, like then, there are all sorts at the meeting. In addition to those already mentioned there are several Indians, a load of black guys either African or London-born, a proper Shoreditch twit with ridiculous hair and white leather jacket, people from all over Europe, a load of grungy-looking guys who are either homeless (complete with tracksuits, hoodies, roll ups, cans of lager and rotten teeth) or perennials on the festival circuit, a few couples, some city bods of various shapes and sizes, and goodness knows what else.


Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, buy and hold, carried interest, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, money market fund, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

Within the same two-week time frame, a third top-five investment bank, Merrill Lynch, would sink to the bottom alongside Lehman Brothers thanks to a hole blown in its side by years of reckless gambling debts; Merrill would be swallowed up in a shady state-aided backroom shotgun wedding to Bank of America that would never become anything like a major issue in this presidential race. The root cause of all these disasters was the unraveling of a massive Ponzi scheme centered around the American real estate market, a huge bubble of investment fraud that floated the American economy for the better part of a decade. This is a pretty big story, but at the moment I know nothing about it. Take it as a powerful indictment of American journalism that I’m far from alone in this among the campaign press corps charged with covering the 2008 election. None of us understands this stuff.

But we’ll never see our political parties sensibly aligned according to these obvious economic divisions, mainly because it’s so pathetically easy to set big groups of voters off angrily chasing their own tails in response to media-manufactured nonsense, with the Tea Party being a classic example of the phenomenon. If you want to understand why America is such a paradise for high-class thieves, just look at the way a manufactured movement like the Tea Party corrals and neutralizes public anger that otherwise should be sending pitchforks in the direction of downtown Manhattan. There are two reasons why Tea Party voters will probably never get wise to the Ponzi-scheme reality of bubble economics. One has to do with the sales pitch of Tea Party rhetoric, which cleverly exploits Main Street frustrations over genuinely intrusive state and local governments that are constantly in the pockets of small businesses for fees and fines and permits. The other reason is obvious: the bubble economy is hard as hell to understand. To even have a chance at grasping how it works, you need to commit large chunks of time to learning about things like securitization, credit default swaps, collateralized debt obligations, etc., stuff that’s fiendishly complicated and that if ingested too quickly can feature a truly toxic boredom factor.

It was a shell game—money comes in the front door as payroll taxes and goes right out the back door as deficit spending, with only new payroll taxes over the years keeping the bubble from popping, continuing the illusion that the money had never left. Senator Daniel Patrick Moynihan, way back in 1983, had called this “thievery,” but as the scam played out over the decades it earned a more specific title. “A classic Ponzi scheme” is how one reporter who covered Greenspan put it. Coming up with a scheme like this is the sort of service that endears one to presidents, and by the mid-eighties Greenspan got his chance at the big job. Reagan had grown disenchanted with Volcker. The administration apparently wanted a Fed chief who would “collaborate more intimately with the White House,” as one Fed historian put it, and they got him in Greenspan, whom Reagan put in the top job in 1987.


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

A timely election applies to the year for which it is made and all later years unless the IRS grants permission to revoke the election. As recent court decisions have demonstrated, the election cannot be made retroactively and no extension can be granted to make a late election. 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.

The portion of the gain from the sale of this small business stock that is excludable from income for regular tax purposes is includible in alternative minimum taxable income. For instance, if the 50 percent exclusion applies, then seven percent of the exclusion becomes a tax preference for the AMT. P1: OTA/XYZ P2: ABC c04 JWBT413/Weltman October 14, 2010 14:52 Printer Name: Yet to Come INVESTMENT LOSSES IN PONZI SCHEMES Mark-to-Market Reporting Those who regularly trade in securities may make a tax election, called markto-market accounting, to treat all securities positions as having been sold at the end of the year for their fair market value, with all gains and losses deemed to be ordinary gains or losses. Thus, those who incur losses would be able to report them all as ordinary losses rather than as capital losses subject to limitations.

See also Married couples Joint tenant, 4, 158 Keogh plan, 138 Kiddie tax: additional Medicare tax, 18 AMT exemption, 117 “child” definition for, 16 income shifting, 126 planning strategies, 17–18 threshold amounts, 16–17 Leased cars, 135–136 Leasehold improvements, 130 Legal expenses, 118 Life expectancy: Joint and Last Survivor Expectancy table, 64–77 Single Life Expectancy table, 78 Life insurance policies: accelerated death benefits, 30 tax-free exchange, 27 Lifetime gift tax exemption amount, 162 Lifetime Learning credit, 37 Limited liability companies (LLCs), 89 Limited liability partnerships (LLPs), 89 Living trust, 81, 158 LLCs. See Limited liability companies (LLCs) LLPs. See Limited liability partnerships (LLPs) Local tax, prepaid, 124 Lodging, travel expenses substantiation, 137 Long-term care insurance: deductible portion of, 26 exclusion for benefits paid from, 30 planning strategies, 27 riders, 27 Losses: in federal disaster areas, 108 in passive activities, 86–89 in Ponzi schemes, 85–86 Loss on sale of residence, 9 Lottery winnings, 155 Luxury cars, 132 P1: OTA/XYZ P2: ABC ind JWBT413/Weltman October 18, 2010 15:26 Printer Name: Yet to Come INDEX Making Work Pay tax credit: eligibility, 93–94 expiring tax laws, 167 MAGI cap, 95 payment method, 94 planning strategies, 96 Schedule M, 94 for self-employed individuals, 149–150 tax savings, 50 Mandatory health coverage.


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

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. In the early 2000s it was mutual fund timing. In the late 2000s it was PIPEs. In the later 2000s it was insider trading. Of course there were plenty of Ponzi schemes, of which Madoff is the worst. And, of course, a Ponzi scheme has many victims. For instance, me. I was not invested in Madoff. But I was running what’s called a fund of hedge funds at the time. This means an investor would invest money with me, I’d charge a fee, I’d then invest the money in hedge funds I did due diligence on, and they would all charge me fees. Forget that the initial investor is now paying 1 percent to me and then 2 percent to all the funds I invest in, plus a percentage of the profits to all the hedge funds I invest in (since hedge funds are allowed to charge on a percentage of profits, unlike mutual funds for unsophisticated investors).

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. Some vehicles that “sophisticated investors” invest in: hedge funds, funds of hedge funds, derivatives, venture capital funds, private equity funds. Other than the Ponzi schemes and super-fees charged by all these entities, here is the dark secret that none of these funds will tell you: when the market goes up, all of these funds do well. When the market goes down, pretty much all of these funds go down. There are exceptions, but that’s the case with any broad statement.

People who hold stocks for a millionth of a second (see Michael Lewis’s book “Flash Boys” which I highly recommend.) This is borderline illegal and I don’t recommend it. People who cheat. I’ve seen it for 20 years. I’ve seen every scam. I can write a history of scams in the past 20 years. Without describing them, here’s the history: Reg S, Calendar trading, Mutual fund timing, Death spirals, Front running, Pump and Dump, manipulating illiquid stocks, Ponzi schemes, and inside information. Inside information has always existed and always will exist. One time I wanted to raise money for one of my funds. I went to visit my neighbor’s boss. 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.


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

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. The last two hundred years of industrialized growth have been a Ponzi scheme. We have depleted our natural resources, spewed poisonous gases into our atmosphere, and created wasteful products that will far outlive our own existence. In essence we have taken without the intent of giving or ever repaying. The results can no longer be swept under the proverbial carpets of “liberal conspiracy” or “consumer denial.”

When the great recession hit in 2008, some pundits and economists heralded the end of consumerism, while some suggested that consumers needed to be prodded to shop again. Either way, they assumed that the traditional model of consumerism, the one in which we buy products, use them, throw them away, and then buy more, would continue, even if at a hobbled rate. While the “spend more, consume more” way out may be a short-term fix, it is neither sustainable nor healthy. While the rampant unregulated financial systems led to investors losing millions in Ponzi schemes, hedge funds, insurance companies, and even savings banks, everyday people pursuing the supposed American dream felt the worst impact. In all corners of the world, millions lost their homes, their jobs, their buying power, and their confidence. But within weeks of the crash, there were signs of a new and increasing consumer awareness, tinged with anger. We have been living in a society that for more than fifty years has encouraged us to live beyond our means, both financial and ecological.

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.


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

While the price was rising, few would want to sell – the point Law had made about the value of French land. However, this was a false analogy. French land was worth something because it produced food and offered shelter. The colonial possessions delivered nothing like enough to pay the dividends promised to those who bought the shares. Law had to pay those from the money raised in new issues – the definition of a Ponzi scheme.5 Law developed his system so that the bank would both collect taxes and assume the national debt. Everything seemed to add up; investors could pay for the shares with gold and silver (good), paper from Law’s bank (also good), or with government bonds (another positive, since it reduced the debt). But the system depended on confidence, which in turn relied on an ever-rising share price. That required the printing of more bank notes, the ability of investors to pay for shares in instalments and the promise of generous dividends on the stock.

Each layer needs more people than before, and the supply of optimists (suckers) is limited. In the Women Empowering Women scheme, each person needed to find eight new investors at every stage. At that rate, the expansion is very rapid, with successive stages requiring 8, 64, 512,4,096, 32,768 and 262,144 investors. 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.)

And lending standards had to be relaxed if the boom was to be kept going. Had banks kept a lid on the amount they would lend, relative to incomes, the supply of new buyers would have run out. So they increased the income multiple – janitors were given the chance to buy $500,000 houses. This was the heyday of sub-prime mortgages, when people with poor credit records and no proof of income were able to get loans. From the point of view of a Ponzi scheme, this made sense. A scheme always needs a fresh supply of new buyers. So the proportion of homeowners in the US population increased from 63 per cent to 69 per cent, and plenty of people ‘invested’ in property by buying additional homes. Loans were made with no money down. Indeed some loans did not even require borrowers to meet the full interest payment, with the shortfall simply added to the capital sum due.


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

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.

See also Creative Capitalism Gates, Melinda, 9, 30, 92 Girl Scouts of America, The, 52, 58 GiveWell, 80 Global Fund to Fight AIDS, Tuberculosis and Malaria, 2 Global Giving, 72 Global Peace Index, 61 Good Club, The, 94 Good to Great, 78 Google.org, 20, 32, 34, 80 Grameen Bank, 19, 62 Grameen Foundation, 41 Grameen Phone, 41 Greed patterns of, 9 Green Dot, 47 Green, Michael, 2 Greenlining Institute, 101 GuideStar International, 79 H Habitat for Humanity, 52, 58 Hartigan, Pamela, 74 Hasan, Arif, 12 Hatred patterns of, 9 Helmsley, Leona, 94 Hewlett Foundation, 104 Hindustan Lever (HLL), 42 HIV/AIDS, 37, 60, 89 Hoffman, Kurt, 3–4 Holla, Richard, 43 Homophobia patterns of, 9 Hookworm, 37 Hotmail, 72 How to Change the World: Social Entrepreneurs and the Power of New Ideas (Bornstein), 19 Humankind, love of, 2 I Ibrahim, Mo, 32 IMproved, 72 Individualism role of entrepreneur and, 71 Inequality attitudes toward economic, 67 Infosys, 3 Intel, 31 Iverson, Erik, 8 J JEHT Foundation, 4 K Kahn, Si, 70 Kaletra, 37 Karnani, Aneel, 42 Karnofsky, Holden, 80 Kassoy, Andrew, 21 King, Martin Luther, 19 Kiva, 72 Kunreuther, Frances, 70 L La Mujer Obrera, 19, 44 Landsburg, Daniel, 31 Lee, Mike, 87 Lehman Brothers, 4, 59 Leishmaniasis, 37 M Madoff, Bernard, 4, 59. See also Ponzi scheme Make the Road New York, 10, 11, 77 index Malaria bed nets and, 36 Mandela, Nelson, 30 Market regulation, 6 McKinsey and Company, 39, 52 Menon, Lakshmi, 43 Micro-Credit Ratings International Ltd., 73 Microcredit, 40 Microfinance, 40 Microsoft, 29, 30, 72 Mondragon, 22 Morino, Mario (quoted), 5 Movement Strategy Center, 13 MTV.com, 44 Multinational companies versus mom-and-pop stores, 17 Munger, Charles (quoted), 2 N National AIDS Control Organization, 39 National Center for Social Entrepreneurs, 47 National Committee for Responsive Philanthropy (NCRP), 90–91 Nature Conservancy, The, 51 NCRP (National Committee for Responsive Philanthropy), 90–91 New business models, 21–22 New Deal, 23 New Philanthropy Capital (NPC), 79 Nightingale, Florence, 19 Nilekani, Nandan, 3 Nilekani, Rohini, 74 Nonmarket peer production, 22 Nonprofit Quarterly, 51, 57–58 Novogratz, Jacqueline, 8 121 O Obama, Barack, 6 Omidyar Network, The, 30, 104 Omidyar, Peter, 7, 89 One Laptop Per Child, 31, 44 Oracle, 2 P Parent Teacher Associations (PTAs), 54 Participant Productions, 19, 44 PATH, 44 Peaceworks, 30 Philanthrocapitalism as form of philanthropy, 2 civil rights and, 14 competition and, 68 focus of, 9 hype surrounding, 34 rise of, 1–6 social justice and, 73 social problems and, 36 versus social transformation, 7 Philanthrocapitalists, 2–3, 78.

., 73 Microcredit, 40 Microfinance, 40 Microsoft, 29, 30, 72 Mondragon, 22 Morino, Mario (quoted), 5 Movement Strategy Center, 13 MTV.com, 44 Multinational companies versus mom-and-pop stores, 17 Munger, Charles (quoted), 2 N National AIDS Control Organization, 39 National Center for Social Entrepreneurs, 47 National Committee for Responsive Philanthropy (NCRP), 90–91 Nature Conservancy, The, 51 NCRP (National Committee for Responsive Philanthropy), 90–91 New business models, 21–22 New Deal, 23 New Philanthropy Capital (NPC), 79 Nightingale, Florence, 19 Nilekani, Nandan, 3 Nilekani, Rohini, 74 Nonmarket peer production, 22 Nonprofit Quarterly, 51, 57–58 Novogratz, Jacqueline, 8 121 O Obama, Barack, 6 Omidyar Network, The, 30, 104 Omidyar, Peter, 7, 89 One Laptop Per Child, 31, 44 Oracle, 2 P Parent Teacher Associations (PTAs), 54 Participant Productions, 19, 44 PATH, 44 Peaceworks, 30 Philanthrocapitalism as form of philanthropy, 2 civil rights and, 14 competition and, 68 focus of, 9 hype surrounding, 34 rise of, 1–6 social justice and, 73 social problems and, 36 versus social transformation, 7 Philanthrocapitalists, 2–3, 78. See also Philanthrocapitalism; Philanthropy Philanthropy as ineffective, 3 as support system, 99–100 fun of, 102–103 Planned Parenthood of America, 51 Ponzi scheme, 4 Porter, Michael (quoted), 3 Prahalad, C. K., 42 Project Red, 96 Project Shakti, 42 Public goods support for, 104–105 Pulse, 80 Pushback Network, 11 122 small change R Racism patterns of, 9 Rajani, Rakesh, 39 RealBenefits, 44 Red Brand, 2 Resource Generation, 104 Robinson, Mary, 30 Rockefeller, John D., 21 S School of Forestry and Environmental Studies (Yale), 65 Schwarz, Eric, 58 SCOPE (Strategic Concepts in Organizing and Policy Education), 10 Scott, H.


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

Most con artists don’t ever come to trial: they simply aren’t brought to the authorities to begin with. No matter the medium or the guise, cons, at their core, are united by the same basic principles—principles that rest on the manipulation of belief. Cons go unreported—indeed, undetected—because none of us want to admit that our basic beliefs could be wrong. It matters little if we’re dealing with a Ponzi scheme or falsified data, fake quotes or misleading information, fraudulent art or doubtful health claims, a false version of history or a less than honest version of the future. At a fundamental, psychological level, it’s all about confidence—or, rather, the taking advantage of somebody else’s. This book is not a history of the con. Nor is it an exhaustive look at every con there ever was. It is, rather, an exploration of the psychological principles that underlie each and every game, from the most elementary to the most involved, step by step, from the moment the endeavor is conceived to the aftermath of its execution.

And can you ever understand your own mind well enough that you learn to extricate yourself before it’s too late? CHAPTER 1 THE GRIFTER AND THE MARK He does not answer questions, or gives evasive answers; he speaks nonsense, rubs the great toe along the ground, and shivers; his face is discolored; he rubs the roots of his hair with his fingers. —PROFILE OF A LIAR, 900 BCE Whenever people ask me if I’ve ever been conned, I tell them the truth: I have no idea. I’ve never given money to a Ponzi scheme or gotten tripped up on an unwinnable game of three-card monte—that much I know. And there have been some smaller deceptions I’ve certainly fallen for—though whether they qualify as full-fledged cons is a matter of dispute. But here’s the thing about cons: the best of them are never discovered. We don’t ever realize we’ve fallen; we simply write our loss off as a matter of bad luck. Magicians often resist showing the same trick twice.

Marks vary as much as, and perhaps even more than, the grifters who fool them. In a 2011 study of over seven hundred fraud victims, alongside fifteen hundred non-victims, psychologists Karla Pak and Doug Shadel found that different types of people fell for different types of cons; depending on where you look, the profile of the ideal mark shifts considerably. Victims of investment frauds, like Bernie Madoff’s Ponzi scheme, and business opportunity frauds, like a lucrative investment in a new oil field, were more likely to be well-educated older men who made over $50,000 a year. Lottery frauds, on the other hand—fake tickets and the like—were likely to claim victims who were less educated and earned less money. When it came to prescription drug fraud and identity theft, the typical victim was a single female who made less than $50,000 a year.


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

The structure is an example of what Minsky would later call “Ponzi finance”—in reference to Mr. Ponzi, who ran one of the most audacious Ponzi schemes in the 1920s. See Minsky, Stabilizing an Unstable Economy, pp. 230–232, where he compares hedge, speculative, and Ponzi finance. 61. 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.

The company paid high dividends to boost the value of Crédit Mobilier’s share price, thereby keeping existing shareholders happy and attracting new ones; but to sustain the scheme over time, it was not enough to attract new shareholders or bondholders and take their contributions to pay out dividends or fixed returns to old shareholders and old bondholders. 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.

., 49 Pennsylvania University, 113 pensions, 63, 75, 83, 106, 255n71 Péreire brothers, 102–3 Pfizer Pharmaceuticals, 121–22, 124 pharmaceutical industry: Eli Lilly and, 138– 42, 152–55, 261n17, 261n19; intellectual property and, 129; Pfizer and, 121–22, 124; sovereignty and, 138; trade secrets and, 129 Piketty, Thomas, 4–5 plaintiffs, 32, 58, 69, 113, 142, 214, 265n5, 275n17 poison pills, 163–64, 266n15, 266n17 Poland, 133 Polanyi, Karl von, 11, 19, 128, 133, 220, 228, 276n29 Ponzi schemes, 103, 254n60, 254n62 Portugal, 133, 255n66 Posner, Eric A., 230, 232 power structures, 185, 206 Pratt, Ed, 121–22 PRIMA (place of the relevant intermediary approach), 136 priority rights: capital rule and, 206–7, 215; cloning legal persons and, 55–56, 63; code masters and, 158, 161; coding land and, 24–25, 29, 37, 39, 46; digital code 293 and, 193; durability and, 14; empire of law and, 13–14, 16, 18; enforcement of, 16; global code and, 149, 156; landlords and, 206; lawyers and, 158, 161; legal entities and, 14; minting debt and, 97, 107; Native Americans and, 34, 192–93; nature’s code and, 110; shielding and, 54–56, 107, 215; trade secrets and, 126 private law, ix; capital rule and, 20, 209–19; cloning legal persons and, 68; code masters and, 169–73, 182; contracts and, 2 (see also contracts); crytocurrency and, 198; digital code and, 198; empire of law and, 20–21; first-mover advantage and, 214–15; global code and, 133, 136, 154; international, 68, 136; law’s inherent incompleteness and, 210–13; minting debt and, 107; public power and, 216–19; trust law and, 3, 5, 44, 78, 211, 219, 226 private money: code masters and, 175; Crédit Mobilier and, 102–6; crytocurrency and, 198–99, 202; digital code and, 198–99, 202; future growth and, 102; Germany and, 101; minting debt and, 86, 89, 92, 101–7, 147, 202; Péreire brothers and, 102–3; risk and, 187, 198– 99; state money and, 15, 238n52 Privy Council, 27–29, 126 productivity, 39, 79, 117, 244n64 property: absolute, 30, 33; acquired rights and, ix–x, 42–45; capital rule and, 206, 209, 212–20, 222, 224, 230, 276n24; cloning legal persons and, 47, 68; code masters and, 158–60, 164, 172, 177; coding land and, 23–39, 42–46, 240n2, 241n10, 241n13, 242n27, 242n36, 243n41, 245n75; Cohen on, 137–38; Conveyance Act and, 38–39; courts and, 17, 23–28, 30, 38–39, 43–44, 96–97, 126, 136, 140, 143, 159–60, 172, 214–15, 218, 262; Debt Recovery Act and, 39–40; digital code and, 184–86, 191–94, 198, 203–4, 272n28; discovery doctrine and, 34–35; as dominium, 138; emerging land market and, 32; empire of law and, 1–5, 11–14, 17, 19, 21, 238n44, 238n48, 238n50, 239n56, 240n68; enclosure and, 29–35, 39, 229, 256n14; Enclosure Acts and, 29–30; eviction and, 41, 233; exclusive use rights and, 35, 209; feudalism and, 30, 36, 128–29, 158, 218; foreclosure and, 39, 95–98, 253n44; France and, 218, 242n27; general, 30; global code and, 135–40, 143, 262n45; 294 indeX property (continued) growth and, 4; industrial policy and, 118– 22; intangible capital and, 13, 24, 115–21, 143, 212, 216; intellectual, 3, 138 (see also intellectual property); ISDS and, 136–38, 140, 155–56, 261n22; labor and, 120; landlords and, 29–32, 35, 59, 93, 112–13, 158–59, 192, 206, 214, 244n64; landowners and, 24, 34–39, 42, 45, 56, 78, 128, 158–59, 166; legal entities and, 24, 44–47, 136, 159, 217, 224; legal title and, 24–29, 31, 33–34, 45–46; Maya people and, 23–29, 230, 261n21; minting debt and, 78, 86, 95–97, 107; monopolies and, 119–21 (see also monopolies); Native Americans and, 34, 192–93; nature’s code and, 108–9, 114–30; Norman conquest and, 30; numerus clausus and, 160; occupancy and, 31; ownership and, 30; patents and, 118–22; residual rights and, 191–92; rise of West and, 4; securitization and, 43, 78; Settled Land Acts and, 38–39; settlers and, 33–35, 42, 125, 192–93; sovereignty and, 26–27, 33, 120–21, 135–43, 160; squatters and, 34; Statute of Enrollments and, 44; Statute of Uses and, 44; Szabo on, 192–93, 198; titles and, 13, 25–27, 30–35, 37, 43, 46, 75, 96–97, 110, 125, 194, 206; treaty law and, 120; trust law and, 42–45; turning land into private, 29–35; US Constitution and, 25; wealth and, 4–5, 12, 14, 19, 21, 24, 36, 42–43, 46, 108, 130, 209, 217, 222, 224, 237n38, 240n68 Prussia, 93–95, 172–73, 242n27 public power, 216–19 put option, 55, 64, 226 Qatar, 84 Quarterly Journal of Economics, 94 radical markets, 230–33 rate of return, 4–5, 147 rating agencies, 80, 86–87, 98–100, 251n6, 251n19 rational choice theorists, 208, 216 real estate mortgage investment conduits (REMIC), 95, 253n41 reform: capital rule and, 218, 231; code masters and, 158–59, 171; coding land and, 38–41, 244n58, 244n64; digital code and, 273n46; empire of law and, 1; English land law and, 158, 244n58; minting debt and, 101, 106, 255n73; TRIPS and, 124–25 regulation: arbitrage and, 48, 56, 73–76, 90–91, 226; capital rule and, 211, 213, 216–17, 221, 224–27, 274n1; code masters and, 160–63, 168, 171–77, 182, 267n37, 268n42; coding land and, 44; convertibility and, 226–27; corporations and, 47–48, 50, 56, 68, 73–75, 249n46; digital code and, 185–86, 190, 271n17, 272n30; empire of law and, 7; global code and, 132, 135, 137, 141, 143, 145, 148, 151–54, 264n58, 264n67; insurance, 271n17; lawyers and, 160–63, 168, 171–77, 182, 267n37, 268n42; minting debt and, 85, 90–91, 99–100, 103–7, 251n6, 255n73; private, 264n58; REMIC and, 253n41; US Securities and Exchange Commission (SEC) and, 103, 195 Regulation and Administration of Safe Custody and Global Settlement (RASCAL), 73–75, 250n60, 250n62 regulatory arbitrage, 48, 73–76, 90–91, 226 religion, 90, 236n26 repurchase agreements (Repos), 74, 76, 145, 148, 211, 262n45 residential mortgage-backed securities (RMBS), 87, 94, 103, 108 residual rights, 191–92 retirement, 65 R.


Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, feminist movement, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, mental accounting, meta analysis, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

The moths dive into the flame. Shiller contends that speculative bubbles are naturally occurring Ponzi schemes that emerge spontaneously in financial markets, without requiring the machinations of a fraudulent promoter.82 Such self-organizing phenomena are common in complex systems. There is no need for false stories because there is always some buzz about the stock market anyway. A trend Theories of Nonrandom Price Motion 371 of rising prices acts as a call to action much like the gains of early investors in a Ponzi scheme. The message is then amplified by Wall Street’s salesmen, and they need not tell lies. They simply pitch the upside potential while downplaying the risk side of the story. The parallels between Ponzi schemes and speculative bubbles are so clear in Shiller’s opinion that the burden of proof is on those who deny the similarity.

If the late 1990s was a price bubble, it seems to be ending with many intervening pauses. 370 METHODOLOGICAL, PSYCHOLOGICAL, PHILOSOPHICAL, STATISTICAL FOUNDATIONS Self-Organizing Ponzi Schemes The feedback theory of price bubbles is appealing because of its plausibility and the numerous historical examples that seem to confirm its validity. However, it is hard to prove that a simple feedback mechanism involving heightened investor focus, imitative behavior, and exaggerated investor confidence is truly operational in financial markets. Nevertheless, Yale economist Robert Shiller believes actual cases of pyramid frauds known as Ponzi schemes offer evidence that confirms the feedback theory. The scheme, named after the infamous Charles Ponzi, who invented the idea in the 1920s, involves promising investors a high rate of return from some sort of business venture or investment.

See also Data mining; Data-mining bias computer-intensive methods applied to single rule, 241–243 data mining versus single-rule, 268–271 position bias and market trend components, 23–27 Bacon, Francis, 125–126 Barberis, Shleifer, and Vishny (BSV) hypothesis, 372–374, 376 Baseball statistics, data-mining bias and, 258 Base rate fallacy, 91 Bayes’ theorem, 90, 346 Beads in a box sampling example, 172–186 sampling distribution and, 203 statistical theory elements and, 186–190 Behavioral finance theory, 355–378 foundations of, 356–357 psychological factors, 357–362 scientific hypotheses of, 371–378 self-organizing Ponzi schemes and, 370–371 social factors, 362–369 Behaviorism, 81–82 Beliefs: belief inertia, in behavioral finance theory, 375 contrasted to knowledge, 1–5 erroneous, 33–38 Bell curve, 211–213 517 518 Bellman, Richard, 465 Benchmarks, 22–29 detrending and, 27–28 effect of position bias and market trend on, 23–27 using logs instead of percentages, 28–29 Best-performing rule: data-mining bias and, 263–264, 278–287 defined, 256 Biases, see Subjective technical analysis Bible Codes, data-mining bias and, 258–260 Binary rules, 15–31 inputs, outputs, signals, 16, 17 look-ahead bias, 29–30 subjective technical analysis and, 15–16, 72–78 thresholds and: fixed, 16–19 multiple, 19–21 trading costs, 31 traditional and inverse rules, 21–22 use of benchmarks in evaluation, 22–29 Black, Fischer, 345 Bloom, Norman, 258 Bootstrap sampling, 215, 235–238 applied to back test of single rule, 241–242 confidence intervals and, 248–250 contrasted to Monte Carlo method, 235 data-mining bias solutions and, 320–330 Bostian, David, 409 Bounded rationality, principle of, 42 INDEX Box Theory, 36–37 Bulkowski, T.N., 161 Camerer, C., 466–467 Capital asset pricing model (CAPM), 340–341 Case study, see Rule data mining case study Categorical syllogisms, 112–115 Central Limit Theorem, 211–213 Central tendency measurements, 191 Chaiken, Marc, 409 Chang, Kevin, 151–161 Channel breakout operator (CBO), 397–398, 419–420 Channel-normalization operator (CN), 401–403 Chart analysis, misplaced faith in, 82–86 representativeness heuristic and illusory trends and patterns, 93–101 Clustering illusion, 99–100, 362 Cognitive content, of knowledge and beliefs, 2–5 Cognitive psychology, see Subjective technical analysis Cohen, P.R., 282 Cointegration, 434–436 Commodity and currency hedge risk transfer premium, 379, 380–384 Complex rules, not in case study, 392, 452–461 Computer-based sampling methods, 215, 234–243 human interaction with, 464–465, 471–473 Conditional probability (p-value), 231–233 Index Conditional syllogisms, 115–116 invalid forms, 118–121 valid forms, 117–118 Confidence interval, 243, 245–247 defined, 216 generating with bootstrap method, 248–250 hypothesis test contrasted to, 250–252 sampling distribution and, 247–248 for TT-4-91 rule, 252–253 Configural-thinking problems, 42–45 Confirmation bias, 62–71 behavioral finance theory and, 358 belief survival and, 69 contradictory evidence and, 67–69 perception and motivation and, 62–63 questions and search and, 63–64 subjective methods and, 69–71 vague evidence and, 66–67 value evaluation criteria and, 64–66 Conjunction fallacy, 91–93 Conservatism bias: behavioral finance theory and, 357–358 BVS hypothesis and, 372–374 DHS hypothesis and, 375–376 Consistency, rule of, 111–112 Control illusion, 50 Cooper, Michael, 353, 384 Correlations, illusory, 72–82 asymmetric binary variables and, 78–80 behavioral psychology and, 81–82 binary variables and, 72 519 hidden or missing data and, 80 possible outcomes of binary variables and faulty intuition, 73–78 Cowles, Alfred, 462–463 Cumulative sum price-volume functions, 407–413 Curse of dimensionality, 465 Cutler, D., 349 Daniel, Hirshleifer, and Subrahmanyam (DHS) hypothesis, 375–376 Darvas, Nicholas, 36–37 Data distribution of the population, 206–207 Data distribution of the sample, 206–207 Data mining, see also Data-mining bias; Rule data mining case study confirmation bias and, 64 defined, 171, 255, 256, 264 as multiple comparison procedure, 264–265 soundness of premise of, 309–311 as specification search, 265–267 Data-mining bias, see also Data mining; Rule data mining case study anecdotal examples of, 256–261 causes of, 263–264, 278–287 defined, 255–256 experimental investigations of, 291–320 ATRs and, 309–311 variable merit rules and, 311–320 factors determining magnitude of, 287–291 objective technical analysis and, 267–272 520 Data-mining bias (Continued) solutions for dealing with, 320–330 statistical inference and, 272–278 Data-snooping bias, 390–391, 449 Dawes, R.M., 468–469 Declarative statements, beliefs and knowledge and, 2–5 Deductive logic, 112–121 categorical syllogisms, 112–115 conditional syllogisms, 115–121 Denial of the consequent, 112–121, 170, 219, 221 Descartes, Rene, 126 Detrending, 19, 27–28 in case study, 391–392 proof of value of, 475–476 Diaconis, Percy, 260 Directional modes, 21 Discernible-difference test, cognitive content and, 3–4 Divergence rules, tested in case study, 430–440 Drosnin, Michael, 259, 260 Dysart, Paul, 411, 412–413 Efficient Markets Hypothesis (EMH), 331, 334–355 assumptions of, 343–345 flaws in, 345–348 consequences of market efficiency, 335–336 efficient markets defined, 334–335 empirical challenges to, 349–355 evidence of, 337–342 false notions of, 337 falsification and, 141–143 information content of hypotheses and, 137–138 nonrandom price motion and, 378–385 paradoxes of, 342–343 INDEX Ehlers, J.F., 399, 400, 452 Einstein, Albert, 108 Elder, John, 83 Elfron, B., 235 Elliott Wave Principle (EWP), 60–61, 69–70, 137 Endowment bias, 375–376 Engle, R.F., 434, 436 Enumeration, deduction by, 122–124 Equity market risk premium, 379 Error-correction model, 434–435 Errors, unbiased and systematic, 272–274 Euler circles, 114–115 Evidence, vague and contradictory, 64–69 Evidence-based technical analysis (EBTA), see also Rule data mining case study academic findings and, 8–9 defined, 1 differs from technical analysis, 6–8 future and, 463–465, 471–473 Expected performance, defined, 255 Extended Middle, Law of, 111 Extreme values and transitions (E rules), tested in case study, 420–430 Falsifiable forecast, 47, 58 Falsificationism, 130–136 information content and, 136–139 scientific responses to, 139–143 Falsification of the consequent, 219–221 Fama, Eugene, 339, 354–355 Feedback, behavioral finance theory and, 366–371 Felsen, J., 464 Index Festinger, L., 63 Finucase, M., 470 Flip-flop(s), 20, 361 Forgas, Joseph, 471 Fosback, Norman, 411, 412–413, 416, 436, 464 Fosback Index, 436 French, Kenneth, 354–355 Frequency distribution, 179–181, 190–191 measuring central tendency, 191 variability (dispersion) measurements, 192–193 Futures markets, 380–384 Galileo Galilei, 106–107 Gambler’s fallacy, 99–100, 362 Gilovich, Thomas, 38, 68, 80, 85 Goldberg, L.R., 467 Gould, Stephen Jay, 58 Granger, C.W.J., 434, 436 Granville, Joseph, 408 Grossman, S.J., 343, 378 Grove, W.M., 468 Hall, J., 3–4 Hansen, Peter, 329 Harlow, C.V., 413 Hastie, R., 468–469 Hayes, T., 21 Head-and-shoulders pattern, objectification example, 151–161 Heiby, W.A., 403, 433 Herd behavior, 362–369 Heuristic bias, 41, 86–87 availability heuristic, 87–88 heuristic defined, 86 representativeness heuristic, 88–93 illusory trends and patterns and, 93–101 521 Hindsight bias, 50–58 Hong and Stein (HS) hypothesis, 376–377 Hsu, P.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, plutocrats, Plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, women in the workforce, young professional

.: The Financial Shadow Capital IMF Meetings in Istanbul: Dancing on the Titanic Power Summit: The Bilderberg Conference Stealth Power: Family Office Gatherings Feeding Off Power: Power Lunches Power Workout: Networking, Working, and Working Out “Superhub-Nobbing”: Private Parties The Higher Purpose of Networking: The Charity Circuit CHAPTER 8 OPPORTUNITY COSTS: THE DOWNSIDE OF THE UPSIDE Missing Out on Memorable Moments Stress Test: When Being a Superhub Is Not So Super Married to Their Jobs: Work-Family Life Imbalance Media Madness: Living Under a Microscope Super-Sick: Paying the Ultimate Price Clash of the Titans: Close Combat and Coups d’État Triumph and Defeat: A Turbulent Career CHAPTER 9 “WOMENOMICS”: THE MISSING LINK The Gender Gap: Women Missing in Action The Access Gap: Exclusive Means Excluding The Networking Gap: Schmooze or Lose The Assessment Gap: Performance versus Potential The Wage Gap: Selling Women Short The Failure Gap: Demoting Promotions The Mentoring Gap: Missing Out on Mentoring The Sexism Gap: The Wolves of Wall Street on the Prowl The Resilience Gap: Male Might and Female Feebleness Closing the Gender Gap: Superhub Christine Lagarde CHAPTER 10 REVOLVING SUPERHUBS: CREATING NETWORK MONOPOLIES Psychological Kidnapping The Revolving Door The Oscillating Megahub: Robert Rubin Open Doors: Tony Blair Cross-Connections: Cooperating Constructively in Times of Crises Launching a President “Legalized Corruption”: The Best Democracy Money Can Buy Purchasing Political Protection Relationship Power: Diffusing the Euro Time Bomb Super-Entity: The Capitalist Network That Runs the World CHAPTER 11 DE-LINKED: EXPULSION AND COMEBACK Sent into Exile: Dick Fuld Shock-Resistant: Larry Summers’s Network Meteoric Rise Against All Odds The Bull in Charge of the China Shop Den of Thieves: Mike Milken Complete Network Collapse: Dominique Strauss-Kahn Ponzi Schemes and Sex Scandals: Buddy Fletcher and Ellen Pao Omni-Connected: Michael Klein CHAPTER 12 SUPER-CRASH: “EXECUTIVE CONTAGION” The Crash of a Titan: John Meriwether The Big Picture: Capitalism in Crisis Debt and Financialization Wealth Gap and Inequality Globalization Winners versus Globalization Losers Approaching the Tipping Point When an Irresistible Force Meets an Immovable Object: Brexit The Next Crisis: Systemic Failure and Contagion The Culprit: The Superhubs or the System?

While any official position at least for the time being seems inconceivable, the stigma surrounding him has somewhat subsided—though it will likely never fully disappear. The French establishment has slowly lowered its guard and begun opening up its ranks and including him again. Thus, while regaining his status as a superhub is highly unlikely, becoming a well-linked hub again seems feasible in the absence of further jaw-dropping scandals. PONZI SCHEMES AND SEX SCANDALS: BUDDY FLETCHER AND ELLEN PAO Minorities in high finance are rare; rarest of all are minority couples in which both partners are superhubs. One of those power couples was Buddy Fletcher and Ellen Pao. In network terms, they started out as nodes at the fringes of the system before equipping themselves with the preconditions and qualities needed to move to the center of the financial network.

Upon liquidation, the court-appointed liquidator stated that $125 million appeared to have vanished and that investors’ monies were handled inappropriately, including the drawing of opaque and excessive fees at multiple levels and payment to Fletcher-affiliated entities without any benefit to investors and payment to Fletcher-affiliated entities. It also surfaced that Fletcher had financed his brother Geoffrey’s movie Violet & Daisy with $7.7 million of public-pension-fund money, an investment that unfortunately yielded a multimillion-dollar unrealized loss.13 According to the trustee’s report, “In many ways, the fraud here has many of the characteristics of a Ponzi scheme, where, absent new investor money coming in, the overall structure would collapse.”14 While building his impressive portfolio of prime real estate, cars, and relationships, Fletcher also continued to build an impressive portfolio of high-profile lawsuits. In addition to his racial discrimination suits against Kidder Peabody and the Dakota, he was sued by two of his Harvard friends-turned-employees, Michael Meade and Stephen Cass, who alleged sexual harassment after being fired for spurned advances.


pages: 349 words: 102,827

The Infinite Machine: How an Army of Crypto-Hackers Is Building the Next Internet With Ethereum by Camila Russo

4chan, Airbnb, algorithmic trading, altcoin, always be closing, Any sufficiently advanced technology is indistinguishable from magic, Asian financial crisis, bitcoin, blockchain, Burning Man, crowdsourcing, cryptocurrency, distributed ledger, diversification, Donald Trump, East Village, Ethereum, ethereum blockchain, Flash crash, Google Glasses, Google Hangouts, hacker house, Internet of things, Mark Zuckerberg, Maui Hawaii, mobile money, new economy, peer-to-peer, Peter Thiel, pets.com, Ponzi scheme, prediction markets, QR code, reserve currency, RFC: Request For Comment, Richard Stallman, Robert Shiller, Robert Shiller, Sand Hill Road, Satoshi Nakamoto, semantic web, sharing economy, side project, Silicon Valley, Skype, slashdot, smart contracts, South of Market, San Francisco, the payments system, too big to fail, tulip mania, Turing complete, Uber for X

Voters would release funds as milestones were met, and if they were unhappy, they could just shut down the DAICO and get their money back. Some teams tried this out, but the damage was done. Many of the scams that mushroomed in 2017 started getting uncovered. Plexcoin was one of the many obvious Ponzi schemes, with promoters guaranteeing 1,300 percent monthly returns. The SEC shut them down in January. The two creators of CentraTech, the company behind the ICO promoted by Floyd Mayweather and DJ Khaled, were arrested for securities fraud. A Vietnamese company called Modern Tech, which had raised $660 million in two ICOs, simply disappeared with the money. Probably the most notorious scam was Bitconnect, another Ponzi scheme, infamous for a cultlike gathering where spokesman Carlos Matos half-danced, half-jumped around onstage as he told the cheering crowd how he was putting his money in the scheme even as his wife and friends told him it was a scam.

In part it was thanks to Matthew’s arguably overly aggressive ambition to see the magazine in print that got them there, but he didn’t remain in the magazine for long. Matthew, who was editor in chief at the time, resigned in September 2012, just four months after the first issue shipped. His departure was a consequence of his decision to throw his support behind a crypto project called “Pirate” that was rumored to be a scam. On BitcoinTalk, he challenged those saying the project was a Ponzi scheme or fraud to comment on his post saying how much they were willing to bet him the project was legitimate. If he won, he would pay them back double the amounts committed. Not surprisingly, with a name like Pirate, the project closed with allegations of lost investments discussed in online forums. He didn’t pay back all the money he owed from his bets, his reputation was tarnished, and his apology letter to the community was endlessly questioned and ridiculed.

The first post said, “it simply is NOT fair and safe or possibly even legal what these guys are doing and if regulation is looming and imposed without warning you people out there supporting crap like this could wound [sic] up waking up tomorrow with charges laid against you.” It added, “Bottom line it’s a dumb idea and it’s an IPO and IPO’s in crypto are ALL scams.” Farther down the thirty-page thread someone wrote, “Ethereum is a ponzi scheme ran [sic] by a few wealthy investors who think throwing bags of money to a coin will attract subsequent bags of money from subsequent investors.” Some went for personal attacks on the cofounders. Joe Lubin’s connection with Goldman Sachs was brought up as a reason to be wary, while a more vicious user wrote, Anthony is some Oliver Twist–esque Fagin character and Vitalik is an anointed coding genius that is utilized to play the role of lead dev.


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.

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.’’ We can confidently expect to see a long string of scams and frauds to wash up on the shore.

We can’t anticipate exactly what the market will do tomorrow, but we can hedge our bets and act on our own risk tolerance. We Conclusion can make our own decisions like grown-ups and take responsibility for the ones that go wrong. If something sounds too good to be true, it probably is, and those who are not skeptical of the claims of financial professionals can end up at the wrong end of a Ponzi scheme or an exploding interest-only mortgage. However, nobody is compelled to do anything. Markets are about choice. Political risk is different, as our founding fathers, who knew a lot of real history, well understood. When the state seizes the ‘‘commanding heights’’ of the economy like the banking system and replaces the millions of choices people make in markets with its own superior wisdom, bad things almost always follow.


pages: 296 words: 76,284

The End of the Suburbs: Where the American Dream Is Moving by Leigh Gallagher

Airbnb, big-box store, Burning Man, call centre, car-free, Celebration, Florida, clean water, collaborative consumption, Columbine, commoditize, crack epidemic, East Village, edge city, Edward Glaeser, extreme commuting, helicopter parent, Home mortgage interest deduction, housing crisis, Jane Jacobs, Kickstarter, low skilled workers, Mark Zuckerberg, McMansion, Menlo Park, mortgage tax deduction, negative equity, New Urbanism, peak oil, Peter Calthorpe, Ponzi scheme, Richard Florida, Robert Shiller, Robert Shiller, Sand Hill Road, Seaside, Florida, Silicon Valley, Steve Jobs, Stewart Brand, the built environment, The Death and Life of Great American Cities, Tony Hsieh, transit-oriented development, upwardly mobile, urban planning, urban sprawl, Victor Gruen, walkable city, white flight, white picket fence, young professional, Zipcar

The amount of tax revenue their low-density setup generates, he says, doesn’t come close to paying for the cost of maintaining the vast and costly infrastructure systems, so the only way to keep the machine going is to keep adding and growing. “The public yield from the suburban development pattern is ridiculously low,” he says. One of the most popular articles on the Strong Towns Web site is a five-part series Marohn wrote likening American suburban development to a giant Ponzi scheme. Here’s what he means. The way suburban development usually works is that a town lays the pipes, plumbing, and infrastructure for housing development—often getting big loans from the government to do so—and soon after a developer appears and offers to build homes on it. Developers usually fund most of the cost of the infrastructure because they make their money back from the sale of the homes.

Marohn has not been immune from the pain of the housing crisis. His house, which he and his wife had built in 1995 and refinanced a few times, has lost value; it was assessed at $272,000 a few years ago and he thinks it would sell today for $200,000. But he’s more concerned for his brother, Brent, who lives forty-five minutes from Minneapolis in the exurb of Rogers, Minnesota—an area that, as Marohn puts it, “got very caught up in the entire growth Ponzi scheme”—and commutes to an inner-ring suburb. Brent’s house has dropped “tremendously” in value, Marohn says. He worries about his brother’s situation; the more gas prices go up, the fewer people there will be that can afford his house, forcing prices to drop further and further. At that point, Marohn believes, one of two things will happen: either a local economy will spring up in his brother’s town to provide jobs for its people so they don’t have to commute, or his brother’s house is going to continue to lose value until it’s ultimately worth nothing and sold for salvage.

., 204 Las Vegas housing bust in, 72, 73–74 Zappos relocation to, 174–77 Lawrenceville, Pittsburgh, 202 Le Corbusier, 119 Lee, Annette, 85–86, 194 Leinberger, Christopher, 38, 64, 81–82, 130, 131, 135, 188 on housing market location, 199 reactions to ideas of, 195 on suburban development, 38 Lennar Corporation, 156 Levitt, William, 37 Levittown, 37, 43, 46, 65 Libertyville, Illinois, 140–41 LifeEdited, 22, 138–39, 159 Lifestyle centers, 127–28, 132 Lind, Diana, 208 Lindsay, Greg, 166 “Little Boxes” (song), 39 Littledigs.com, 138 Live/work spaces, 122 Living alone, rise of, 146 Llewellyn Park, West Orange, New Jersey, 31 Location-efficient mortgages, 101–3, 206 LoDo, Denver, 168 Loneliness of suburbanites, 91–92, 125, 132–33 Long Beach, California, 63 Lopez, Russ, 45–46 Loudoun County, Virginia, 13, 68 Lower East Side, New York City, 29 Lowe’s, 45 Lucy, William, 160–61, 199–200, 210 McGirr, Lisa, 179 McIlwain, John, 209 McLinden, John, 7, 140, 141–42, 200–201 McLives, 139–140 McMahon, Bob, 133 McMansions, 69–71, 136, 205 Malls. See Shopping malls Mangiamele, Paul M., 182 Mansueto, Joe, 173 Marohn, Charles, 53–61 background information, 53–56 on codes and standards, 63 on housing boom/bust, 74 Ponzi scheme, suburban development as, 58–60, 77–78 Strong Towns/Curbside Chat, 56–58 on suburban prosperity myth, 65, 207 Marriage average age of, 146 decline in rate of, 145–46 Mass-produced communities, 37–38, 46, 70 Matthews, Anne, 184 May, William, 154 Media, Pennsylvania, 10–13, 133, 201–2 Meeks, Rachel, 108 Melman, Stephen, 138 MetroWest, Washington, DC, 128 Meyer, Deborah, 128, 145 Millennials birth years of, 19 cities, preference for, 19–20, 157–59 delayed adulthood of, 152–54 driver’s license decline among, 20 in “first ring” suburbs, 202–3 as Generation Rent, 158 home-related needs of, 157–59 impact on housing market, 155–59 living with parents, 152–55 Miller, Nicole, 154, 161 Minimalism, post-Recession mentality, 138–140 Model T, 32, 82 Morristown, New Jersey, 128–29, 203 Mortgages cheap, and housing boom (2000s), 66, 69, 71 deduction, negative aspects of, 74–76 foreclosures and housing bust, 73–74 historical view, 35, 40, 61 interest tax deduction, 35, 61, 74–75 location-efficient mortgages, 101–3, 206 Moses, Robert, 47 Multifamily construction, 6, 16, 18, 198 Multigenerational homes, 156–57 Mumford, Lewis, 27, 33, 46, 48 My Favorite, 144 Narberth, Pennsylvania, 134–35, 171 National Association of Home Builders (NAHB), 39 National Homeownership Day, 65 National Homeownership Strategy, 66 Neighborhood Market, 18, 172 Neighborhood satisfaction, 91 Nelson, Arthur C., 20, 60, 159, 204 Newgeography.com, 193 Newtown Station, Pennsylvania, 129 New Urbanism, 113–142.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, buy and hold, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Joi Ito, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, underbanked, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

In late June 2013, reports emerged that the FBI had seized 11 bitcoins (then worth $800) from a drug dealer in what was seen as an initial “honeypot sting” on Silk Road. A month later, the Securities and Exchange Commission filed charges against Trendon Shavers, a Texan accused of running a bitcoin Ponzi scheme under the moniker pirateat40. That the Feds were now taking bitcoin seriously was an alarming yet exhilarating proposition for bitcoiners, who were divided between those who wanted its lawlessness to continue and those who believed its growth depended on the legitimacy of regulation and enforcement against criminality. While the news of drug busts and Ponzi schemes bred some mainstream suspicion about this unfamiliar, anonymous currency, it also spurred curiosity among some who hadn’t yet cottoned on to bitcoin’s possibilities. What was the fuss about? Inquiries led to discoveries, which led to investments.

Stage Two: Skepticism. You read the paper every day, and enough stories have appeared to convince you that bitcoin is real, that some entrepreneurs, including the Winklevoss twins of Facebook fame, expect to make a lot of money from it. But the details don’t add up. You get it by doing math problems? No? By having your computer do math problems? How can that possibly work? At this stage, phrases like Ponzi scheme and tulip mania enter your mind. Stage Three: Curiosity. You’ve kept reading. It becomes clear that many people, even some seemingly sensible people such as Internet pioneer Marc Andreessen, people with a track record for being right about this stuff, are genuinely excited by it. But why all the fuss? Okay, it’s digital money, it may work, but what difference is that going to make to regular people?

By the summer of 2012 Kenna was unable to meet payroll and knew he had to shut the exchange down. Kenna had to return all the money his customers had entrusted to Tradehill and shut down the exchange. The only other option was to “turn into a fractional-reserve bank,” he said jokingly, referring to the bank model that allows banks to lend out deposits while holding only a fraction of those funds in reserve. “They call it a Ponzi scheme unless you have a banking license.” He’d sunk everything he had into Tradehill. Now, he was broke, so broke that he couldn’t afford rent. He figured the only way he could find shelter was to turn some place into a communal living space. If he could organize it, he figured, he could finagle the rent. Kenna had always been intrigued by the idea of what’s popularly called a hacker house, with people working together and pooling resources, “but until I got to San Francisco, I didn’t realize you could actually do it.”


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

Deflating financial bubbles and inflating the cost of living are problems that only scoundrels at the Fed can deliver to us. All the regulations in the world on the economy won’t help. Regulations must someday be directed toward the more deserving targets, such as the Fed, Treasury, FDIC, SEC, and the Exchange Stabilization Fund. The entire system of fiat money and fractional-reserve banking is like a super Ponzi scheme (if we can’t pay it back, let’s just create more!) and is the source of our problems. Why should we be surprised that, if our government runs a Ponzi scheme, some people feel morally justified doing the same? When did we accept this idea that governments have license to do what they want without moral restraints, and the people must live by a different standard? The answer, of course, is that government must follow the same rules that moral people are expected to. One of the great dangers that exists once the problem breaks out from collapsing financial bubbles is the cry for protectionism.

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. Congress accommodated and quickly passed the Sarbanes-Oxley legislation. Just as the SEC regulations of the 1930s aggravated and helped to prolong the Depression, the bear market starting in the year 2000 has been aggravated and prolonged by Sarbanes-Oxley. The argument following the Madoff revelation of a $50 billion Ponzi scheme prompted outcries about the deficiencies of the SEC and that we needed even more SEC regulators on the job. We have 3,500 bureaucrats in the SEC, and the argument is that we don’t have enough. Of course that’s enough, although the truth is that 20,000 SEC regulators wouldn’t suffice because they can’t police every business transaction and prevent fraud from being committed. We don’t expect a policeman in front of every house in the country to prevent our homes from being broken into.


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

He has since moved on to ventures far exceeding simple web site design, so it was very random that his book Rework inspired me to write Trend Commandments. His big question made me think: Ignition 7 “Taking a stand always stands out. Who do you want to take a shot at?”4 A valid question. My answer: Wall Street, the government, and media for starters. Let go of them. That is a breath of fresh air in an era of constant depression and recession talk, nonstop predictions, clueless economists, and Federal Reserve Ponzi schemes. Trend Commandments is for those who know deep down that there is a real way to make money in the markets, but just do not know how yet. However, you will be surprised that the secret is hiding in plain sight. There was a great story on author Seth Godin’s web site. He had a college professor who worked as an engineering consultant. There was a 40story office tower in Boston with a serious problem—an unsightly dark smudge was coming through the drywall.

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.

In 2010, Brian Sack, a senior official at the New York Fed, admitted the need to keep stock markets artificially high: “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, If you close your and it adds to household wealth by keeping asset eyes, the monster prices higher than they otherwise would be.” will not go away. The Fed has essentially admitted to operating 2 a Ponzi scheme. Am I saying to not trade? No. A government-manipulated market is still a market. You lose money and you jump out the window, too bad. It’s your problem. Government should realize at the end of the day it’s investors who bear responsibility for their investments.3 With all of the extracurricular policy-making of the government aimed at rigging the markets to some unknown right level, trend following is the only sanity available.


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.

The audience before her was filled with friends and acquaintances, people she had known for years during her decades-long career as a government and private sector regulator, and she was happy to be in front of what was certainly a friendly group. She needed friends. Appointed chairman of the SEC just over a year earlier, Schapiro was trying to reform a government agency reeling from one spectacular failure after another, especially the Madoff and Stanford Ponzi schemes and the SEC’s own role in the 2008 financial crisis. Madoff was an exceptionally deep wound. The SEC’s Inspector General had recently issued a scathing report on the agency’s failure to detect the scam. The report showed that despite many tips and warnings, some of them very detailed, and despite sending several teams of SEC examiners to Madoff’s offices over the years to look for fraud, Madoff swindled clients for 20 years under the SEC’s nose.

A few weeks later in January 2009, an outspoken economics and financial industry blogger writing under the name Tyler Durden at ZeroHedge.com appeared. He soon started writing critically about HFT strategies and firms. In April he wrote, “What retail investors fail to acknowledge is that the quants [HFT firms] close out a majority of their ultra-short term positions at the end of each trading day, meaning that the vanilla money is stuck as a hot potato bag holder to what can only be classified as an unprecedented Ponzi scheme.”10 In July, after a former Goldman Sachs programmer was arrested on charges he stole Goldman’s proprietary trading software, Tyler Durden wrote almost daily about the dominance and risks of hyperactive computer-driven trading strategies, drawing more attention to the practice than ever before. The mainstream press noticed, and stories about high-speed, computerized traders started appearing in The New York Times and The Wall Street Journal.


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

But the more people do this the greater the threat to the continuity of circulation. Releasing money back into circulation to get more social power takes either an act of faith, or requires safe and trustworthy institutions where you can put your personal money at someone else’s disposal to pursue profit-making adventures (which is, of course, what banks traditionally do). Trust in the system becomes crucial. Ponzi schemes of whatever sort undermine that trust. Loss of confidence in the symbols of money (the power of the state to guarantee monetary stability) or in the quality of money (inflation) butts up against the possibility of monetary famine and the freezing up of the means of payment of the sort that occurred in autumn in 2008. At the heart of the credit system there exist a range of technical and legal aspects (many of which can fail or badly distort, simply by virtue of their rules of operation) coupled with subjective expectations and anticipations.

All manner of predatory practices as well as legal (usurious interest rates on credit cards, foreclosures on businesses by the denial of liquidity at key moments, and the like) can be used to pursue tactics of dispossession that advantage the already rich and powerful. The wave of financialisation that occurred after the mid-1970s has been spectacular for its predatory style. Stock promotions and market manipulations; Ponzi schemes and corporate fraud; asset stripping through mergers and acquisitions; the promotion of levels of debt incumbency that reduce whole populations, even in the advanced capitalist countries, to debt peonage; dispossession of assets (the raiding of pension funds and their decimation by stock and corporate collapses) – all these features are central to what contemporary capitalism is about. Wholly new mechanisms of accumulation by dispossession have also opened up.

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: 353 words: 91,520

Most Likely to Succeed: Preparing Our Kids for the Innovation Era by Tony Wagner, Ted Dintersmith

affirmative action, Airbnb, Albert Einstein, Bernie Sanders, Clayton Christensen, creative destruction, David Brooks, en.wikipedia.org, Frederick Winslow Taylor, future of work, immigration reform, income inequality, index card, Jeff Bezos, jimmy wales, Joi Ito, Khan Academy, Kickstarter, knowledge economy, knowledge worker, low skilled workers, Lyft, Mark Zuckerberg, means of production, new economy, pattern recognition, Paul Graham, Peter Thiel, Ponzi scheme, pre–internet, school choice, Silicon Valley, Skype, Steven Pinker, TaskRabbit, the scientific method, uber lyft, unpaid internship, Y Combinator

A vitriolic controversy rages in our country about the fiscal sustainability of these funds. We have prominent political figures calling them “Ponzi schemes”22 and other political influencers calling them the financial equivalent of the Rock of Gibraltar.23 Analyzing the financial footing of any of these large pools of money, including realistic estimates of future in-flows and out-flows, is a numbers-driven exercise. Determining under what circumstances a given pool will remain financially solvent shouldn’t be determined by political party affiliation. Yet, as our parties have become more polarized, we see a sharp partisan divide on the issue of financial reality.24 Democrats Give Far Less Priority to Reducing the Budget Deficit While we wouldn’t use the ethically charged term “Ponzi scheme” to describe the financial underpinnings of these pools, it is quite clear that many of these vehicles are ticking financial time bombs.

Mother Jones, January 21, 2014. http://www.motherjones.com/blue-marble/2014/01/global-warming-janus-snow (accessed December 30, 2014). 21 Clynes, Tom. “The battle over climate science.” Popular Science, June 21, 2012. http://www.popsci.com/science/article/2012-06/battle-over-climate-change (accessed December 30, 2014). 22 Jacobson, Louis. “Rick Perry says Social Security is a Ponzi scheme.” PolitiFact.com, September 12, 2011. http://www.politifact.com/truth-o-meter/statements/2011/sep/12/rick-perry/rick-perry-says-social-security-ponzi-scheme/ (accessed December 30, 2014). 23 Baker, Dean, and David Rosnick. “Basic facts on social security and proposed benefit cuts/privatization.” Center for Economic and Policy Research, March 2005. 24 Krugman, Paul. “Inventing a crisis.” New York Times Op-Ed. December 7, 2004. http://www.nytimes.com/2004/12/07/opinion/07krugman.html?


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

ZZZZ Best was accused of acting as a front for organized-crime figures who would buy equipment for the company with “dirty” money and replace their investment with “clean” cash skimmed from the proceeds of ZZZZ Best’s legitimate carpet-cleaning business. The spectacular growth of the company was produced with fictitious contracts, phony credit card charges, and the like. The operation was a giant Ponzi scheme in which money was recycled from one set of investors to pay off another. Minkow was also charged with skimming millions from the company treasury for his own personal use. Minkow and all the investors in ZZZZ Best were in wall-to-wall trouble. The next chapter of the story (after Chapter Eleven) occurred in 1989 when Minkow, then twenty-three, was convicted of fifty-seven counts of fraud, sentenced to twenty-five years in prison, and required to make restitution of $26 million he was accused of stealing from the company.

The updraft encourages more people to buy the stocks, which causes more TV and print coverage, which causes even more people to buy, which creates big profits for early Internet stockholders. The successful investors tell you at cocktail parties how easy it is to get rich, which causes the stocks to rise further, which pulls in larger and larger groups of investors. But the whole mechanism is a kind of Ponzi scheme where more and more credulous investors must be found to buy the stock from the earlier investors. Eventually, one runs out of greater fools. Even highly respected Wall Street firms joined in the hot-air float. The venerable investment firm Goldman Sachs argued in mid-2000 that the cash burned by the dot-com companies was primarily an “investor sentiment” issue and not a “long-term risk” for the sector or “space,” as it was often called.

As the economic historian Charles Kindleberger has stated, “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” And as Robert Shiller, author of the best-selling Irrational Exuberance, has noted, the process feeds on itself in a “positive feedback loop.” The initial price rise encourages more people to buy, which in turn produces greater profits and induces a larger and larger group of participants. The phenomenon is another example of the Ponzi scheme that I described in chapter 4, in connection with the Internet bubble. Eventually one runs out of greater fools. Such herding is not limited to unsophisticated individual investors. Mutual-fund managers have a tendency to follow the same strategies and herd into the same stocks. Indeed, a study by Harrison Hong, Jeffrey Kubik, and Jeremy Stein, three leaders in the field of behavioral finance, determined that mutual-fund managers were more likely to hold similar stocks if other managers in the same city were holding similar portfolios.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, business cycle, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kickstarter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Another cause was that the very feature that was meant to ensure that Bitcoins were sound money (just like gold) in the first place—their finite supply—became a source of speculation, and a Bitcoin bubble.35 Arguably, Bitcoins were being mined primarily not in order to be used but rather to be hoarded. This phenomenon prompted some critics to liken the currency to a Ponzi scheme. The comparison seems flawed: unlike entrants to a Ponzi scheme, holders of Bitcoins are not—per se—victims of fraud. But according to Eric Posner, Bitcoin “investors” are likely to suffer the same fate: “Bitcoin will collapse when people realize that it can’t survive as a currency because of its built-in deflationary features, or because of the emergence of bytecoins, or both. A real Ponzi scheme takes fraud; Bitcoin, by contrast, seems more like a collective delusion.”36 Viewed simply as a currency, Bitcoin’s biggest pitfall is likely to be price deflation (and, in extremis, hyperdeflation), not inflation.

Bureau of Economic Analysis, see http://www.bea.gov/scb/pdf/2011/07%20July/0711_brief_indy_tables.pdf. 34 Source: Federal Deposit Insurance Corporation, see http://www.fdic.gov/bank/statistical/. 35 Source: World Bank, see http://search.worldbank.org/quickview?name=%3Cem%3EBank%3C%2Fem%3E+capital+to+assets+ratio+%28%25%29&id=FB.BNK.CAPA.ZS&type=Indicators&cube_no=2&qterm=bank+debt+leverage. 36 The latter is a reference to Charles Ponzi, origin (but not originator) of the term “Ponzi scheme.” A Ponzi scheme is a fraudulent investment scheme that pays returns to its investors not from earned profits but from the monies paid into the scheme from new investors. Ponzi operated such a scheme, via his Securities Exchange Company based in Boston, which collapsed in 1920. He spent the next fourteen years in and out of prison (Zuckoff 2006). 37 The sophistication increases when nonbank financial institutions use bank debt, open-market debt, and long-term bonds to acquire debts and a “layering” of debt occurs (Minsky 1975: 121). 38 “Thus investment becomes ‘safe’ for the individual investor over short periods.”

Paul Krugman described the system that made the crisis possible as “a world gone Madoff,” in which fraud is rife and bankers’ salaries are based merely on the illusion of profit. According to Krugman, “the vast riches being earned … in our bloated financial industry undermined our sense of reality.”25 In a similar vein, Slavoj Žižek called the Bernard Madoff case “an extreme but therefore pure example of what caused the financial breakdown itself” (Žižek 2009: 36). Madoff’s crime (his wealth management business operated as a Ponzi scheme for many years before its collapse in 2008, costing investors around $18 billion) was merely a manifestation of a form of reasoning that is inscribed into the very system of capitalist relations, namely, that the sphere of circulation must be expanded—using “fraudulent” monetary instruments, if necessary—to keep the machinery running: “the temptation to ‘morph’ legitimate business into a pyramid scheme is part of the very nature of the capitalist circulation process” (Žižek 2009: 36).


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Ponzi scheme, rent-seeking, Ronald Reagan, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

By mid-2004, this group had invested a total of nearly US$23 billion in about 450 micro-finance institutions. But micro-finance is not without its naysayers. This type of lending to the poor is criticized as loan-sharking (charging punitive and exorbitant rates), as fuelling Ponzi schemes (borrowing from one lender to pay off another) and as simply supporting reckless consumption. However, with ever-increasing numbers of micro-lenders, and growing participation in this type of lending, the interest rates charged inevitably become lower and, in this sense, more competitive. As to the Ponzi scheme criticism, the objection merely points to the need for more information concerning borrowers – who’s good and who’s bad (which, by the way, is exactly the information asymmetry that the Grameen model mitigates). And on the issue of consumption versus investment, this applies to any loan, any time, anywhere.

D. 46 Heavily Indebted Poorest Country debt relief programme (HIPC) 53 HIV–AIDS pandemic 4–5, 7, 71–2 Hu Jintao 104, 108 Human Development Report (1994) 52 Hungary 85–6 IMF (International Monetary Fund) aid warning 47 appointment of Irwin Blumenthal 53 debt crisis 18–19 and foreign capital 63 inception 11–13 and Malawi 55–6 and ‘nit-picking’ 108–9 Structural Adjustment Facilities 21 In Search of Prosperity (Rodrik) 34 India 112, 117, 123, 132, 134, 137–8 India–Africa Forum 112, 123 Indonesia 34, 56 Industrial and Commercial Bank (China) 106 inflation 61–5 innovation 139–40 International Bank for Reconstruction and Development see World Bank International Development Association (IDA) 37–8 International Development and Food Assistance Act (US 1975) 16 International Peace Research Institute (Stockholm) 59 International Remittance Network 136 International Trade Organization 11 investment bonds 77–83, 87–96 borrowing costs 84–5 credit ratings 78, 83, 87–8 emerging markets 79–81, 85 portfolio diversification 80–82 Ireland 37, 125 Israel 134 Italy 125 Ivory Coast 109–10 Jamaica 136 Japan 99, 102–3, 112, 125 Johannesburg Stock Exchange 4 John Paul II, Pope 26 joint liability 129 Jubilee Debt Campaign 26 Kagame, President Paul 27–8, 148–9 Kanbur, Ravi 54 Kariba dam 15 Kenya and EBA 118 and exports 62 favourable view of China 109 fragile democracy 72 HIV prevalence rates 3 and long-term debt 87–8 money transfer systems 136 population 124 and rampant corruption 48 stake in the economy 152 trade-oriented commodity-driven economy 146 turbulent elections 2008 33 Keynes, John Maynard 11 Kibaki, Mwai 33 Kiva 130 Kurtzman, Joel 51 Lambsdorff, Graf 51 Landes, David 33–4, 147 least-developed countries (LDC) 123 Lensink, R. 136 Lesotho 118 life expectancy 5 Lin Yifu, Justin 153 Live Aid 26 Lumumba, Patrice 14 Lundin, Lukas 98 M-Pesa (money transfer system) 136 Mahajan, Vijay 132 McLiesh, Caralee 101 McNamara, Robert 16, 17 maize scandal (Malawi) 56 Malawi 55–6, 106, 117, 145 Mali 71–2, 94, 109–10, 116 Maren, Michael 60 Markit (data/index firm) 91 Marshall, George C. 12 Marshall Plan 12–13, 35–8 Mauritania 120 Mauritius 34, 89 Maystadt, Philippe 107 Mengistu Haile Mariam 14, 23 Mexico 18, 82, 84, 117, 132, 144, 151 micro-finance 126–32, 140 middle class 57–8 Millennium Challenge Corporation aid campaign (US) 40, 56 Millennium Development Goals (MDG) 45, 96–7 Mkapa, President Benjamin 26 Mobutu Sese Seko, President 14, 22–3, 48, 53, 108 Monterrey Consensus 2002 74 Moody’s Investors Service 83 morality 150 ‘More Aid for the Poorest’ (UK white paper) 16 mosquito net producer (example) 44–5, 114, 122, 130–31 Mozambique 117, 134 Mugabe, Grace 146 Mugabe, Robert 108, 146–7 Mwanawasa, President Levy 53 Mystery of Capital, The (de Soto) 137–8 Na’m, Moisés 107 Namibia 89, 93 ‘negative corruption’ 57; see also corruption Netherlands 63 New York City 151; see also United States New Zealand 121 Nicaragua 151 Nigeria and AGOA duty-free benefits 118 aid from World Bank 107–8 assets looted 48 banking sector 4 beneficiary of FDI 105 and the bond index 92 and corruption 23 cotton revenues 116 favourable view of China 109 humanitarian catastrophe 26 independence 71 and long-term credit ratings 88 Maiduguri money find 137 many tribes 32 natural-gas reserves development 112 rebuilding colonial-era railway 106 remittances 133 ‘No Donor Money, No Loans’ policy 128 North, Douglass 41 Norway 73 ODA (official aid) 25 Odinga, Raila 33 oil 17–18, 48–9, 82, 105–6, 108–9, 120 oil crisis 1979 17–18 Olson, Mancur 41 Olympics 2008 108 Organization of Economic Cooperation and Development (OECD) 115 Oxfam 117 Pakistan 34, 124 Pan-African Infrastructure Development Fund (PAIDF) 95 Paris Club of creditors 108 PEPFAR (AIDS Relief) 7 Peru 151 Peters Projection Map 121 Pew Report 2007 109 Philippines, the 135 PIMCO (bond investment organization) 91 Poland 8–6 Ponzi schemes 130 ‘positive’ corruption 56, 59; see also corruption Private Equity investments 4–5 programme aid 21 Protestantism 31 Przeworski, Adam 43 Raiffeisen, Friedrich 131 Rajan, Raghuram G. 142 Ramalho, Rita 101 Ramesh, Jairam 123 Reagan, Ronald 20, 22 Reichel, R. 46 remittances 133–6 Resource Flows to Africa (UN) 133 Revolutionary United Front (Sierra Leone) 59 Rodrik, Dani 34 Rosenstein-Rodan, Paul 39 Ruiz-Arranz, Marta 136 Russia 84, 87, 112 Rwanda 27, 32, 148 Sachs, Jeffrey 96–7 Sani Abacha, President 48 São Tomé and Principe 106 savings 137–40 Schulze-Delitzsch, Herman 131 Scottish Banks 139–40 Second Conference of Chinese and African Entrepreneurs 114 securitization 96 Sen, Amartya 42 Senegal 109–10 Short, Clare 56 Sierra Leone 59 Singapore 152 Singh, Manmohan 123 small/medium enterprises (SMEs) 125 social capital 58–9 Somalia 60, 118, 133 South Africa abandoning foreign aid 144 and AGOA duty-free benefits 118 and bond issues 89, 92–3 and credit league tables 82 1997 stock market fall 84 not reliant on aid 150 and PAIDF 95 remittances 133 setting an example 78 South Korea 45, 82, 87 Sovereign Wealth Funds 112 Spain 86 Spatafora, N. 133 stabilization programme 20 Standard & Poor’s rating agency 83, 87–8 Standard Bank 106 sterilization 64–5 stock market liquidity 4 Structural Adjustment Facilities 20–21 Subramanian, Arvind 142 subsidies 115–16 Sudan 105–6, 108, 120 sugar production 116–17 Svensson, J. 39, 52 Swaziland 5, 106 Sweden 73 Tanzam Railway 103–4 Tanzania 26, 56, 97, 103–4, 110, 124, 131 taxation 52, 66 Thailand 57 Thatcher, Margaret 20, 67 Togo 94, 116 Tokyo International Conference on African Development 112 Toxopeus, H. 136 trade 17, 19–21, 38–40, 62, 64, 112, 114, 117–24 Transparency International 51, 56, 71 Turkey 93, 112, 117 Uganda aid-fuelled corruption 53 and bonds 65, 97 favourable view of China 109 and HIV–AIDS 71 improved economic growth 101 plunderers and despots 108 population 124 remittances 134 trade-oriented commodity-driven economy 146 UN Conference on Trade and Development (UNCTAD) 102 United Kingdom 108, 120 United Nations Development Programme (UNDP) 25 United Nations Human Development Report 5 United States and African Growth and Opportunity Act 118 aid history 12–17, 40 bond comparisons 80 diplomatic ties with Zimbabwe 108 Energy Information Administration 103 Food For Peace budget 45 freer trade access for African countries 149 influence compared to China 109–10 and Malawi 56 public’s desire on aid 74 Soft Banks 139 and subsidies 115–16 trading partner status 119 2006 foreign aid 99–100 US Farm Security and Rural Investment Act 2005 115 USSR 14, 19, 24 Venezuela 86 venture capital (VC) 139 Wade, President Abdoulaye 149 Washington Consensus 21–2 Wealth and Poverty of Nations, The (Landes) 33–4, 147 Weber, Max 31 Weder, Beatrice 52 Wen Jibao 104, 114 West African Economic and Monetary Union 88 What makes Democracies endure?


pages: 256 words: 60,620

Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin

affirmative action, asset allocation, Atul Gawande, availability heuristic, Benoit Mandelbrot, Bernie Madoff, Black Swan, butter production in bangladesh, Cass Sunstein, choice architecture, Clayton Christensen, cognitive dissonance, collateralized debt obligation, Daniel Kahneman / Amos Tversky, deliberate practice, disruptive innovation, Edward Thorp, experimental economics, financial innovation, framing effect, fundamental attribution error, Geoffrey West, Santa Fe Institute, George Akerlof, hindsight bias, hiring and firing, information asymmetry, libertarian paternalism, Long Term Capital Management, loose coupling, loss aversion, mandelbrot fractal, Menlo Park, meta analysis, meta-analysis, money market fund, Murray Gell-Mann, Netflix Prize, pattern recognition, Philip Mirowski, placebo effect, Ponzi scheme, prediction markets, presumed consent, Richard Thaler, Robert Shiller, Robert Shiller, statistical model, Steven Pinker, The Wisdom of Crowds, ultimatum game

He ended the book with helpful advice on becoming less gullible. The second was the exposure of the greatest Ponzi scheme in history, run by Bernard Madoff, which cost its unsuspecting investors in excess of $60 billion. A Ponzi scheme is a fraudulent operation in which a manager uses funds from new investors to pay off old investors. Since there is no legitimate investment activity, it collapses when the operator can’t find enough additional investors. Madoff’s scheme unraveled when he couldn’t meet requests for redemptions from the investors stung by the financial meltdown. The irony is that Greenspan, who is bright and well regarded, lost 30 percent of his retirement savings in Madoff’s Ponzi scheme.1 The guy who wrote the book on gullibility got taken by one of the greatest scammers of all time. In fairness, Greenspan didn’t know Madoff.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Bank sponsors of WMPs address the problems of nonperforming assets and maturity mismatches by issuing new WMPs. The new WMP proceeds are then used to buy the bad assets of the old WMPs at inflated values so the old WMPs can be redeemed at maturity. This is a Ponzi scheme on a colossal scale. Estimates are that there were twenty thousand WMP programs in existence in 2013 versus seven hundred in 2007. One report on WMP sales in the first half of 2012 estimates that almost $2 trillion of new money was raised. The undoing of any Ponzi scheme is inevitable, and the Chinese property and infrastructure bubbles fueled by shadow banking are no exception. A collapse could begin with the failure of a particular rollover scheme or with exposure of corruption associated with a particular project. The exact trigger for the debacle is unimportant because it is certain to happen, and once it commences, the catastrophe will be unstoppable without government controls or bailouts.

CHAPTER 4 CHINA’S NEW FINANCIAL WARLORDS Most countries fail in the reform and adjustment process precisely because the sectors of the economy that have benefitted from . . . distortions are powerful enough to block any attempt to eliminate those distortions. Michael Pettis Peking University December 2012 China’s shadow banking sector has become a potential source of systemic financial risk. . . . To some extent, this is fundamentally a Ponzi scheme. Xiao Gang Chairman, Bank of China October 2012 ■ History’s Burden To contemporary Western eyes, China appears like a monolithic juggernaut poised to dominate East Asia and surpass the West in wealth and output in a matter of years. In fact, China is a fragile construct that could easily descend into chaos, as it has many times before. No one is more aware of this than the Chinese themselves, who understand that China’s future is highly uncertain.

A more likely scenario is that money printing will continue in both nations long after 2 percent inflation is achieved. At that point, the risks are all on the side of much higher inflation as the change in expectations becomes difficult to reverse, especially in the United States. A Chinese collapse. The seventh sign will be financial disintegration in China as the wealth-management-product Ponzi scheme collapses. China’s degree of financial interconnectedness with the rest of the world is lower than that of the major U.S. and European banks, so a collapse in China would be mainly a local affair, in which the Communist Party will use reserves held by its sovereign wealth funds to assuage savers and recapitalize banks. However, the aftermath will include a resumption of Chinese efforts to cap or even devalue the yuan in foreign exchange markets to promote exports, create jobs, and restore wealth lost in the collapse.


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

Predictably, Breuer dodged Ted’s questions and instead proffered generalities (“The department has engaged in a robust and comprehensive investigation”), statistics on garden-variety financial fraud cases (“between October 2009 and June 2010, nearly three thousand defendants were sentenced to prison for financial fraud, and more than sixteen hundred of these defendants have received sentences of greater than twelve months”), and details of recent cases that had nothing to do with Wall Street and the financial crisis (“on September 15, 2010, Nevin Shapiro, the former CEO of Capital Investments USA Inc., pleaded guilty in Newark, New Jersey, to fraudulently soliciting funds for a non-existent grocery distribution business”). Sitting behind Ted, I tried hard not to roll my eyes as Breuer touted the successful prosecution of a grocer for a small-time New Jersey Ponzi scheme. He was ducking the main issue and continuing to assure Ted and the rest of the committee that the department was being “thorough” and “robust” in its effort to bust big-time fraudsters. To the department’s credit, the U.S. attorney in the Eastern District of Virginia, Neil MacBride (a former Biden chief counsel), had recently indicted Lee Bentley Farkas, the former CEO of Taylor, Bean & Whitaker Mortgage Corporation (TBW).

Farkas was charged with perpetrating a massive fraud scheme that resulted in losses exceeding $1.9 billion and that contributed to the failure not just of TBW, but also of Colonial Bank, one of the fifty largest U.S. banks before its collapse in 2009 (in June 2011, Farkas was sentenced to thirty years in prison and fined $38.5 million). That was the only significant case Breuer could point to. In his testimony, Khuzami was more clear and detailed. He at least separated the cases the SEC had brought into two categories: those related to the financial crisis (like civil actions against Goldman Sachs, Citigroup, State Street, and several other major players) and those unrelated to the crisis (like Ponzi schemes and insider trading). Khuzami stressed that in the last nine months the SEC had brought enforcement actions (and obtained hundreds of millions of dollars in settlement penalties) against companies and individuals that: concealed from investors the risks and exposures from subprime mortgage-based securities; concealed business strategies that heightened the risks relating to mortgage-based securities; failed to disclose to investors the involvement of adverse parties in structuring complex mortgage-based securities; concealed that investment funds contained high-risk mortgage-based securities; marketed high-risk mortgage-based securities while secretly divesting themselves of their own holdings.

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.”


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

Not surprisingly, a Treasury official defended the Fed’s actions in not forcing “haircuts” on the full dollar-for-dollar payoff by AIG to the banks while Geithner was at the New York Fed: “The government could not unilaterally impose haircuts [lower prices] on creditors, and it would not have been appropriate for the government to pressure counterparties to accept haircuts by threatening to retaliate in some way through its regulatory power.” Nonsense, argued Eliot Spitzer, who as New York attorney general was way ahead of the curve in challenging Wall Street arrogance. Writing in Slate on November 23, 2009, Spitzer pointed out: “Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme.” The Ponzi scheme brings us back full circle to the Clinton bubble. As the inspector general’s report stated: “In 2000, the [Clinton administration-backed] Commodity Futures Modernization Act (CFMA) . . . barred the regulation of credit default swaps and other derivatives.” Why did the financial geniuses of the Clinton administration seek to prevent that obviously needed regulation? Because the Clintonistas believed that the Wall Street guys knew what they were doing and that what was good for them was good for us lesser folk.

That was because of the wonders of securitization of debt to be sold in that unregulated commodities market, which seventeen months later the Commodity Futures Modernization Act signed by Clinton would guarantee to remain unregulated. The press release marked this enormous shift in the marketing of mortgages, quoting Mozilo: “This new strategic agreement between Fannie Mae and Countrywide is an unprecedented milestone in mortgage banking history.” Key to the new era of the housing Ponzi scheme was the reduction of capital required to back up the unsavory mortgages as the Countrywide press release clearly stated: “The strategic agreement contemplates efforts by Fannie Mae and Countrywide to work together to create capital structures that reduce the intensive capital demands of mortgage banking. The Alternative Servicing Compensation mortgage-backed securities (ASC MBS) product developed by Fannie Mae and recently issued by Countrywide is an initial effort to provide this flexibility.”


pages: 242 words: 71,943

Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity by Charles L. Marohn, Jr.

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, A Pattern Language, American Society of Civil Engineers: Report Card, bank run, big-box store, Black Swan, Bretton Woods, British Empire, business cycle, call centre, cognitive dissonance, complexity theory, corporate governance, Detroit bankruptcy, Donald Trump, en.wikipedia.org, facts on the ground, Ferguson, Missouri, global reserve currency, housing crisis, index fund, Jane Jacobs, Jeff Bezos, low skilled workers, mass immigration, mortgage debt, Network effects, new economy, New Urbanism, paradox of thrift, Paul Samuelson, pensions crisis, Ponzi scheme, quantitative easing, reserve currency, the built environment, The Death and Life of Great American Cities, trickle-down economics, Upton Sinclair, urban planning, urban renewal, walkable city, white flight, women in the workforce, yield curve, zero-sum game

Human Habitat Complex, Adaptive Systems Spooky Wisdom Systems That Are Merely Complicated Notes Chapter 2. Incremental Growth Complex versus Complicated Buildings Neighborhood Renewal The Stifling Nature of High Land Values Private and Public Investment The Party Analogy Note Chapter 3. An Infinite Game An Infinite Game Revenues and Expenses Infrastructure Not as a Means, but as an End The Municipal Ponzi Scheme The Illusion of Wealth Understanding Detroit Notes Chapter 4. The Infrastructure Cult The American Society of Civil Engineers Real Investment, Paper Returns Accounting for Infrastructure Assuming Secondary Effects A Real Return on Investment The Data Doesn’t Lie Notes Chapter 5. Growth or Stability Where Does Strength Come From? Depression Economics The Last Country Standing The Post-War Boom Struggling with Constraints Going All In on Debt Does Growth Serve Us?

It was Upton Sinclair who said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.” With a few notable exceptions, I found Sinclair’s observation maddeningly insightful. For me, the evidence was pointing to a conclusion I found difficult to believe, yet impossible to ignore: The more our cities build, the poorer they become. The Municipal Ponzi Scheme When local governments need professional assistance, they often issue what is called a request for proposal (RFP). Consultants like myself respond to the RFP and, if successful, there is an interview. I’ve done many such interviews, answering questions from city staff as well as elected and appointed public officials. One might expect such interviews to delve into the competence of the professional seeking to provide services, but I was never asked about my engineering or planning expertise.

Any neighborhoods deemed “at risk” also didn’t qualify for government support, the left hand of government policy destroying urban land values while the right hand kept people trapped there – at this point, largely economically stressed minority populations – from sharing in the spoils of new growth. By the time the United States reached the end of the first generation of the post-war boom, the first iteration of what I’ve termed the Municipal Ponzi Scheme, the bulk of the country felt so prosperous it embarked on a massive campaign to end poverty – the Great Society – as it simultaneously fought an expensive war in Vietnam. By many economic measurements, this is the high-water mark of the twentieth century, particularly for America’s middle class. Generations of wealth incrementally built within America’s cities had been destroyed in favor of rapid growth and economic expansion, an exchange with a naturally redistributive effect.


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

He handed me a bag of money, which I would then take back and distribute.’ (To whom the payments were distributed, he did not say.) BCCI infested US politics too: when Jack Blum, one of the lawyers who eventually helped bring the bank down, started investigating it he soon came up against the CIA and ‘an army of people working in Washington on all sides’. BCCI wasn’t just a global octopus of murder and organised crime; it was also a giant Ponzi scheme for ripping off its depositors and investors, and turned out to be the biggest banking fraud of the twentieth century.1 It bamboozled everyone by splitting its main operations three ways: between two separate holding companies in Luxembourg and Cayman, and its headquarters in London. By this stage of the book it should be obvious why Abedi chose Cayman and London. Less well understood, however, is the role of Luxembourg, a small tax haven nestled at the geographical meeting point of France, Germany and Belgium.

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.

You are then shocked when you find out the converse is true. Here in America we assume everyone who handles other people’s money has the potential to be a criminal. And we legislate for the possibility.”’6 As Bosworth-Davies and his colleagues faced this influx of crime, the BCCI scandal exploded in Britain. As I described in Chapter 5, BCCI combined organised crime and murder with risky mechanisms threatening financial stability in a single Ponzi-scheme package run out of the bank’s global headquarters in London. It was arguably the biggest single banking fraud of the twentieth century. As the scandal unfolded in the early 1990s, Britain and the Bank of England actively worked to frustrate US efforts to shut the rogue bank down. Robert Morganthau, the Manhattan district attorney who led the attempts to close BCCI down, remembers the Cayman attorney general, ‘a crotchety British guy’, refusing to help.


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

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.

When practiced in its purest form, it involves buying and selling calls, puts, and an underlying equity such that risk of price movement is hedged away. Under these circumstances the market has long offered essentially Treasury bill type returns, because arbitrage has narrowed spreads since at least the 1970s. In contrast to other risky investments, Madoff ’s returns were not off the charts. Just like any good Ponzi scheme they were plausibly in the low double digits, with never a down month and rarely if ever a sub-par result. However, they aroused suspicion in the options community. Madoff ’s competitors, assailed with feedback from the capital-raising specialists that they were incompetent because they could not replicate the effortlessly sellable Madoff track record, were appalled. One in particular, Harry Marcopolos, took it upon himself to pen a 19-page examination of Madoff complete with a recitation of no less than 29 “red flags,” which he presented seemingly on a silver platter to SEC officials titled, The World’s Largest Hedge Fund is a Fraud.12 Marcopolos is a derivatives expert, having traded portfolios in the billions of dollars in various options strategies for hedge funds and institutional clients.

Beginning in 2009, we will add at least $1.75 trillion of debt, and probably more in entitlements! Presently the government is hooked on debt and does not feel its pinch due to generationally low interest rates. Legislators maintain high spending to maintain voter support from the left. As socialization spreads to the mainstream, spending increasingly helps the lower-middle class, which might vote conservative otherwise. Government can essentially operate a Ponzi scheme, fooling buyers of Treasury bonds into believing that other dupes, be they taxpayers or other bond buyers, will be there to make good on the next coupons as they are presented for payment. We have operated this way for decades, causing layer upon layer of debt to be added, but in the Bush presidency the problem became intractable due to the math of compounding, despite generally having had manageable deficits as a percentage of GDP.


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

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.

., 115–17, 157–58 liabilities, 31–35 in balance sheets, 25–28, 31–34, 37 of banks, 25, 32–35, 37, 41, 204 of individuals, 27–28, 35 leverage and, 35, 41, 60 libel law, 93 life expectancies, 17, 213 liquidity, 212 housing and, 28–29, 90, 96–97 investments and, 60–61 Lloyds TSB, 36, 38–40 loans, lending, 74–76, 108–9 in balance sheets, 27, 30, 34 of banks, 22, 24, 27, 33–36, 41–42, 58–60, 67, 69–70, 74, 83–84, 91–94, 102, 117, 127, 129–30, 143, 146, 165, 187, 216–17, 229 credit and, 209, 216–17 derivatives and, 50–51, 55, 66–75, 80, 121–22 Exxon deal and, 67–68 interest rates and, 59–60, 66, 74, 102, 108, 145, 172–73 paying the bill and, 220–21 predatory, 122, 127–32 risk and, 66–67, 69–72, 74–75, 80, 95, 117, 145, 174 securitization in, 69, 74 see also mortgages London, 53, 84 housing in, 88–90 see also City of London Long-Term Capital Management (LTCM): collapse of, 142, 162, 164–65, 230–31 derivatives and, 54–56, 80 loss aversion, 137 Lovelock, James, 231 Lowenstein, Roger, 161 Macmillan, Harold, 216 Madoff, Bernard, 105, 171, 191–92, 195 Mailer, Norman, 172 Manias, Panics, and Crashes (Kindleberger), 104 manufacturing, 4, 13, 58, 109, 229 and financial vs. industrial interests, 197, 199 Marxist analysis of, 15–16 stocks and, 148–49 market discipline, 183–84 Markopolos, Harry, 192 Markowitz, Harry, 147–49, 158 mark to market, 42, 105–6 Marx, Karl, 15–16 Maryland, housing in, 125–31 Masters, Blythe, 68, 121 mathematics, 5, 231 derivatives and, 47–48, 52–54, 115–17, 166 risk and, 46, 55–56, 74, 133, 136, 146–50, 154, 158, 160–67, 202 of share pricing, 147–48 Meriwether, John, 54 Merrill Lynch, 39, 77, 120, 190, 227 Merton, Robert, 54–55 microeconomics, 137 Minsky, Hyman, 104 Monetary Policy Committee, 178–79 money: assumptions based on primacy of, 202–4 cost of, 102–3 flows of, 7–9, 26 inconceivable amounts of, 8 Money Machine, The (Coggan), 25 Moody’s Investors Service, 62, 70, 114, 119, 208, 210 Morgan, John Pierpont, 20, 64 Morgan Stanley, 40, 64, 227 Morris, Charles, 42 mortgages, 38–40, 83–87, 89–95, 97–102, 110–32 in balance sheets, 27–28 balloon payments on, 100 and buy-to-let properties, 177 conforming, 112, 124 credit ratings and, 123–24, 126 of Cutter family, 126–27 defaults on, 159–60, 163, 165, 229 derivatives and, 38, 57–58, 75–76, 112–22, 132, 157–60, 172, 210–12 discriminatory practices and, 99–101, 127 durations of, 95 endowment, 86–87, 89–90, 146 Iceland’s economic crisis and, 10–11 interest and, 8, 58, 86, 89, 91–92, 95, 100, 102, 108, 110, 112–14, 122, 128, 145–46, 174, 176, 212 “liar,” 126, 132 “no doc,” 132 No Income, No Job or Assets (NINJA), 126 piggyback, 132 predatory lending and, 122, 127–32 regulation and, 99–100, 185 risk and, 145, 158–60, 163–65 sizes of, 92–94 subprime, 38, 75, 83, 100, 113–19, 122–25, 127, 132, 157–59, 165, 202, 210 see also houses, housing, home ownership Nasdaq, 104 nationalization, 24, 39–40, 228–30 New York Times, The, 77, 98, 208 “Night in Tunisia, A,” 45 Nikkei 225, 51–52, 54 9/11 terrorist attacks, 2, 107 Northern Rock, 5, 39, 94, 194, 206 Obama, Barack, 77, 205 regulation and, 188, 190, 223–24 Objectivism, 142–43, 173 oil, 3–4, 107–8, 148–49 “On Default Correlation” (Li), 116 options, 50–52, 151, 174, 184 how they work, 46–47, 50–51 Osaka exchange, 54 Pacioli, Luca, 26 panic of 1893, 64 panic of 1907, 20, 64 Parker, Charlie, 45 Paulos, John Allen, 8 pensions, 76–77, 165, 204 in balance sheets, 27–28, 31 Phillips, Julia, 199 politics, politicians, 5–6, 19–21, 23–25, 81, 118–19, 169–70, 176–78, 217–26, 228–32 AIG bailout and, 76–78 banks and, 25, 33, 43, 182, 186, 195, 202, 207, 211, 217, 228–31 bonds and, 29–30, 61–62, 103, 109, 118, 144, 176–77, 208–9 derivatives and, 57, 183–86 financial industry’s ascent and, 19–20 free-market capitalism and, 14–15, 19, 21, 23–24 housing and, 87–89, 91, 96–101, 177–78 Iceland’s economic crisis and, 9–10, 12, 24, 223 interest rates and, 102–3, 107–8, 172–80, 221 paying the bill and, 219–23 regulation and, 15, 19–21, 24, 169, 180–92, 195, 199, 201, 223–26 risk and, 142–43, 164–66, 174, 184 Ponzi, Charles, 105 Ponzi schemes, 191–92 poor, poverty, 3–4, 13, 21, 82, 179, 196 housing and, 100, 113, 118, 121–23, 126–27, 130–31, 163 pork bellies, 48–49 portfolio insurance, 151–52, 162 “Portfolio Selection” (Markowitz), 147 Posner, Richard A., 120, 174, 182, 193 Powell, Anthony, 62 price, prices, 105–11, 203 and banking-and-credit crisis, 216–18, 220 bonds and, 61, 63, 102–3, 108–10, 144 derivatives and, 38, 46–52, 54, 56, 75, 158–59, 166 of houses, 5, 28–29, 37–38, 61, 71, 86–91, 101, 109–11, 113, 115, 125, 157, 160, 164–66, 173–76, 194, 208 of oil, 3–4, 107–8, 148–49 risk and, 145–50, 158–59, 164–66 of stocks, 102, 105–6, 109–10, 147–51, 158, 174 of toxic assets, 37–38, 42 volatility of, 47–48, 148–50 “Pricing of Options and Corporate Liabilities, The” (Black and Scholes), 45, 47–48, 147 probabilities, 46, 55, 74, 115, 141, 145, 153–55, 160–63 profits, 20, 28, 104–6, 110, 192, 226–28, 230 banks and, 33, 35, 67, 78, 227–28 and benefits of debt, 59–60 derivatives and, 50, 54, 57, 63, 65, 106, 114, 121–22 Enron and, 105–6 regulation and, 204, 226 risk and, 150, 226 Protection of Homeowners in Foreclosure Act, 131 “Quiet Coup, The” (Johnson), 19–20, 185–86 Ragtime (Doctorow), 64 Rand, Ayn, 142–43, 173 Reagan, Ronald, 14, 19–20, 24, 142, 185 recessions, 42, 89, 94, 142, 171, 175, 219 regulation, deregulation, 15, 19–22, 24, 169, 180–202 banking and, 21, 33, 180–91, 194–96, 199–200, 202, 204–5, 208, 211, 223–27 bond ratings and, 208–9 derivatives and, 68, 70, 73, 153, 183–86, 200–201 framework and regime of, 189–92 market discipline and, 183–84 mortgages and, 99–100, 185 proposals for, 223–26 risk and, 143, 153, 164, 187–88, 191, 195, 202, 204–5, 212, 224, 226 in U.K., 21–22, 105n, 180–82, 194–96, 199–201, 218 in U.S., 181, 184–92, 195, 199–200, 223–24, 227 Reykjavík, 10, 12, 170 risk, risks, 49–58, 66–76, 133–36, 141–67, 211–12, 219 AIG and, 75–76 assessment of, 46, 55–56, 74, 133, 135–36, 141–43, 145–67, 187–88, 191, 202, 205, 212, 216, 226 banks and, 19, 34–37, 41, 133, 135–36, 143, 150–54, 156–57, 160, 165–66, 174, 187–88, 191–95, 202, 204–7, 216, 224, 226, 228, 230 bonds and, 61–63, 103, 118, 144, 154, 208 derivatives and, 46–47, 49–52, 54–55, 57–58, 66–75, 78–80, 114–15, 117–22, 151, 153, 158–60, 163, 166–67, 184–85, 205, 212 desirability of, 144, 146, 150, 206–7 diversification and, 146–48 Greenspan and, 142–43, 164–66, 174, 184 hedging of, 49–50, 52, 58, 115, 205 historical data and, 163, 166 housing and, 88, 94–97, 112–13, 125, 129, 145, 158–60, 163–65 investing and, 5, 68, 70, 88, 103, 144, 146–53, 158, 165, 184, 190 leverage and, 35–36 LTCM and, 55–56 overconcentration of, 72–73 regulation and, 143, 153, 164, 187–88, 191, 195, 202, 204–5, 212, 224, 226 securitization and, 69–70, 163, 165 of stairs, 134–35 VAR and, 151–57, 162–63 risk-adjusted return on capital (RAROC), 150–51 Ritholtz, Barry, 219–20 Robinson, Phillip, 128–31 Rogers, Jim, 221 Royal Bank of Scotland (RBS), 34–36, 120, 227 bailout of, 32, 40, 204 Russia, 3, 15–16, 18, 53 bond default of, 55–56, 162, 164–65 Salomon Brothers, 63 Sanford, Charles, 150 Santander, 40 savings, 28, 86, 107, 177, 179, 187 savings and loan crisis, 73, 185, 220 Scholes, Myron, 45, 47–48, 54–55, 147 Securities and Exchange Commission (SEC), 195 credit ratings and, 209–10 regulation and, 153, 186, 189–92 securitization, 20, 22, 200 derivatives and, 69–70, 74, 113–14, 117–19, 122, 212 risk and, 69–70, 125, 163, 165, 212, 224 selling, sales, 34, 42, 104, 174, 203 of bonds, 59, 61–63, 144 derivatives and, 46–50, 52, 56, 65, 67–68, 73–74, 120 of equity, 58–59 of houses, 28–29, 71, 89–90 risk and, 151–52, 165, 224 Shiller, Robert, 106, 145n, 194 Simon, David, 83–84 Singapore exchange, 54 Skilling, Jeffrey, 106 small numbers, law of, 137 Sociét Générale, 51, 77 solvency, insolvency, 28–29 of banks, 36–38, 40–43, 64, 74–75, 120 Spain, 15, 40, 177, 214 contracting economy of, 222–23 housing in, 92, 110 special purpose vehicles (SPVs), 70, 120 stairs, deaths caused by, 134–35 Standard & Poor’s (S&P), 62, 114, 151, 209 statistics, 160–62 Stefánsdóttir, Rakel, 9–10, 12 stock market, stocks, 22, 54–55, 61, 76, 80, 101–11, 115, 226 bubbles and implosions in, 3, 42, 103–9, 142, 175–76 derivatives and, 50–52, 54 investing in, 59, 73, 101–7, 111, 146–52, 158, 175, 192 new-economy, 103 1929 crash of, 152, 199, 213 October 1987 crash of, 142, 151–52, 161–62, 164–65 prices of, 102, 105–6, 109–10, 147–51, 158, 174 structured investment vehicles (SIVs), 120 Summa de Arithmetica (Pacioli), 26 Summers, Lawrence, 43, 74, 188 Taleb, Nassim, 53, 155–56 Tax Reform Act of 1986 (TRA), 100 technology, 42, 104, 149, 155, 166 terrorism, 2, 12, 18, 107 Tett, Gillian, 121, 193 Thatcher, Margaret, 199, 217, 222 free-market capitalism and, 14, 21, 24 on housing, 87, 91, 98 regulation and, 21, 195–96 torture, end of ban on, 18 tranching, 117–18, 122 Treasury, British, 181–82 Treasury, U.S., 43, 54, 64, 74, 76–78 AIG bailout and, 76, 78 regulation and, 188–90 Treasury bills (T-bills), 29–30, 62, 103, 118, 144, 208 China’s investment in, 109, 176–77 Trichet, Jean-Claude, 92 Trillion Dollar Meltdown, The (Morris), 42 Troubled Assets Relief Program (TARP), 37, 189 Turner, Adair, 181 Tversky, Amos, 136–38, 141 UBS, 36, 120 uncertainty, 96 fair value theory and, 147–48 risk and, 55–56, 153, 163 United Kingdom, 9, 11–12, 18, 28–29, 61, 122–24, 134, 139, 194–202, 216–18 banking in, 5, 11, 32–36, 38–40, 51–54, 76–77, 89, 94, 120, 146, 180, 194–96, 199, 202, 204–6, 211–12, 217, 227–28 bill of, 220–22, 224 and City of London, 21–22, 32, 195–97, 200, 217–18 credit ratings and, 123–24, 209 derivatives and, 72, 200–201 financial vs. industrial interests in, 196–99 free-market capitalism in, 14–15, 21, 230 GDP of, 32, 214, 220 Goodwin’s pension and, 76–77 housing in, 38, 87–98, 110, 122, 177–78 interest rates in, 102, 177–80 personal debt in, 221–22 prosperity of, 214, 216 regulation in, 21–22, 105n, 180–82, 194–96, 199–201, 218 United Nations, 4 United States, 17–22, 34, 62–71, 120–31, 134n, 165, 199–201 AIG bailout and, 76–78 banks of, 36–37, 39–40, 43, 63–71, 73, 75, 77–78, 84, 116, 120–21, 127, 150, 152, 163, 183, 185, 190, 195, 204, 211–12, 219–20, 225, 227–28 bill of, 219–20 China’s investment in, 109, 176–77 credit and, 109, 123–24, 195, 208–9, 211 free-market capitalism in, 14–15, 230 housing in, 37, 82–86, 95, 97–101, 109–10, 114–15, 122, 125–31, 157–58, 163 interest rates in, 102, 107–8, 173–77 regulation in, 181, 184–92, 195, 199–200, 223–24, 227 urban desolation in, 81–86 value, values, 42, 74–75, 78–80, 103–4, 179, 181, 217–18, 220, 227 bonds and, 61, 103 derivatives and, 38, 48–49, 185, 201 housing and, 28–29, 71, 90, 92–95, 111, 176 investing and, 60–61, 104, 198 LTCM and, 55–56 notional, 38, 48–49, 80 value at risk (VAR), 151–57, 162–63 Vietnam War, 18, 220 Viniar, David, 163 volatility, 20, 158 risk and, 47–48, 148–50, 161 Volcker, Paul, 20 Waldrow, Mary, 127 Wall Street, 22, 53, 64, 129, 188 Washington Post, The, 18 wealth, 4, 10, 19–21, 64, 204, 206 financial industry’s ascent and, 20–21 in free-market capitalism, 15, 19, 230 housing and, 87, 90, 121 Keynes’s predictions on, 214–15 in West, 218–19 Weatherstone, Dennis, 152 Wells Fargo, 84, 127 Wessex Water, 105n West, 14–18, 43, 213, 231 conflict between Communist bloc and, 16–18 free-market capitalism in, 14–15, 17, 21, 23 wealth in, 218–19 wheat, 49n, 52 When Genius Failed (Lowenstein), 161 Williams, John Burr, 147 Wilson, Lashawn, 130–31 Wire, The, 83–84 World Bank, 58, 65, 69 * GDP, which will be mentioned quite a few times in this story, sounds complicated but isn’t: it’s nothing more than the value of all the goods and services produced in an economy.


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.

The Trouble with Mary—and Gary The Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) chiefs in charge of the Flash Crash investigation had a litany of strengths but also a cart full of heavy baggage that could affect its progress. Mary Schapiro, the first female to head the SEC, had to live down her imperfect record while at the helm of Financial Industry Regulatory Authority (FINRA), the brokerage industry’s self-regulatory agency. Two big scandals had broken on her watch—the Madoff Ponzi scheme and the alleged, $8 billion, R. Allen Stanford investment scam—and she had been faulted for not uncovering them. Gary Gensler, chairman of the CFTC, had opposed the regulation of the credit derivatives market while serving in the U.S, Treasury under Bill Clinton. Inadequate regulation of this market had been a major cause of the credit market meltdown from 2007 to 2008 that put seven million people out of work and required federal bailouts of major Wall Street banks and brokerage houses.


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 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. The most dangerous narcissists are those whose utter lack of empathy and high levels of grandiosity verge on psychopathy: the ability to do harm without remorse.

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. Similarly, when you hear of someone who’s always in trouble with the law, is a serial sex offender, a recidivist, or someone who is scheming to cheat others of their money, you’re hearing about a predator. Expect predators to frequently change jobs, change plans, fail to repay loans, ruin or end relationships, disappoint or take advantage of others, and shirk responsibilities.

“He’s just been arrested, and he appears to enjoy the attention he’s getting from the media.” “Funny you should say that,” Dr. Forero-Parra replied. “As he was being led into the jail, he asked, ‘How does my hair look?’ ” Sometimes, predators are palpably narcissistic. This was one of those times. Indeed, we often see some of the features of the predator with the narcissist. Bernard Madoff, mastermind and architect of the largest Ponzi scheme in US history, who took advantage of his own family and friends, appears to have many of the features of the narcissist, whose behaviors say, “I can do anything, by any means, without restraint” and the predator, whose behaviors say, “I will take advantage of whom I can, when I can, without remorse.” The grandiose scale of the plan, the audacity of its implementation, the aloofness and willingness to hurt others—all speak volumes about this multifaceted dangerous personality.10 Many experts believe that aggressive narcissism is at the core of social predation—in other words, in order to prey mercilessly on others, you have to be able to overvalue yourself and devalue others.11 It makes sense.


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

ZZZZ Best was accused of acting as a front for organized-crime figures who would buy equipment for the company with “dirty” money and replace their investment with “clean” cash skimmed from the proceeds of ZZZZ Best’s legitimate carpet-cleaning business. The spectacular growth of the company was produced with fictitious contracts, phony credit card charges, and the like. The operation was a giant Ponzi scheme in which money was recycled from one set of investors to pay off another. Minkow was also charged with skimming millions from the company treasury for his own personal use. Minkow and all the investors in ZZZZ Best were in wall-to-wall trouble. The next chapter of the story (after Chapter Eleven) occurred in 1989 when Minkow, then twenty-three, was convicted of fifty-seven counts of fraud, sentenced to twenty-five years in prison, and required to make restitution of $26 million he was accused of stealing from the company.

The updraft encourages more people to buy the stocks, which causes more TV and print coverage, which causes even more people to buy, which creates big profits for early Internet stockholders. The successful investors tell you at cocktail parties how easy it is to get rich, which causes the stocks to rise further, which pulls in larger and larger groups of investors. But the whole mechanism is a kind of Ponzi scheme where more and more credulous investors must be found to buy the stock from the earlier investors. Eventually, one runs out of greater fools. Even highly respected Wall Street firms joined in the hot-air float. The venerable investment firm Goldman Sachs argued in mid-2000 that the cash burned by the dot-com companies was primarily an “investor sentiment” issue and not a “long-term risk” for the sector or “space,” as it was often called.

As the economic historian Charles Kindleberger has stated, “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.” And as Robert Shiller, author of the best-selling Irrational Exuberance, has noted, the process feeds on itself in a “positive feedback loop.” The initial price rise encourages more people to buy, which in turn produces greater profits and induces a larger and larger group of participants. The phenomenon is another example of the Ponzi scheme that I described in chapter 4, in connection with the Internet bubble. Eventually one runs out of greater fools. Such herding is not limited to unsophisticated individual investors. Mutual-fund managers have a tendency to follow the same strategies and herd into the same stocks. Indeed, a study by Harrison Hong, Jeffrey Kubik, and Jeremy Stein, three leaders in the field of behavioral finance, determined that mutual-fund managers were more likely to hold similar stocks if other managers in the same city were holding similar portfolios.


pages: 387 words: 112,868

Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper

4chan, Airbnb, Apple's 1984 Super Bowl advert, banking crisis, Ben Horowitz, bitcoin, blockchain, Burning Man, buy and hold, capital controls, Colonization of Mars, crowdsourcing, cryptocurrency, David Graeber, Edward Snowden, Elon Musk, Extropian, fiat currency, Fractional reserve banking, Jeff Bezos, Julian Assange, Kickstarter, life extension, litecoin, lone genius, M-Pesa, Marc Andreessen, Mark Zuckerberg, Occupy movement, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price stability, QR code, Ross Ulbricht, Satoshi Nakamoto, Silicon Valley, Simon Singh, Skype, slashdot, smart contracts, Startup school, stealth mode startup, the payments system, transaction costs, tulip mania, WikiLeaks

Just as the Internet took power from big media organizations and put it in the hands of bloggers and dissidents, Bitcoin held out the promise of taking power from banks and governments and giving it to the people using the money. This was all rather high-minded stuff and it attracted plenty of derision—most ordinary folks imagined it falling somewhere on the spectrum between Tamagotchi pet and Ponzi scheme, when they heard about it at all. But Bitcoin had the good fortune of entering the world at a utopian moment, in the wake of a financial crisis that had exposed many of the shortcomings of our existing financial and political system, creating a desire for alternatives. The Tea Party, Occupy Wall Street, and WikiLeaks—among others—had divergent goals, but they were united in their desire to take power back from the privileged elite and give it to individuals.

But this argument ignored the fact that the United States government promised to always take dollars for tax bills, which was a real value no matter how much people disliked paying taxes. Practically no one was promising to take Bitcoin for anything. The primary value the coins had at this point was the expectation that they would be worth more in the future, allowing current holders to cash out for more than they paid. To some cynics, that description made Bitcoin sound suspiciously like a less savory sort of financial invention: a Ponzi scheme. FROM THE OUTSIDE, it would have been easy to conclude that Charlie and BitInstant were somehow dodging all these problems. Charlie was shopping for new, larger real estate for his company and eventually settled on a well-appointed suite in an office tower. Charlie had finally managed to move out of his parents’ basement in Brooklyn. He was motivated to do this, in no small part, because he was afraid to tell his parents about his girlfriend, Courtney, who was a waitress at his favorite bar, EVR.

Gox collapse, 309 2014 Bitcoin Pacifica (Lake Tahoe), 346–348 Anoncoin (digital currency), 270–271 Anti-state.org (website), 29 Argentina, 153–161, 182, 240–242, 259, 277–280, 286, 349–353 ASIC (computer chip), 189–190, 259, 329–330 Assange, Julian, 56–57 Athey, Susan, 345 Atlantis, 245 Australia, 44–45, 117, 168, 171 Automated Clearing House (ACH), 133 Avalon (ASIC), 190, 206 Back, Adam, 17–22, 339, 348 Baidu (Chinese search engine), 261–262 bank bailout of 2008, 32, 111 Bank of America, 272 Bates, Richard, 75–77, 115–116 bee-te-bee (Chinese Bitcoin), 255–256 Beijing Summer Olympics (2008), 145 Benchmark Capital, 282, 293, 305 Bernanke, Ben, 266 Bezos, Jeff, 353 Bharara, Preet, 299–300 Bill and Melinda Gates Foundation, 353–355 Bitcoin arrival of Gavin Andresen, 44–47 arrival of Martti Malmi, 29–30 building trust, 24–25, 33, 48, 61–62, 69, 99–100, 279, 315, 339 buying/selling with, 43–44, 82, 119–120, 129–130 changing business model, 236–239 characterization as “cryptocurrency,” 36 comparison to gold, 157–158, 165, 182 comparison to paper money, 219, 286–287 creation and operation of original code, 4–6, 20–24 disappearance of Satoshi Nakamoto, x–xiii hacking and scandals, 91–99 increasing price/value, 38, 66–69, 79, 81–85, 89–91, 131, 175, 180, 184, 193–196, 204–206, 210–211, 250–253, 262–264, 267, 271–275, 284–285 legality/government regulation, 196–198, 251 limitations based upon computers, 347 Mt. Gox collapse busts bubble, 308–317 origin and ideology, vii–xv, 5, 113–114 as Ponzi scheme, 220 proof-of-work, 18–19 Bitcoin Foundation candidacy of Bobby Lee, 345 dealing with Bitcoin collapse, 314–315 Gavin Andresen as member, 192 involvement in Senate hearing, 265–267, 270, 300–302 Patrick Murck as member, 176 planning and creation of, 138–142 regulatory problems, 217–219, 233–236 resignation of Charlie Shrem, 302 Bitcoinica, 237 Bitcoin Investment Trust, 314 Bitcoin Meetups.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, 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 Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

Too many investors in developed markets were happy to chase higher yields on riskier assets, disregarding the associated dangers. As they did so, they allowed banks to raise funds well beyond their deposits through the creation of securitized products. Many of these funds were lent to US households with questionable credit histories in the form of sub-prime mortgages. Some of the funds raised, though, were lent back to the emerging economies. This wasn’t quite a Ponzi scheme (although Ponzi schemes, most obviously Bernard L. Madoff Investment Securities LLC, nevertheless developed), but it had much the same effect. The combination of rapidly growing emerging economies, 1990s Asian failures and a hunt for yield left investors with the belief that capital gains had to be plucked from the tree without any real regard for risk. Even sensible investors were forced to take part. I recall talking to one particularly cautious bond investor in 2007 who was lamenting his company’s determination to deliver to its investors a particularly high rate of return.

(i), (ii) Permanent Income Hypothesis (i) Persia (i), (ii) Philippines (i), (ii), (iii) Pike, Rob (i) Pingali, Prabhu (i) plague (i), (ii) Plaza accord (i) pogroms (i), (ii) Poland (i) political economy inequalities (i) education (i) the emerging gap (i) emerging nations and income inequality in the developed world (i) food shortages (i) globalization (i) living with inequality (i) new modes of distribution (i) not getting just rewards (i) a three-country model (i) too much domesticity (i) United Kingdom (i) winners and losers (i) market forces (i) return of political economy (i) scarcity (i) state capitalism (i) politics (i), (ii), (iii), (iv), (v) Ponzi schemes (i) population ageing anarchy in capital markets (i), (ii) command over limited resources (i) demographic dividends and deficits (i), (ii), (iii), (iv) globalization (i) government debt (i) Japan (i) migration (i), (ii), (iii), (iv), (v) nationalism (i) pensions and healthcare (i) political economy and inequalities (i), (ii) savings (i) trade (i) population demographics China (i), (ii) demographic dividends and deficits (i) demographic dynamics (i), (ii) globalization (i), (ii) infant mortality (i) Japan (i) migration (i) pensions and healthcare (i) political economy and inequalities (i) scarcity (i), (ii), (iii), (iv), (v) population of working age (i), (ii), (iii), (iv), (v), (vi) porcelain (i) ports (i) Portsmouth FC (i) Portugal (i), (ii), (iii) Potosí (i) poverty globalization (i), (ii), (iii) migration (i) political economy and inequalities (i), (ii), (iii) price stability and economic instability (i) scarcity (i) Spain and silver (i) price stability anarchy in capital markets (i), (ii) political economy and inequalities (i), (ii), (iii), (iv) price stability brings economic instability (i) back to the 1970s (i) defining and controlling inflation (i) emerging economies (i), (ii) inflation as an instrument of income and wealth distribution (i) inflation as a result of currency linkages (i) overview (i), (ii) from stability to instability (i), (ii) we are not alone (i) scarcity (i), (ii), (iii) state capitalism (i), (ii) trade (i), (ii) printing money (i), (ii) privatization (i), (ii) productivity anarchy in capital markets (i) land grabs (i) political economy and inequalities (i), (ii), (iii) population demographics (i), (ii), (iii), (iv) price stability (i), (ii), (iii), (iv), (v) rent-seeking behaviour (i) scarcity (i), (ii), (iii), (iv) Spain and silver (i) state capitalism (i) trade (i) Western progress (i), (ii) profits anarchy in capital markets (i), (ii) price stability (i), (ii), (iii), (iv) scarcity (i), (ii) state capitalism (i) trade (i) property rights population demographics (i) scarcity (i), (ii), (iii) secrets of Western success (i), (ii) the West’s diminished status (i), (ii), (iii), (iv) Prophet Mohammed (i) prostitution (i) protectionism anarchy in capital markets (i), (ii) globalization (i) migration (i) nineteenth century (i) political economy and inequalities (i), (ii), (iii) secrets of Western success (i), (ii), (iii) trade (i) the West’s diminished status (i), (ii), (iii), (iv), (v) Prussia (i) public sector (i), (ii) purchasing power parity (i), (ii), (iii) Putin, Vladimir (i), (ii), (iii) Qu Hongbin (i) racism (i), (ii), (iii), (iv) railways (i), (ii) Rauh, Joshua (i) Rawls, John (i) raw materials (i), (ii), (iii), (iv), (v), (vi), (vii) Reagan, Ronald (i), (ii) real estate (i), (ii), (iii), (iv), (v), (vi) recession (i), (ii), (iii), (iv), (v), (vi), (vii) Reformation (i) regulation (i), (ii), (iii) religion (i), (ii), (iii), (iv), (v) remittances (i), (ii) renminbi (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) rent-seeking behaviour (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) reserve currency (i), (ii), (iii), (iv), (v), (vi), (vii) Reserve Fund for Future Generations (i) reserves see foreign-exchange reserves resources population demographics (i), (ii), (iii) price stability and economic instability (i) scarcity (i), (ii), (iii), (iv), (v), (vi) state capitalism (i) the West’s diminished status (i), (ii), (iii) retirement (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Ricardo, David (i), (ii), (iii), (iv), (v), (vi) rice (i), (ii) risk (i), (ii), (iii) Rockefeller Center (i), (ii), (iii) Rocket steam locomotive (i) Roman Empire (i), (ii), (iii) Romania (i), (ii), (iii) Rover Group (i) Royal Navy (i), (ii) rural populations (i), (ii), (iii), (iv), (v), (vi) Russian Revolution (i), (ii) Russia/Russian Federation pogroms (i), (ii) political economy and inequalities (i), (ii), (iii) population demographics (i), (ii), (iii) a post-dollar financial order (i), (ii), (iii) price stability and economic instability (i), (ii) Russian default (i), (ii), (iii) scarcity (i), (ii) secrets of Western success (i), (ii), (iii) state capitalism (i), (ii), (iii), (iv) trade (i), (ii), (iii), (iv), (v) the West’s diminished status (i), (ii), (iii), (iv), (v) Saddam Hussein (i) Samsung (i) Samuelson, Paul (i), (ii) sanitation (i), (ii) Saudi Arabia (i), (ii), (iii), (iv), (v), (vi), (vii) savings anarchy in capital markets (i), (ii), (iii), (iv), (v) economic models (i), (ii) political economy and inequalities (i) population demographics (i), (ii), (iii) price stability and economic instability (i), (ii) state capitalism (i), (ii), (iii), (iv) trade (i) the West’s diminished status (i), (ii), (iii) Scandinavia (i) scarcity (i) back to the classical economists (i) faith in the market (i) history (i) opportunity for all (i) overview (i) population demographics (i), (ii) price stability and economic instability (i) technology replication and resource scarcity (i) the West’s diminished status (i), (ii) Wimbledon and the Olympics (i) Schröder, Gerhard (i), (ii) Schumer, Charles (i) science (i), (ii), (iii) SCO see Shanghai Co-operation Organization Scotland (i) Seat (i) Second World War (i), (ii), (iii), (iv) securities (i), (ii), (iii), (iv) Sen, Amartya (i) Seoul (i) Sevilla, Jaypee (i) Shah, Saef (i) Shanghai (i), (ii) Shanghai Co-operation Organization (SCO) (i), (ii), (iii) Shinawatra, Thaksin (i) Shinkasen (‘Bullet’ train) (i) ships (i), (ii), (iii) Siemens (i) Silicon Valley (i) silk (i), (ii), (iii) Silk Road (i), (ii), (iii) silver (i), (ii) Singapore (i), (ii), (iii) Sinopec (i) SIVs see special investment vehicles Škoda (i) slavery political economy and inequalities (i) population demographics (i), (ii), (iii) scarcity (i), (ii) secrets of Western success (i) Spain (i) Slovakia (i) Slovenia (i) Smetters, Kent (i) Smith, Adam (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Smoot–Hawley trade tariff (i), (ii) smuggling (i), (ii) soccer clubs (i), (ii), (iii), (iv), (v) social security (i), (ii), (iii), (iv), (v), (vi) soft knowledge (i), (ii) software development (i), (ii), (iii) South Korea (i), (ii), (iii), (iv), (v), (vi) South Stream (i), (ii), (iii), (iv) sovereign wealth funds (SWFs) (i), (ii), (iii), (iv), (v) Soviet communism (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) Soviet Union (i), (ii), (iii), (iv), (v) Spain (i), (ii), (iii), (iv) special investment vehicles (SIVs) (i), (ii) specialization (i), (ii), (iii), (iv), (v) spending power (i), (ii), (iii), (iv) spice trade (i), (ii), (iii) sports (i), (ii), (iii), (iv) stagflation (i), (ii) Standard Bank (i), (ii) ‘Starbucks effect’ (i), (ii) state (i), (ii), (iii), (iv) state capitalism indulging the US no more (i), (ii), (iii) migration (i) political economy and inequalities (i), (ii), (iii), (iv) protectionism (i) rise of state capitalism (i) dynamics of excess saving (i) excess savings and command over assets (i) food prices (i) heading East (i) overruling the market (i) ownership versus control (i) rise of Russian power politics (i) rise of sovereign wealth funds (i) sleeping giants no more (i) unwilling sellers (i) who owns what?


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

But when Carillion collapsed in 2017, the government did not step in to help — perhaps because of the public outrage at the incredible irresponsibility of the firm. When the auditors came in to manage Carillion’s bankruptcy, they found that the company had just £29m in cash and owed £1.2bn to the banks, meaning that it didn’t even have enough money to pass through administration before entering liquidation. Carillion had become a giant, state-sponsored Ponzi scheme, siphoning off money from the taxpayer and channelling it into the pockets of wealthy shareholders. Whilst many of those shareholders who did not sell on the first signs of trouble have now lost out, the real losers have been the contractors and workers hired by Carillion, many of whom have found themselves out of pocket. Today, billions of pounds worth of taxpayers’ money is being funnelled into inefficient, financialised outsourcing giants like Carillion, only to enrich executives and shareholders, whilst leaving taxpayers to foot the bill.

Banks also tend to lend more to businesses when the economy is doing well. More money enters the financial system, pushing up asset prices even further and creating a self-reinforcing cycle of optimism-driven asset price inflation. Eventually, the financial cycle enters a phase of “Ponzi finance”, with investors piling into assets one after another based purely on the speculation-driven price rises of the recent past. Just like a Ponzi scheme which uses new recruits to pay off old lenders, investors end up taking out debt simply to repay interest. This underlies Minsky’s famous insight that “stability is destabilising”: when investors experience an extended period of high returns without any crashes, they become overexuberant about the prospects of future growth and take risks they otherwise might not. But eventually lending dries up, investment slows, and asset prices start to level off.

The states that had encouraged the financialisation of the firm deregulated their banking sectors in order to give households greater access to credit and expand asset ownership. In doing so, they were attempting to disguise the chronic shortfall in demand finance-led growth threatened to create, and to make the system politically sustainable. Rising mortgage lending increased house prices, eventually inflating a bubble that saw the British and American housing markets turned into a giant Ponzi scheme. Banks took this mortgage debt, packaged it up and sold it on international financial markets, disguising the amount of risk they were taking. Capital flooded into the US and the UK to take advantage of the boom, and repressed activity in the rest of the economy. The spark that set the whole thing alight came from the US, but the fallout extended throughout the financialised economies of the global North, and was particularly severe in Britain, whose economy had been buoyed by rising debt and asset prices for decades.


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.

The judge asked Nav to confirm he agreed to forfeit the $12.87 million, and Burlingame said he did, although so far Kobre & Kim had still only managed to retrieve $6.5 million—essentially what was seized from the R. J. O’Brien trading account. “Judge, if I might, we’ve been engaged in a process with the CFTC for the last sixteen months of attempting to collect the defendant’s assets all of which have been stolen from…I mean, he invested in a Ponzi scheme,” the lawyer explained. In lieu of the full amount, the judge agreed for Nav’s parents and brother, Jasvinder, to place a lien on their homes to the value of $750,000. To confirm the arrangement, she placed a call to Hounslow that was played on the courtroom’s speakers. “Good evening. My name is Judge Kendall, and you are on the record and in open court. Can you please tell me who is on the phone?”

It was one of those rare finance stories that cross into the mainstream—the genius kid from the wrong side of the tracks who finds himself in the crosshairs of the U.S. government—and I watched with fascination as the Hound of Hounslow butted up against the UK and U.S. legal systems. Then his lawyer revealed in court that, despite making tens of millions of pounds, the master manipulator of the S&P 500 couldn’t pay his fine because he himself had been the victim of a Ponzi scheme, and I knew someone had to write a book. This is a work of nonfiction. All the characters and events I describe are real, and no details have been changed or exaggerated for effect. The narrative was built using both public and private documents, which I detail extensively in the notes, as well as interviews with over 150 people from every facet of the story, many numerous times. Owing to the sensitivity of the subject matter, the majority of interviews were carried out anonymously.


pages: 482 words: 122,497

The Wrecking Crew: How Conservatives Rule by Thomas Frank

affirmative action, anti-communist, barriers to entry, Berlin Wall, Bernie Madoff, British Empire, business cycle, collective bargaining, corporate governance, Credit Default Swap, David Brooks, edge city, financial deregulation, full employment, George Gilder, guest worker program, income inequality, invisible hand, job satisfaction, Mikhail Gorbachev, Mont Pelerin Society, mortgage debt, Naomi Klein, Nelson Mandela, new economy, P = NP, plutocrats, Plutocrats, Ponzi scheme, Ralph Nader, rent control, Richard Florida, road to serfdom, rolodex, Ronald Reagan, school vouchers, shareholder value, Silicon Valley, stem cell, Telecommunications Act of 1996, the scientific method, too big to fail, union organizing, War on Poverty

The liberal state has no more claim to legitimacy than the thief who robs you at gunpoint. The system is corruption itself. In its heyday, conservative Washington was saturated with these ideas: The Federal Reserve as a “legal counterfeiter” because it is empowered to adjust the nation’s money supply. The Community Reinvestment Act, which outlaws redlining, as “a blackmail tool.” Social Security as a “Ponzi scheme.” The EPA as “the Gestapo of government.” The operations of city governments as “looting.” As for taxation, wrote Grover Norquist, “your average street mugger is an improvement. He knows it’s your wallet. He knows you earned the money. He just wants it for himself and he is straightforward enough to say, ‘Give me your money, I have a knife.’ Muggers understand this transaction.”5 The most improbable corruption theorist on the conservative scene was Michael Scanlon, the aforementioned aide to Tom DeLay.

Maybe it’s only a coincidence that some of the biggest banks ever to fail were under OTS’s watch, but I doubt it.6 The Securities and Exchange Commission (SEC), the top cop on Wall Street, was no better. Its overworked staffers, whose pay was comparable to that of other federal employees, were expected to face down some of the most highly paid corporation lawyers in the world—a disparity that led, here as elsewhere, to the revolving door. By the time of the crash, the SEC was so utterly clueless that it completely missed the greatest Ponzi scheme of all time, the investment firm run by Bernard Madoff, despite having received numerous tips on the megafraud. It took years for conservatives to transform the SEC into the laughingstock it became in 2008. Their vandalism began, as we have seen elsewhere, with personnel decisions: Before the 1980s, SEC commissioners were drawn from within the agency; from Reagan’s presidency on, they came from Wall Street.

Our ancestors understood that capitalism requires supervision; when you take it away—or when you defund the supervisors, or make them answer to the supervised, or replace them with a “voluntary compliance” program—suddenly you’ve got diseased factories shipping salmonella-laced peanut butter throughout the country. You’ve got worthless mortgage-backed securities—rated triple-A, backed up by useless appraisals, issued by defunct banks—sickening financial institutions from San Diego to Budapest. You’ve got the world’s greatest Ponzi scheme spreading its gift of bankruptcy throughout the land. Thus did the conservative movement keep its appointment with destiny. Free-market techniques secured for it a world of free markets; criminal techniques gave it a land in which crime was triumphant. And with their eyes fixed firmly on their nineteenth-century utopia, its armies of privatizers, pressure boys, PAC men, political entrepreneurs, and professional victims made the world safe for predation.


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

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.

In fact, Dimon’s star actually rose at the bank when, due to his personal connections, he negotiated with the government directly. He reached out to then attorney general Eric Holder to get a $13 billion settlement on claims of mortgage fraud. A few months later, he personally approached Preet Bharara, the United States attorney in Manhattan who had led the investigation into the Madoff Ponzi scheme, and settled that one, too. Still, JPMorgan’s board struggled to strike the right balance in determining Dimon’s compensation, according to the people briefed on the matter. Cutting his pay would have sent a message to bank regulators that the firm understood it had done wrong, but might have angered Dimon. In the end, the board opted to please Dimon rather than its regulators. The decision made sense in narrow economic terms.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, market clearing, Martin Wolf, means of production, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

To own money and own an interest-bearing debt-claim at the same time is still impossible. In depositing money in a bank, ownership of money has been relinquished. Money has been exchanged for a claim against a bank, which—one hopes—is almost as good as money. Inevitably it comes with extra risk, and the interest income it provides can be considered compensation for this risk. It would not be entirely incorrect to compare fractional-reserve banking with a Ponzi scheme. The depositors pool their money holdings in a bank and get paper receipts in return. They know that the banker will issue more receipts as part of his lending business so that ultimately considerably more paper tickets circulate than is money in the bank to pay out every holder of a paper ticket. However, the banker shares some of his profit from this process of money creation with his depositors, which is their incentive to participate in the scheme.

If such a restriction on fractional-reserve banking were not to be enacted, then the state should in any case abandon all measures by which it supports and encourages these banking practices and socializes their risks. The disastrous and misguided idea of state-sponsored “cheap credit” has to be abandoned completely. The state has to exit, once and for all, the sphere of money and banking. Personally, this would be my preferred solution. I do not think that fractional-reserve banking should be outlawed by the state. The practice can correctly be called a Ponzi scheme, but in a free society people should still be allowed to join such schemes. As long as the fallout from this practice is not being socialized through central banking and other support mechanisms by the state, we should trust voluntary cooperation on free markets to properly guide and restrict this activity. But whatever the specific features of the new monetary order are going to be, the allegation that a return to commodity money is impossible because we lack sufficient supply of a suitable commodity is nonsense.

See European Central Bank economic deterioration, pattern of economic equilibrium economist, paper money and economy government fixes for growing shaping elastic money, desire for elastic, inelastic versus electronic money. See also money, paper money Enron equilibrium, economic European Central Bank (ECB) evenly rotating economy F Fannie Mae Federal Reserve establishment of fiat money fiduciary model Fisher, Irving foreign exchange market Foster, William Trufant fractional-reserve banking as Ponzi scheme controls of misconceptions about stability of state and understanding franc France, paper money and Freddie Mac Friedman, Milton functions of money G GDP. See gross domestic product Geldwertstabilisierung und Konjunkterpolitik The General Theory of Employment, Interest, and Money Germany, paper money and global foreign exchange market global reserve currency global state fiat money standard gold gold standard Nixon and resurrecting Roosevelt and goldsmiths Goldtheorie und Konjunkturtheorie goods production, money production versus government debt, monetization of government, funding Great Depression greenbacks Gresham’s law gross domestic product (GDP) effect of money injections on H Harrison, Henry Hayek, Fredrich August von hyperinflation I IMF.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

Asperger Syndrome, asset-backed security, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, medical residency, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, quantitative trading / quantitative finance, Robert Bork, short selling, Silicon Valley, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game

You give them cheap loans. To sift every pool of subprime mortgage loans took him six months, but when he was done he came out of the room and gave Eisman the news. All these subprime lending companies were growing so rapidly, and using such goofy accounting, that they could mask the fact that they had no real earnings, just illusory, accounting-driven, ones. They had the essential feature of a Ponzi scheme: To maintain the fiction that they were profitable enterprises, they needed more and more capital to create more and more subprime loans. "I wasn't actually a hundred percent sure I was right," said Vinny, "but I go to Steve and say, 'This really doesn't look good.' That was all he needed to know. I think what he needed was evidence to downgrade the stock." The report Eisman wrote trashed all of the subprime originators; one by one, he exposed the deceptions of a dozen companies.

"* What shocked Eisman was that none of the people he met in Las Vegas seemed to have wrestled with anything. They were doing what they were doing without thinking very much about it. It was in Las Vegas that Eisman and his associates' attitude toward the U.S. bond market hardened into something like its final shape. As Vinny put it, "That was the moment when we said, 'Holy shit, this isn't just credit. This is a fictitious Ponzi scheme.'" In Vegas the question lingering at the back of their minds ceased to be, Do these bond market people know something we do not? It was replaced by, Do they deserve merely to be fired, or should they be put in jail? Are they delusional, or do they know what they're doing? Danny thought that the vast majority of the people in the industry were blinded by their interests and failed to see the risks they had created.

Eisman was now explaining why the world was going to blow up, but his partners were only half-listening...because the financial world was blowing up. "The minute Steve starts to speak," said Vinny, "the stock starts to fall." As Eisman explained why no one in his right mind would own the very shares he had bought sixteen hours earlier, Danny dashed off text messages to his partners. 9:49. Oh my--Bear at 47 "If [the U.S. financial system] sounds like a circular Ponzi scheme it's because it is." 9:55. Bear is 43 last OMG "The banks in the United States are only beginning to come to grips with their massive loan problems. For instance, I wouldn't own a single bank in the State of Florida because I think they might all be gone." 10:02. Bear 29 last!!!! "The upper classes of this country raped this country. You fucked people. You built a castle to rip people off.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Borrowers have to pay interest and ultimately repay the amount borrowed. But the interest and the amount borrowed may not be paid back, therefore requiring more borrowing that continues until the borrower collapses under the weight of debt. The only way out is for borrowers to induce new borrowers into larger amounts of debt to allow them to pay off their own debts. The system works, like any Ponzi scheme, as long as everyone believes the debt can be paid back and the market value of assets bought with that debt keeps rising. The economy inexorably gravitates toward debt-fueled consumerism, inflation, and increasing debt. This leads to a constant cycle of credit booms and bust. In the second half of the twentieth century, credit money gradually became the primary form of money, leading to an explosion of debt.

As the inflation adjustment was paid at maturity, the structure conserved cash flows, which were distributed to other investors or to the bank as fees. Issuing these securities robbed shareholders in the infrastructure projects of at least some of the inflation hedge that they purchased. Jim Chanos, whose fund Kynikos Associates bet on Macquarie’s share pricing falling, argued that the model was a giant Ponzi scheme. Edward Chancellor, a journalist, was also critical: “excessive fees, excessive leverage and excessive complexity.”4 Public Squalor, Private Profits Over time, adjacency—close enough—allowed the techniques to be applied to mobile phone antennae, casinos, car parks, parking meters, shopping centers, water utilities, and even emergency services communications networks. The common theme was debt, lots of it.

Regulators suggested that the practice was so widespread as to verge on a “corrupt business model.”16 Some fund managers dispense with pretence and fabricate returns. In 2008, Bernard Madoff confessed to an investment fraud totaling more than $60 billion, involving nearly 5,000 clients. Madoff’s hedge funds, operating from three floors of the Lipstick Building, generated solid returns, trading stocks, and options. In reality, since the mid-1990s, Madoff had operated a Ponzi scheme. Lucky Man Jones charged 20 percent of performance, but no management fee, and paid expenses from his performance fee. Traditional hedge funds charged 1 percent management fee and a performance fee of 20 percent of returns above a benchmark, the watermark. There was also a high watermark. If it makes losses, then the fund must recoup these before performance fees resume. Funds now routinely charge 2 percent and 20 percent with no watermark.


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

To get loan managers and internal auditors to give loans to people that are not creditworthy, devise an incentive scheme that rewards turnover and punishes prudence. After the first movers start to do this, other bank CEOs are compelled to do likewise, because otherwise they would not be able to meet the new industry standard for profitability and success. If such a dynamic plays out on the mortgage market, house prices will go up, making the aggressive lending strategy even seem reasonable. By the time the Ponzi scheme collapses and takes the companies down with the lending institutions, the control frauds and many of their imitators have cashed out big. If they were careful, they have not done anything for which they could go to jail (Black 2010). This may sound like an ex post description of what was going on in the run-up to the subprime crisis. It is noteworthy, though, that Black developed his theory of control fraud earlier, based on the evidence of the savings and loan crisis of the mid-1990s, which had followed a similar pattern.

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.

Morgan (bank) 54, 59, 70, 87, 105 labor xii, 4–6, 8, 10, 18, 33–4, 137, 139, 141, 143, 146, 153–5, 157–9, 163–5, 167–73, 176, 178–83, 189–94, 197, 200, 203–5 legitimacy 16, 25 Lehman Brothers 17, 90, 94, 96 Leviathan (government) 210 liberty 8, 25, 207 liquidity xi, 66, 103–5, 112 London School of Economics 20, 27, 40, 144 Long-Term Capital Management (LCTM) 66, 92 macroeconomics 14 Madoff, Bernard 217 managerial power approach 119, 120, 124, 126, 132 marginal cost 142–4 marginal product 156–8, 189, 192 marginal rate of substitution 14 marginal utility 5–6, 13, 214 marginalism 1, 4–5 market forces x, 126, 169, 171–2, 180–82 market power xii, 154, 161, 164, 170, 203 Marshall, Alfred 5, 10, 16, 188, 193 Marx, Karl 5, 188, 198 Marxism 5–6, 10, 165 mass production 7, 15, 143, 161 Mazur, Paul 17–18 median voter theory 212, 214 Menger, Carl 5, 12 mercantilism 2–3 Merrill Lynch 90, 112, 133 Methuen Treaty 3 military vii, 3, 19–20, 22, 25, 45, 116, 208, 215 minimum wage 140–41, 154, 158, 183, 188–9, 192–7, 203–4 Mises, Ludwig von 12 monopoly viii, 9, 18, 26, 41, 86–7, 97–9, 142, 145–7, 149–54, 161, 171, 177 monopsony 153–4 Moody’s (ratings agency) 97–9 Morgan Stanley 49, 63, 90, 217 mutual fund 56, 58, 64–6, 68, 97, 134 NASDAQ 55 natural selection 167 negotiating power 160, 179, 205 net present value 159 new welfare economics 14, 19 news 53, 56, 114, 122, 143, 220 Nobel Prize 7, 17, 20, 22–4, 26, 44, 170, 186 Organisation for Economic Cooperation and Development (OECD) 20, 30, 41, 187, 189, 203 Olson, Mancur 23–4 optimal contracting 109, 119–20, 124, 126–7, 132 ordinalism 1, 11, 17, 21 outrage constraint 119–21, 124, 126–7, 136 outsourcing 165, 177, 184–6 over the counter (OTC) (derivatives) 90 Paretian welfare economics 14 Pareto, Vilfredo 12–13, 21, 157 INDEX pay-for-performance 95, 107–8, 111–12, 115, 119, 121–2, 126, 128, 139 pensions viii, 36, 39, 57, 58, 98, 113, 140, 134 perfect competition (economic) x, xii, 141–2, 145–6, 168, 187, 193 perfectly substitutable (economically) x performance-related pay 109, 111; see also pay-for-performance perverse incentive 113, 133 Pigou, Arthur C. 10, 188, 192–3, 198 Pimco (fund) 96, 215 Ponzi (scheme) 95, 217 poststructuralism 8 power viii–xii, 1–4, 8–9, 18, 25, 27–32, 42, 145, 147, 153–4, 159–61, 164, 166–8, 171, 174, 177–9, 184–7, 193, 198, 203–4 corporate 107–40 economic xii, 1, 32, 45, 46, 54, 208, 219 financial 47–106 informational 207–20 managerial (see managerial power approach) political ix, xii, 32, 86, 208, 210, 219 principal–agent theory 107 prisoner’s dilemma 38 private equity 68, 136 productivity (economic) ix, 10, 32, 34–6, 48, 79–80, 101, 137, 141, 146–7, 156, 171, 173, 176, 178, 180, 186, 189, 192, 194, 196, 201, 204–5 professions, the viii, 1, 25 profit xii, 2, 7, 43, 46, 54–6, 59, 61–2, 65, 68, 76, 82–3, 85, 91, 97, 99– 100, 105, 109–10, 112–13, 118, 127–8, 130, 135, 137, 141–3, 145–50, 153, 155, 157, 159–60, 164, 166, 171, 173, 175, 177–9, 184, 186, 197, 205, 215–16 profitability 49, 53, 60, 74, 84, 95, 97, 100, 132–3, 139, 143, 151, 183, 191, 194 245 profit margin 3, 195 profit maximization 120, 143, 147, 149–51 property rights 22, 215 public relations (PR) 15–16 quadratic weighting (inflation) 33 rating agencies x, 97–100 rational choice movement 1, 21–3, 25, 214 raw materials 2–3, 184 redistribution 10, 12, 19, 39, 161, 186, 210, 213 representative agent 14 reserve requirement 82–4, 103–4 risk management 94 Robbins, Lionel 12–13, 17, 21, 210–11 Robinson, Joan 146, 159–60, 208 Ross, Edward 9–10, 18, 38 Rothschild, Mayer Amschel 72–3, 75 S&P 500 110, 120 Samuelson, Paul 159–60 Sarbanes–Oxley Act 92, 99, 123 Schumpeter, Joseph 19 Second (Workingmen’s) International 5 Second World War 2, 18–19, 30, 79–80 Securities and Exchange Commission (SEC) 52–3, 69, 90, 93–4, 97–8, 115, 123–4, 130, 217 securitization 112 selfishness 7, 38, 40, 108, 167, 170, 211, 213 shareholder franchise 133 shareholders xii, 93, 102, 107–10, 112–15, 120–22, 128, 131, 133–6, 138 SMD assumptions/conditions 7, 14 Smith, Adam 3–4, 42, 155, 163, 188, 198 social norms 38, 108, 117, 120, 135, 138–9, 164 social security 36, 39, 188, 198–9 246 ECONOMISTS AND THE POWERFUL socialism 5–6 , 9–10, 19, 24, 27, 193 Solow, Robert 159 Sonnenschein–Mantel–Debreu theorem: see SMD assumptions/ conditions Soros, George 47, 67, 105 spring loading (stock options) 122 Squam Lake Group 44 Sraffa, Piero 141, 144, 159–60 staggered board (of directors) 126, 134 stagnation 32, 101, 218 stakeholders xii, 107–8, 117, 136–7 Standard & Poor’s (rating agency) 97, 99 Stanford University 10, 18, 93 stock option backdating 122 stock options 43, 67, 92–3, 96, 108–10, 112–13, 120, 122–5, 128, 131–3 structural reforms 188–9 subprime xi, 43, 47, 69–71, 82, 88, 90, 95, 97–8, 101, 105, 108, 111, 113, 120, 133, 136, 205, 217 supply and demand 108, 167 sustainability ix, 13 Syracuse University 9 takeover 70, 102, 113, 126, 135 tariffs 3, 16, 84 TARP: see Troubled Asset Relief Program (TARP) taxation 83, 109, 139, 214 Thatcher, Margaret 40 “too big to fail” 83, 105 transaction costs 7, 74, 168–9 transportation 7, 41, 73, 118, 143, 144–5, 169, 186 treasury secretary xi, 69, 71, 87, 90, 96 Troubled Asset Relief Program (TARP) 70 UBS (bank) 105 unemployment 170, 180–81, 188–9, 197–200, 203–5, 213 university 9, 16–17, 20–21, 27, 41, 101, 117, 142 University of Chicago: see Chicago, University of value added 31, 136 Wall Street xi, 38, 42, 54, 63, 67, 69–70, 88, 92–3, 96, 99, 105, 122–3 Walras, Leon 5–7 Warwick Commission 100–101, 103 Washington Mutual (bank) 95–6 wealth viii, xii, 2, 9, 42, 45, 69, 71–2, 96, 101, 110–11, 120, 135, 207–10 welfare economics 14–15 welfarism 10–11 Wieser, Friedrich von 12–13 worker representatives 137 World Bank 27–8, 31 Worldcom 52, 61, 92, 98, 110, 113, 128, 132 Yale University 10, 13


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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

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.

In a massive exercise of musical chairs, MFIs were encouraged by funds to take yet more money, to lend to yet more “entrepreneurs,” and earn a fat margin in the process. Details, such as having nineteen simultaneous loans, were ignored as long as the music continued to play. The microfinance funds proudly announced their social impact by catapulting people out of poverty in Nicaragua, that war-torn country many had heard of but few could identify on a map, and they naturally earned their fair share of the profits. The musical Ponzi scheme continued unabated until one rather awkward moment that everyone had assumed would never occur: the music stopped. 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.

For the few funds that do strive to honestly tackle the problem of poverty, here are some suggestions to help produce positive results: • Demand a higher management fee—2 percent is not enough to cover genuine due diligence and will inevitably lead to cutting corners. If your investors don’t appreciate the benefit of this, find new investors or close your fund. Pay peanuts, get monkeys. • Assume a priori that every MFI you consider is a jazzed-up Ponzi scheme. Be happy to be proved wrong. • Listen to what your investors actually want. If you can’t actually deliver it, don’t take their money. • Do proper due diligence, on-site, including an auditor; take an IT expert to sniff around in the MFI’s back office; do background checks on managers and look for conflicts of interest within the MFI. Don’t subcontract due diligence to another fund, particularly one that has already invested in the same MFI


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Amazon: How the World’s Most Relentless Retailer Will Continue to Revolutionize Commerce by Natalie Berg, Miya Knights

3D printing, Airbnb, Amazon Web Services, augmented reality, Bernie Sanders, big-box store, business intelligence, cloud computing, Colonization of Mars, commoditize, computer vision, connected car, Donald Trump, Doomsday Clock, Elon Musk, gig economy, Internet of things, inventory management, invisible hand, Jeff Bezos, market fragmentation, new economy, pattern recognition, Ponzi scheme, pre–internet, QR code, race to the bottom, recommendation engine, remote working, sensor fusion, sharing economy, Skype, supply-chain management, TaskRabbit, trade route, underbanked, urban planning, white picket fence

Available from: https://www.sfgate.com/business/networth/article/Scathing-Report-of-Amazon-Is-a-Must-Read-for-2750932.php [Last accessed 19/6/2018]. 20 Anonymous (2000) Can Amazon survive? Knowledge at Wharton, 30 August. Available from: http://knowledge.wharton.upenn.edu/article/can-amazon-survive/ [Last accessed 19/6/2018]. 21 Anonymous (2000) Amazon: Ponzi scheme or Wal-Mart of the web? Slate, 8 February. Available from: http://www.slate.com/articles/business/moneybox/2000/02/amazon_ponzi_scheme_or_walmart_of_the_web.html [Last accessed 19/6/2018]. 22 Corkery, Michael and Nick Wingfield (2018) Amazon asked for patience. Remarkably, Wall Street complied, New York Times, 4 February. Available from: https://www.nytimes.com/2018/02/04/technology/amazon-asked-for-patience-remarkably-wall-street-complied.html [Last accessed 19/6/2018]. 23 Baldwin, Caroline (2018) Sir Ian Cheshire on how to compete with Amazon, Essential Retail, 30 January.

Wall Street analysts were convinced Bezos was building a house of cards,18 with Lehman Bros analyst Ravi Suria predicting Amazon would run out of cash in a matter of months unless it could ‘pull another financing rabbit out of its rather magical hat.’19 Suria wasn’t alone here. The same year, finance magazine Barron’s put out a list of 51 internet companies that were expected to go bust by the end of 2000. The Burn Rate 51 included now-forgotten names like CDNow and Infonautics – and Amazon. Headlines such as ‘Can Amazon Survive?’20 and ‘Amazon: Ponzi Scheme or Wal-Mart of the Web?’21 illustrated doubts over Amazon’s future. Amazon was expected to be yet another victim of the dot-com bubble. Despite the broader scepticism and genuine befuddlement over its unconventional business model, Amazon managed to persuade enough shareholders by telling a compelling story. He requested their patience and surprisingly they agreed. ‘I think it comes down to a consistent message and consistent strategy, one that doesn’t deviate when the stock goes down or goes up’, said Bill Miller, the Chief Investment Officer at Miller Value Partners.22 Today, investors are often confused when Amazon reports the occasional profit – they’ve come to expect Amazon to recycle any cash back into the business.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Synthetic assets and the associated borrowing create tremendous wealth for speculators in these capital markets. They are often hidden from the public authorities and managed off balance sheets in ‘special investment vehicles’ or SIVs. Problems occur when these unregulated ‘promises’ evaporate – and are defaulted upon. The so-called ‘liquidity’ quickly and dangerously dries up. A rush for the exits follows. Like a Ponzi scheme, those who get out first take most of the gains. The losers are left empty-handed. Central bankers have, since the 1990s, turned a blind eye and largely failed to understand these and more innovative self-enriching activities. Shadow banking was only named and identified by the economist Paul McCulley as late as 2007, in a speech at the annual financial symposium hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming.9 Members of the shadow banking ‘blind-eye brigade’ include Alan Greenspan, who in 2004 said that under the deregulated system of credit creation, ‘Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.’10 Credit creation and Goethe’s ‘Sorcerer’s Apprentice’ As argued above, to ensure that the monetary system addresses society’s varied needs, credit (debt) creation must be managed to ensure it is offered at low real rates of interest, and used productively and sustainably to create employment, and with it savings, income and other revenues, part of which can be used to repay the debt.

The currency’s architects deliberately limited the amount of bitcoins in order ostensibly to prevent inflation. In reality, the purpose is to ratchet up the value of bitcoins, most of which are owned by originators of the scheme. In this sense, bitcoin miners are no different from goldbugs talking up the value of of a finite quantity of gold, from tulip growers talking up the price of rare tulips in the seventeenth century, or from Bernard Madoff talking up his fraudulent Ponzi scheme. However, some have hyped up the technology used by bitcoin – blockchain, a distributed database or ledger – and argued that it could revolutionise the distribution of wealth and provide transparent accounts of transactions. We should treat these claims cautiously. In a recent blog, Financial Times journalist Izabella Kaminska argued that financial technology fads follow a pattern similar to new music designated first as ‘hip’ and ‘cool’ but which then fades and becomes ‘so last year’.


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.

You would think an industry with such poor performance would be a niche service and have a hard time staying in business. But there’s almost five trillion dollars invested in these funds.⁶⁶ Give someone the chance of investing alongside “the next Warren Buffett” and they’ll believe with such faith that millions of people will put their life savings behind it. Or take Bernie Madoff. In hindsight his Ponzi scheme should have been obvious. He reported returns that never varied, they were audited by a relatively unknown accounting firm, and he refused to release much information on how the returns were achieved. Yet Madoff raised billions of dollars from some of the most sophisticated investors in the world. He told a good story, and people wanted to believe it. This is a big part of why room for error, flexibility, and financial independence—important themes discussed in previous chapters—are indispensable.


pages: 693 words: 204,042

New York 2140 by Kim Stanley Robinson

availability heuristic, back-to-the-land, Black-Scholes formula, Burning Man, central bank independence, creative destruction, credit crunch, crowdsourcing, decarbonisation, East Village, full employment, happiness index / gross national happiness, hive mind, income inequality, invisible hand, Jane Jacobs, liquidity trap, Mason jar, mass immigration, megastructure, microbiome, music of the spheres, New Urbanism, offshore financial centre, plutocrats, Plutocrats, Ponzi scheme, precariat, quantitative easing, rent-seeking, the built environment, too big to fail

These two developments might not sound like the hugest trees in the forest to fall, not earth-shattering enough to jiggle money seismographs worldwide, pretty much business as usual, in fact. But it’s funny how things sometimes shift like flocking birds. And the way bubbles work is structurally identical to Ponzi schemes—what a coincidence!—and indeed it’s another amazing coincidence how much the entire capitalist economy resembles in its basic structure either a Ponzi scheme or a bundle of Ponzi schemes. How could this be? Is this another case of convergent evolution, or isomorphic identity, or cloning, or simply an astonishing Jungian synchronicity, in other words a coincidence? Probably just a coincidence, sure. But be that as it may, bubbles and Ponzi schemes and capitalism all have to keep growing or else they are in deep shit. A big enough glitch in their growth and they break their own logic, by depriving themselves of the margin needed to fund the next investment that will make the next margin to fund the next investment that will make the next margin to fund the next investment, and so on forever.

Scary, sure, but cool, because you can hedge by way of that knowledge. You can, in short, short it. You can, as I had found out by doing it, invent a bubblistic investment possibility more or less by accident, then sell it to people and watch it go long, knowing all the while that it is turning into a bubble; and all the while you can short it in preparation for the time that bubble pops. Spoofing? No. Ponzi scheme? Not at all! Just finance. Legal as hell. So, for the previous six months, reading the stats from around the coastlines of the world and trying to calculate all the trends, reading the tea leaves, the engineering journals, everything, including urban folktales, I had come to believe that the moment was approaching when this bubble was going to pop. Some places, like good old Manhattan, had a huge influx of technological innovation and human capital and sheer money, and here we were going to uptake the intertidal and make the best of it.


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

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. The account balances that his clients saw weren’t real.

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: 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

All of the staggering wealth that was supposedly created in the 1990s and 2000s—think of the $7.3 trillion in home equity that evaporated when the housing bubble burst—wasn’t really created at all. In DiMicco’s words, “it was a shell game.” “What did we get by playing that game? We got bubbles. The savings-and-loan bubble, the dot-com bubble, the Enron bubble, the housing bubble, all of the Ponzi schemes originating on Wall Street, one after another, all trying to create wealth from nothing, all driven by major debt and smoke and mirrors.” Instead of allowing ourselves to wander further down the path of exploding bubbles and phantom prosperity, DiMicco argues that the nation’s political and economic leaders should have focused on innovating, building, and making things. “We’re kidding ourselves if we think the U.S. economy will come back using an obviously discredited model,” he says.

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. It’s important to manage wealth wisely. But you cannot establish a business of selling mortgages to people with low incomes and poor credit, repackage the debt into “mortgage-backed securities,” sell it around the world, and expect to last very long.


pages: 559 words: 169,094

The Unwinding: An Inner History of the New America by George Packer

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, bank run, big-box store, citizen journalism, cleantech, collateralized debt obligation, collective bargaining, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, diversified portfolio, East Village, El Camino Real, Elon Musk, family office, financial independence, financial innovation, fixed income, Flash crash, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, housing crisis, income inequality, informal economy, Jane Jacobs, life extension, Long Term Capital Management, low skilled workers, Marc Andreessen, margin call, Mark Zuckerberg, market bubble, market fundamentalism, Maui Hawaii, Menlo Park, Neil Kinnock, new economy, New Journalism, obamacare, Occupy movement, oil shock, paypal mafia, peak oil, Peter Thiel, Ponzi scheme, Richard Florida, Robert Bork, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, side project, Silicon Valley, Silicon Valley startup, single-payer health, smart grid, Steve Jobs, strikebreaker, The Death and Life of Great American Cities, the scientific method, too big to fail, union organizing, urban planning, We are the 99%, We wanted flying cars, instead we got 140 characters, white flight, white picket fence, zero-sum game

To encourage more growth, friendly county commissioners would waive the impact fees that were supposed to be assessed to the developers in order to help pay for new roads and water lines. In the exurbs going up around Tampa Bay, property taxes could remain low, with new schools and fire stations funded by bond issues floated on the projection of future growth. So in a sense everyone was getting returns from investments that would come in tomorrow, or next year. A few local critics pointed out the strategy’s resemblance to a Ponzi scheme. But everything kept growing and no one paid attention. The growth machine cleared out the pine trees and palmettos and orange groves along State Road 54 up in Pasco County. It cut down the mangroves on Apollo Beach and laid asphalt over the strawberry farms around Plant City. Farther south down Interstate 75, in Lee County, the growth machine built a university on the wetlands near Fort Myers (Senator Connie Mack put in a call to the Army Corps of Engineers), and it sold quarter-acre lots on the installment plan between the drainage canals of Cape Coral.

Half or two-thirds of the houses were vacant, but the residents who hung on in Country Walk parked their cars in the empty driveways and kept the neighboring lawns of San Augustine grass mowed to avoid an appearance of decline. On the more forsaken blocks the change was obvious—six inches of grass, weeds in the driveway, copper wiring ripped from the air-conditioner boxes, a rash of green mold spreading across a beige stucco wall, a VACANT or ABANDONED notice tacked to a front door. But the collapse of the Ponzi scheme was unspectacular, with no demolished factories or abandoned farms. The ghost subdivisions were pretty, in a way. Under the brilliant aquamarine sky the houses looked like perfect cardboard cutouts, the surfaces smooth and regular, the blinds drawn, the landscape almost untainted by human life. The prices that had rocketed skyward dropped just as fast to earth. Up State Road 54 from Country Walk, Bunny’s house in Twin Lakes, which had gone from $114,000 to $280,000 in six years, fell to $160,000 in two years.

Some of the foreclosed houses were being used by drug dealers or traffickers in stolen goods, littered with contraband. There had even been a shooting. Sheriff’s deputies were making nightly visits out to Carriage Pointe. Paranoia was running high, and one man proudly showed Van Sickler the security cameras he’d installed on his driveway. “In suburbia,” Van Sickler said, “no one can hear you scream.” A Ponzi scheme was a confidence game that succeeded only when enough people were willing to put aside common sense. Everyone involved was both being taken and taking someone else. The result was universal credulousness and universal fear. Carriage Pointe was supposed to be a little slice of the American dream, but it felt like the end of days. Van Sickler’s reporting there led him to conclude that the bust wasn’t all the fault of feckless homeowners, and he wrote a hard-edged piece exposing the role of developers and elected officials in creating the disaster


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.”

Deutsche Bank figured that if home-price appreciation fell to 4 percent a year, subprime losses would jump to 8 percent. A market in which home prices remained flat would completely wipe out triple-B-rated bonds. A triple-B rating is a low investment-grade-rated security. A decline in home values would cause the damage to move up the rating scale, putting even single-A-rated bonds in jeopardy. The subprime market contained the hallmark of every Ponzi scheme. It worked only as long as more money was put into the scheme. When home prices were rising, overextended borrowers usually could pay off their first mortgage—and often a home-equity loan and credit-card bills on top of that—by selling their house in a rising market. Once home prices stopped rising, the game was over, and home prices would plummet. The mortgage market may have become perilous in many places, but MBIA executives said the company remained open for business.

., MBIA Insurance Corporation and National Public Finance Guarantee Corporation, New York Supreme Court, New York County, May 13, 2009. Docket No. 6010475. Financial Guaranty Insurance Co. v. IKB Deutsche Industriebank AG, New York Supreme Court, New York County, Dec. 29, 2008. Docket No. 600704/08. Master File No. 07 Civ. 9901 (SHS) United States District Court Southern District of New York. In re Citigroup Inc. Securities Litigation. Citigroup’s CDO Ponzi Schemes. 208. Luke Mullins, “Waxman Digs Into Moody’s, S&P with Internal Docs,” U.S. News and World Report, Oct. 23, 2008. Special Comment, “Structured Finance Rating Transitions: 1983-2008,” Moody’s Investor Service, March 2009. Alexandre Dumas, The Count of Monte Cristo (New York: Bantam Dell, 2003), p. 272. Index ABX Index ACA Capital CDOs and CDSs and mark-to-market and mortgage crisis and rescue proposals for bond insurers and Standard & Poor’s and ACA Financial Guaranty Ackman, Bill See also Gotham Partners, Bill Ackman and; Pershing Square, Bill Ackman and background of books on investing, favorite children of grandmother of Harvard and Ackman, Jeanne Ackman, Karen Herskovitz background of Ackman, Larry Ackman Brothers & Singer Adamson, Simon Adelphia Adelson, Mark Aetna Life & Casualty Company AHERF (Allegheny Health, Education, and Research Foundation) bankrupty/ reinsurance Allegheny General Hospital Gotham Partners / Ackman and Moody’s and NYS attorney general’s office and- NYS Insurance Department and Pershing Square / Ackman and SEC and transaction details Wall Street Journal and AIG (American International Group) CDOs and CDSs and Congress and downgraded Federal Reserve bailout of Nightingale NYS attorney general’s office and AIG Financial Products (AIGFP) Aladdin Capital Management Allegheny General Hospital Allegheny Health, Education, and Research Foundation.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

accounting loophole / creative accounting, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, global reserve currency, Guggenheim Bilbao, Gunnar Myrdal, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, new economy, New Urbanism, Occupy movement, peak oil, phenotype, plutocrats, Plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, short selling, Silicon Valley, special economic zone, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

The private appropriation and accumulation of this common wealth and the social labour congealed within it occur in two quite different ways. First, there is a vast array of what we would now consider extra-legal activities, such as robbery, thievery, swindling, corruption, usury, predation, violence and coercion, along with a range of suspicious and shady practices in the market (monopolisation, manipulation, market cornering, price fixing, Ponzi schemes etc.). Second, individuals accumulate wealth by legally sanctioned exchanges under conditions of non-coercive trade in freely functioning markets. Theorists of capital circulation and accumulation typically exclude activities of the first sort as excrescences external to the ‘normal’ and legitimate functioning of the capitalist market. They build their models of capital circulation and accumulation on the presumption that only the second mode of private appropriation and accumulation of social wealth is legitimate and relevant.

There are, as we have seen, various adjustments under way, but the more closely these are examined the more they appear as symptoms of the underlying problem rather than as signs of or paths towards long-term solutions. Of course, capital can construct an economy (and to some degree has already done so) based on a fetish world of fantasy and imagination built upon pyramiding fictions that cannot last. One final Ponzi scheme to eclipse all others is a possible scenario. Ironically, the innovations that are available to us in these times are most easily applied to increase rather than dampen speculative activity, as the case of nano-trading on the stock exchange illustrates. Such an economy will, before any ultimate denouement, be subject to periodic volcanic eruptions and crashes. Capital will not, under this scenario, end with either a bang or a whimper but with the sound of innumerable asset bubbles popping across the uneven geographical landscape of an otherwise listless capital accumulation.

283 Maddison, Angus 227 Maghreb 174 Malcolm X 291 Maldives 260 Malthus, Thomas 229–30, 232–3, 244, 246, 251 Manchester 149, 159 Manhattan Institute 143 Mansion House, London 201 manufacturing 104, 239 Mao Zedong 291 maquilas 129, 174 Marcuse, Herbert 204, 289 market cornering 53 market economy 198, 205, 276 marketisation 243 Marshall Plan 153 Martin, Randy 194 Marx, Karl 106, 118, 122, 142, 207, 211 and alienation 125, 126, 213 in the British Museum library 4 on capital 220 conception of wealth 214 on the credit system 239 and deskilling 119 on equal rights 64 and falling profits 107 and fetishism 4 on freedom 207, 208, 213 and greed 33 ‘industrial reserve army’ 79–80 and isolation of workers 125 labour theory of value 109 and monetary system reforms 36 monopoly power and competition 135 reality and appearance 4, 5 as a revolutionary humanist 221 and social reproduction 182 and socialist utopian literature 184 and technological innovation 103 and theorists of the political left 54 and the ‘totally developed individual’ 126–7 and world crises xiii; Capital 57, 79–80, 81, 82, 119, 129, 132, 269, 286, 291–2 The Economic and Philosophic Manuscripts of 1844 269, 286 Grundrisse 97, 212–13 Theories of Surplus Value 1 Marxism contradiction between productive forces and social relations 269 ‘death of Marxism’ xii; ecologically sensitive 263 and humanism 284, 286, 287 ‘profit squeeze’ theory of crisis formation 65 traditional Marxist conception of socialism/ communism 91 Marxists 65, 109 MasterCard Priceless 275 Mau Mau movement 291 Melbourne 141 merchants 67 and industrial capital 179 price-gouging customers 54 and producers 74–5 Mercosur 159 Mexican migrants 115, 175, 195–6 Mexico 123, 129, 174 Mexico City riots (1968) x microcredit 194, 198 microfinance 186, 194, 198, 211 Microsoft 131 Middle East 124, 230 Milanovic, Branko 170 military, the capacities and powers 4 dominance 110 and technology 93, 95 ‘military-industrial complex’ 157 mind-brain duality 70 mining 94, 113, 123, 148, 239, 257 MIT (Massachusetts Institute of Technology) 292 Mitchell, David: Cloud Atlas 264 Mitchell, Timothy 122 Modern Times (film) 103 Mondragon 180 monetarism xi monetary wealth and incomes, inequalities in (1920s) x 1071 monetisation 44, 55, 60, 61, 62, 115, 192–3, 198, 235, 243, 250, 253, 261, 262 money abandonment of metallic basis of global moneys 30, 37, 109 circulation of 15, 25, 30–31, 35 coinage 15, 27, 29, 30 commodification of 57 commodity moneys 27–31 creation of 30, 51, 173, 233, 238–9, 240 credit moneys 28, 30, 31, 152 cyber moneys 36, 109–10 electronic moneys 27, 29, 35, 36, 100 and exchange value 28, 35, 38 fiat 8, 27, 30, 40, 109, 233 gap between money and the value it represents 27 global monetary system 46–7 love of money as a possession 34 measures value 25, 28 a moneyless economy 36 oxidisation of 35 paper 15, 27, 29, 30, 31, 37, 40, 45 power of 25, 36, 59, 60, 62, 65–66, 131–6, 245, 266 quasi-money 35 relation between money and value 27, 35 represented as numbers 29–30 and social labour 25, 27, 31, 42, 55, 88, 243 and the state 45–6, 51, 173 storage of value 25, 26, 35 the US dollar 46–7 use value 28 money capital 28, 32, 59, 74, 142, 147, 158, 177, 178 money laundering 54, 109 ‘money of account’ 27–8, 30 monopolisation 53, 145 monopoly, monopolies 77 and competition 131–45, 218, 295 corporate 123 monetary system 45, 46, 48, 51 monopoly power 45, 46, 51, 93, 117, 120, 132, 133–4, 136, 137, 139, 141, 142–3 monopoly pricing 72, 132 natural 118, 132 of state over legitimate use of force and violence 42, 44, 45, 51, 88, 155, 173 see also prices, monopoly monopsony 131 Monsanto 123 Montreal Protocol 254, 259 ‘moral restraints’ 229, 233 mortgages 19, 21, 28, 32, 54, 67, 82, 239 multiculturalism 166 Mumbai 155, 159 Murdoch, Rupert xi Myrdal, Gunnar 150 N NAFTA 159 name branding 31, 139 nano-trading 243 Nation of Islam 291 national debt 45, 226, 227 National Health Service 115 National Labor Relations Board 120 National Security Administration 136 nationalisation 50 nationalism 7, 8, 44, 289 natural resources 58, 59, 123, 240, 241, 244, 246, 251 nature 56 alienation from 263 capital’s conception of 252 capital’s relation to 246–63 commodification of 59 domination of 247, 272 Heidegger on 59, 250 Polanyi on 58 power over 198 process-thing duality 73 and technology 92, 97, 99, 102 Nazis 151 neoclassical economists 109 neocolonialism 143, 201 neoliberal era 128 neoliberal ethic 277 neoliberalisation x, 48 neoliberalism xiii, 68, 72, 128, 134, 136, 176, 191, 234, 281 capitalism 266 consensus 23 counter-revolution 82, 129, 159, 165 political programme 199 politics 57 privatisation 235 remedies xi Nevada, housing in 77 ‘new economy’ (1990s) 144 New York City 141, 150 creativity 245 domestic labour in 196 income inequality 164 rental markets 22 social reproduction 195 Newton, Isaac 70 NGOs (non-governmental organisations) 189, 210, 284, 286, 287 Nike 31 Nkrumah, Kwame 291 ‘non-coincidence of interests’ 25 Nordic countries 165 North America deindustrialisation in 234 food grain exports 148 indigenous population and property rights 39 women in labour force 230 ‘not in my back yard’ politics 20 nuclear weapons 101 Nyere, Julius 291 O Obama, Barack 167 occupational safety and health 72 Occupy movement 280, 292 Ohlin Foundation 143 oil cartel 252 companies 77, 131 ‘Seven Sisters’ 131 embargo (1973) 124 ‘peak oil’ 251–2, 260 resources 123, 240, 257 oligarchy, oligarchs 34, 143, 165, 221, 223, 242, 245, 264, 286, 292 oligopoly 131, 136, 138 Olympic Games 237–8 oppositional movements 14, 162, 266–7 oppression 193, 266, 288, 297 Orwell, George 213 Nineteen Eighty-Four 202 overaccumulation 154 overheating 228 Owen, Robert 18, 184 Oxfam xi, 169–70 P Paine, Tom: Rights of Man 285 Paris 160 riots (1968) x patents 139, 245, 251 paternalism 165, 209 patriarchy 7 Paulson, Hank 47 pauperisation 104 Peabody, George 18 peasantry ix, 7, 107, 117, 174, 190, 193 revolts 202 pensions 134, 165, 230 rights 58, 67–8, 84, 134 people of colour: disposable populations 111 Pereire, Emile 239 pesticides 255, 258 pharmaceuticals 95, 121, 123, 136, 139 Philanthropic Colonialism 211 philanthropy 18, 128, 189, 190, 210–11, 245, 285 Philippines 115, 196 Picasso, Pablo 140–41, 187, 240 Pinochet, Augusto x Pittsburgh 150, 159, 258 planned obsolescence 74 plutocracy xi, xii, 91, 170, 173, 177, 180 Poland 152 Polanyi, Karl 56, 58, 60, 205–7, 210, 261 The Great Transformation 56–7 police 134 brutality 266 capacities and powers 43 powers xiii, 43, 52 repression 264, 280 surveillance and violence 264 violence 266, 280 police-state 203, 220 political economy xiv, 54, 58, 89, 97, 179–80, 182, 201, 206–9 liberal 204, 206, 209 political parties, incapable of mounting opposition to the power of capital xii political representation 183 pollutants 8, 246, 255 pollution 43, 57, 59, 60, 150, 250, 254, 255, 258 Pontecorvo, Gillo 288 Ponzi schemes 21, 53, 54, 243 population ageing 223, 230 disposable 108, 111, 231, 264 growth 107–8, 229, 230–31, 242, 246 Malthus’s principle 229–30 Portugal 161 post-structuralism xiii potlatch system 33 pounds sterling 46 poverty 229 anti-poverty organisations 286–7 and bourgeois reformism 167 and capital 176 chronic 286 eradication of 211 escape from 170 feminisation of 114 grants 107 and industrialisation 123 and population expansion 229 and unemployment 170, 176 US political movement denies assistance to the poor 292–3 and wealth 146, 168, 177, 218, 219, 243 world xi, 170 power accumulation of 33, 35 of capital xii, 36 class 55, 61, 88, 89, 97, 99, 110, 134, 135, 221, 279 computer 105 and currencies 46 economic 142, 143, 144 global 34, 170 the house as a sign of 15–16 of labour see under labour; of merchants 75 military 143 and money 25, 33, 36, 49, 59, 60, 62, 63, 65–6, 245, 266 monopoly see monopoly power; oligarchic 292 political 62, 143, 144, 162, 171, 219, 292 purchasing 105, 107 social 33, 35, 55, 62, 64, 294 state 42–5, 47–52, 72, 142, 155–9, 164, 209, 295 predation, predators 53, 54, 61, 67, 77, 84, 101, 109, 111, 133, 162, 198, 212, 254–5 price fixing 53, 118, 132 price gouging 132 Price, Richard 226, 227, 229 prices discount 133 equilibrium in 118 extortionate 84 food 244, 251 housing 21, 32, 77 land 77, 78, 150 low 132 market 31, 32 and marketplace anarchy 118 monopoly 31, 72, 139, 141 oil 251, 252 property 77, 78, 141, 150 supermarket 6 and value 31, 55–6 private equity firms 101, 162 private equity funds 22, 162 private property and the commons 41, 50, 57 and eradication of usufructuary rights 41 and individual appropriation 38 and monopoly power 134–5, 137 social bond between human rights and private property 39–40 and the state 47, 50, 58, 59, 146, 210 private property rights 38–42, 44, 58, 204, 252 and collective management 50 conferring the right to trade away that which is owned 39 decentralised 44 exclusionary permanent ownership rights 39 and externality effects 44 held in perpetuity 40 intellectual property rights 41 microenterprises endowed with 211 modification or abolition of the regime 14 and nature 250 over commodities and money 38 and state power 40–41, 42–3 underpinning home ownership 49 usufructuary rights 39 privatisation 23, 24, 48, 59, 60, 61, 84, 185, 235, 250, 253, 261, 262, 266 product lines 92, 107, 219, 236 production bourgeois 1 falling value of 107 immaterial 242 increase in volume and variety of 121 organised 2 and realisation 67, 79–85, 106, 107, 108, 173, 177, 179, 180, 221, 243 regional crises 151 workers’ dispossession of own means of 172 productivity 71, 91, 92, 93, 117, 118, 121, 125, 126, 132, 172, 173, 184, 185, 188, 220, 239 products, compared with commodities 25–6 profitability 92, 94, 98, 102, 103, 104, 106, 112, 116, 118, 125, 147, 184, 191–2, 240, 252, 253, 256, 257 profit(s) banking 54 as capital’s aim 92, 96, 232 and capital’s struggle against labour 64, 65 and competition 93 entrepreneurs 24, 104 falling 81, 107, 244 from commodity sales 71 and money capital 28 monopoly 93 rate of 79, 92 reinvestment in expansion 72 root of 63 spending of 15 and wage rates 172 proletarianisation 191 partial 175, 190, 191 ‘property bubble’ 21 property market boom (1920s) 239 growth of 50 property market crashes 1928 x, 21 1973 21 2008 21–2, 54, 241 property rights 39, 41, 93, 135 see also intellectual property rights; private property property values 78, 85, 234 ‘prosumers’ 237 Proudhon, Pierre-Joseph 183 Prozac 248 public goods 38 public utilities 23, 60, 118, 132 Q quantitative easing 30, 233 R R&D ix race 68, 116, 165, 166, 291 racial minorities 168 racialisation 7, 8, 62, 68 racism 8 Rand, Ayn 200 raw materials 16, 17, 148, 149, 154 Reagan, Ronald x, 72 Speech at Westminster 201 Reagan revolution 165–166 realisation, and production 67, 79–85, 106, 107, 108, 173, 177, 179, 180, 221, 243 reality contradiction between reality and appearance 4–6 social 27 Reclus, Elisée 140 regional development 151 regional volatility 154 Reich, Robert 123, 188 religion 7 religious affiliation 68 religious hatreds and discriminations 8 religious minorities 168 remittances 175 rent seeking 132–3, 142 rentiers 76, 77, 78, 89, 150, 179, 180, 241, 244, 251, 260, 261, 276 rents xii, 16–19, 22, 32, 54, 67, 77, 78, 84, 123, 179, 241 monopoly 93, 135, 141, 187, 251 repression 271, 280 autocratic 130 militarised 264 police-state 203 violent 269, 280, 297 wage 158, 274 Republican Party (US) 145, 280 Republicans (US) 167, 206 res nullius doctrine 40 research and development 94, 96, 187 ‘resource curse’ 123 resource scarcity 77 revolution, Fanon’s view of 288 revolutionary movements 202, 276 Ricardo, David 122, 244, 251 right, the ideological and political assault on the left xii; response to universal alienation 281 ‘rights of man’ 40, 59, 213 Rio de Janeiro 84 risk 17, 141, 162, 219, 240 robbery 53, 57, 60, 63, 72 robotisation 103, 119, 188, 295 Rodney, Walter 291 romantic movement 261 Roosevelt, Theodore 131, 135 Four Freedoms 201 Rousseau, Jean-Jacques 213, 214 Ruhr, Germany 150 rural landscapes 160–61 Russia 154 a BRIC country 170, 228 collapse of (1989) 165 financial crisis (1998) 154, 232 indebtedness 152 local famine 124 oligarchs take natural resource wealth 165 S ‘S’ curve 225, 230–31 Saint-Simon, Claude de Rouvroy, comte de 183 sales 28, 31, 187, 236 San Francisco 150 Santiago, Chile: street battles (2006–) 185 Sao Paulo, Brazil 129, 195 savings the house as a form of saving 19, 22, 58 loss of 20, 58 private 36 protecting the value of 20 Savings and Loan Crisis (USA from 1986) 18 savings accounts 5, 6 Scandinavia 18, 85, 165 scarcity 37, 77, 200, 208, 240, 246, 260, 273 Schumpeter, Joseph 98, 276 science, and technology 95 Seattle 196 Second Empire Paris 197 Second World War x, 161, 234 Securities and Exchange Commission 120, 195 security xiii, 16, 121, 122, 165, 205, 206 economic 36, 153 food 253, 294, 296 job 273 national 157 Sen, Amartya 208–11, 281 Development as Freedom 208–9 senior citizens 168 Seoul 84 serfdom 62, 209 sexual hatreds and discriminations 8 Shanghai 153, 160 share-cropping 62 Sheffield 148, 149, 159, 258 Shenzhen, China 77 Silicon Valley 16, 143, 144, 150 silver 27–31, 33, 37, 57, 233, 238 Simon, Julian 246 Singapore 48, 123, 150, 184, 187, 203 slavery 62, 202, 206, 209, 213, 268 slums ix, 16, 175 Smith, Adam 98, 125–6, 157, 185, 201, 204 ‘invisible hand’ 141–2 The Wealth of Nations 118, 132 Smith, Neil 248 social distinction 68, 166 social inequality 34, 110, 111, 130, 171, 177, 180, 220, 223, 266 social justice 200, 266, 268, 276 social labour 53, 73, 295 alienated 64, 66, 88 and common wealth 53 creation of use values through 36 expansion of total output 232 household and communal work 296 immateriality of 37, 233 and money 25, 27, 31, 42, 55, 88, 243 productivity 239 and profit 104 and value 26, 27, 29, 104, 106, 107, 109 weakening regulatory role of 109, 110 social media 99, 136, 236–7, 278–9 social movements 162–3 social reproduction 80, 127, 182–98, 218, 219, 220, 276 social security 36, 165 social services 68 social struggles 156, 159, 165, 168 social value 26, 27, 32, 33, 55, 172, 179, 241, 244, 268, 270 socialism 215 democratic xii; ‘gas and water’ 183 socialism/communism 91, 269 socialist revolution 67 socialist totalitarianism 205 society capitalist 15, 34, 81, 243, 259 civil 92, 122, 156, 185, 189, 252 civilised 161, 167 complex 26 demolition of 56 and freedom 205–6, 210, 212 hope for a better society 218 industrial 205 information 238 market 204 post-colonial 203 pre-capitalist 55 primitive 57 radical transformation of 290 status position in 186 theocratic 62 women in 113 work-based 273 world 204 soil erosion 257 South Africa 84–5, 152, 169 apartheid 169, 202, 203 South Asia labour 108 population growth 230 software programmers and developers 115, 116 South Korea 123, 148, 150, 153 South-East Asia 107–8 crisis (1997–8) 154, 232, 241 sovereign debt crises 37 Soviet Bloc, ex-, labour in 107 Soviet Union 196, 202 see also Russia Spain xi, 51, 161 housing market crash (2007–9) 82–3 spatio-temporal fixes 151–2, 153, 154, 162 spectacle 237–8, 242, 278 speculative bubbles and busts 178 stagnation xii, 136, 161–2, 169 Stalin, Joseph 70 standard of life 23, 175 starvation 56, 124, 246, 249, 260, 265 state, the aim of 156–7 brutality 266, 280 and capital accumulation 48 and civil society 156 curbing the powers of capital as private property 47 evolution of the capitalist state 42 and externality effects 44 guardian of private property and of individual rights 42 and home ownership 49–50 interstate system 156, 157 interventionism 193, 205 legitimate use of violence 42, 44, 45, 51, 88, 155, 173 loss of state sovereignty xii; and money 1, 45–6, 51, 173 ‘nightwatchman’ role 42, 50 powers of 42–5, 47–52, 57–8, 65, 72, 142, 155–9, 209, 295 and private property 47, 50, 58, 59, 146, 210 provision of collective and public goods 42–3 a security and surveillance state xiii; social democratic states 85 war aims 44 state benefits 165 state regulatory agencies 101 state-finance nexus 44–5, 46–7, 142–3, 156, 233 state-private property nexus 88–9 steam engine, invention of the 3 steel industry 120, 121, 148, 188 steel production 73–4 Stiglitz, Joseph 132–4 stock market crash (1929) x Stockholm, protests in (2013) 171, 243 strikes 65, 103, 124 sub-prime mortgage crisis 50 suburbanisation 253 supply and demand 31, 33, 56, 106 supply chain 124 supply-side remedies xi supply-side theories 82, 176 surplus value 28, 40, 63, 73, 79–83, 172, 239 surveillance xiii, 94, 121, 122, 201, 220, 264, 280, 292 Sweden 166, 167 protests in (2013) 129, 293 Sweezy, Paul 136 swindlers, swindling 45, 53, 57, 239 ‘symbolic analysts’ 188 Syntagma Square, Athens 266, 280 T Tahrir Square, Cairo 266 Taipei, Taiwan 153 Taiwan 123, 150, 153 Taksim Square, Istanbul 266, 280 Tanzania 291 tariffs 137 taxation 40, 43, 47, 67, 84, 93–4, 106, 133, 150, 155, 157, 167, 168, 172, 190 Taylor, Frederick 119, 126 Taylorism 103 Tea Party faction 205, 280, 281, 292 technological evolution 95–6, 97, 101–2, 109 technological imperatives 98–101 technological innovation 94–5 technology changes involving different branches of state apparatus 93–4 communicative technologies 278–9 and competition 92–3 constraints inhibiting deployment 101 culture of 227, 271 definition 92, 248 and devaluation of commodities 234 environmental 248 generic technologies 94 hardware 92, 101 humanising 271 information 100, 147, 158, 177 military 93, 95 monetary 109 and nature 92, 97, 99, 102 organisational forms 92, 99, 101 and productivity 71 relation to nature 92 research and development 94 and science 95 software 92, 99, 101 a specialist field of business 94 and unemployment 80, 103 work and labour control 102–11 telephone companies 54, 67, 84, 278 Tennessee 148 Teresa, Mother 284 Thatcher, Margaret (later Baroness) x, 72, 214, 259 Thatcherism 165 theft 53, 60, 61, 63 Thelluson, Peter 226, 227 think tanks 143 ‘Third Italy’ 143 Third World debt crisis 240 Toffler, Alvin 237 tolls 137 Tönnies, Ferdinand 122, 125 tourism ix, 16, 140, 141, 187, 236 medical 139 toxic waste disposal 249–50, 257 trade networks 24 trade unions xii, 116, 148, 168, 176, 184, 274, 280 trade wars 154 transportation 23, 99, 132, 147–8, 150, 296 Treasury Departments 46, 156 TRIPS agreement 242 tropical rainforest 253 ‘trust-busting’ 131 trusts 135 Turin, Italy 150 Turkey 107, 123, 174, 232, 280, 293 Tuscany, Italy 150 Tutu, Archbishop Desmond 284 Twitter 236 U unemployment 37, 104, 258, 273 benefits 176 deliberately created 65, 174 high xii, 10, 176 insurance 175 and labour reserves 175, 231 and labour-saving technologies 173 long-term 108, 129 permanent 111 echnologically induced 80, 103, 173, 274 uneven geographical developments 178, 296 advanced and underserved regional economies 149–50 and anti-capitalist movements 162 asset bubbles 243 and capital’s reinvention of itself 147, 161 macroeconomic processes of 159 masking the true nature of capital 159–60 and technological forms 219 volatility in 244 United Fruit 136 United Kingdom income inequality in 169; see also Britain United Nations (UN) 285 United States aim of Tea Party faction 280 banking 158 Bill of Rights 284 Britain lends to (nineteenth century) 153 capital in (1990s) 154 Constitution 284 consumption level 194 global reserve currency 45–6 growth 232 hostility towards state interventions 167 House of Representatives 206 human rights abuses 202 imperial power 46 indebtedness of students in 194 Indian reservations 249 interstate highway system 239 jobless recoveries after recession 172–3 liberty and freedom rhetoric 200–201, 202 Midwest ‘rust belt’ 151 military expenditures 46 property market crashes x, 21–2, 50, 54, 58, 82–3 racial issues 166 Savings and Loan Crisis (from 1986) 18 social mobility 196 social reproduction 196–7 solidly capitalist 166 steel industry 120 ‘symbolic analysts’ 188 ‘trust-busting’ 131 unemployment 108 wealth distribution 167 welfare system 176 universal suffrage 183 urbanisation 151, 189, 228, 232, 239, 247, 254, 255, 261 Ure, Andrew 119 US Congress 47 US dollar 15, 30, 45–6 US Executive Branch 47 US Federal Reserve xi, 6, 30, 37, 46, 47, 49, 132, 143, 233 monetary policy 170–71 US Housing Act (1949) 18 US Treasury 47, 142, 240 use values collectively managed pool of 36 commodification of 243 commodities 15, 26, 35 common wealth 53 creation through social labour 36 and entrepreneurs 23–4 and exchange values 15, 35, 42, 44, 50, 60, 65, 88 and housing 14–19, 21–2, 23, 67 and human labour 26 infinitely varied 15 of infrastructural provision 78 loss of 58 marketisation of 243 monetisation of 243 of money 28 privatised and commodified 23 provision of 111 and revolt of the mass of the people 60 social demand for 81 usufructuary rights 39, 41, 59 usury 49, 53, 186, 194 utopianism 18, 35, 42, 51, 66, 119, 132, 183, 184, 204, 206–10, 269, 281, 282 V value(s) commodity 24, 25 failure to produce 40 housing 19, 20, 22 net 19 production and realisation of 82 production of 239 property 21 relation between money and value 27, 35 savings 20 storing 25, 26, 35 see also asset values; exchange values; social value; use values value added 79, 83 Veblen, Thorstein: Theory of the Leisure Class 274 Venezuela 123, 201 Vietnam, labour in 108 Vietnam War 290 violence 53, 57, 72, 204–5, 286 against children 193 against social movements 266 against women 193 colonial 289–90, 291 and contemporary capitalism 8 culture of 271 of dispossession 58, 59 in a dystopian world 264 and humanism 286, 289, 291 of the liberation struggle 290 militarised 292 as the only option 290–91 political 280 in pursuit of liberty and freedom 201 racialised 291 state’s legitimate use of 42, 44, 45, 51, 88, 155, 173 of technology 271 and wage labour 207 virtual ecological transfer 256 Volcker, Paul 37 W wages 103 basic social wage 103 falling 80, 82 for housework 115, 192–3 low xii, 114, 116, 186, 188 lower bound to wage levels 175 non-payment of 72 and profits 172 reduction in 81, 103, 104, 135, 168, 172, 176, 178 rising 178 and unskilled labour 114 wage demands 150, 274 wage levels pushed up by labour 65 wage rates 103, 116, 172, 173 wage repression 158–9 weekly 71 see also income Wall Street criticised by a congressional committee 239–40 illegalities practised by 72, 77 and Lebed 195 new information-processing technologies 100 Wall Street Crash (1929) x, 47 Wall-E (film) 271 Walmart xii, 75, 84, 103, 131 war on terror 280 wars 8, 60, 229 currency 154 defined 44 monetisation of state war-making activities 44–5 privatisation of war making 235 resource 154, 260 and state aims 44 state financing of 32, 44, 48 and technology 93 trade 154 world 154 water privatisation 235 wave theory 70 wave-particle duality 70 wealth accumulation of 33, 34, 35, 157, 205 creation of 132–3, 142, 214 disparities of 164–81 distribution of 34, 167 extraction from non-productive activities 32 global 34 the house as a sign of 15–16 levelling up of per capita wealth 171 and poverty 146, 168, 177, 218, 219, 243 redistribution of 9, 234, 235 social 35, 53, 66, 157, 164, 210, 251, 265, 266, 268 taking it from others 132–3 see also common wealth weather futures 60 Weber, Max 122, 125 Weimar Republic 30 welfare state 165, 190, 191, 208 Wells Fargo 61 West Germany 153, 154, 161 Whitehead, Alfred North 97 Wilson, Woodrow 201 Wolf, Martin 304n2 Wollstonecraft, Mary: A Vindication of the Rights of Woman 285 women career versus family obligations 1–2 disposable populations 111 exploitation of 193 housework versus wage labour 114–15 oppression against 193 social struggle 168 trading of 62 violence against 193 in the workforce 108, 114, 115, 127, 174, 230 women’s rights 202, 218 workers’ rights 202 working classes and capital 80 consumer power 81 crushing organisation 81 education 183, 184 gentrified working-class neighbourhoods ix; housing 160 living conditions 292 wage repression and consumption 158–9 working hours 72, 104–5, 182, 272–5, 279 World Bank 16, 24, 100, 186, 245 World Trade Organization 138, 242 WPA programmes (1930s) 151 Wright, Frank Lloyd: Falling Water 16 Wriston, Walter 240 Y YouTube 236 Yugoslavia, former 174 Z Zola, Émile 7


pages: 446 words: 117,660

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, market bubble, market clearing, market fundamentalism, means of production, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, working-age population

The bottom line is that policymakers left the financial industry free to innovate—and what it did was to innovate itself, and the rest of us, into a big, nasty mess. THE MADOFF ECONOMY December 19, 2008 The revelation that Bernard Madoff—brilliant investor (or so almost everyone thought), philanthropist, pillar of the community—was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend. Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole? The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it.

., 248 Internal Revenue Service (IRS), 350 international diplomacy, 244 International Monetary Fund, 97–98, 208 international trade, 243–45, 249–53 arbitration in, 252 backlash from, 244–45 conflicts of interest in, 246–47 and corporate assets, 249 and corruption, 246, 247, 254, 255–56 free trade, 249 literature on, 400 political realism in, 251–52 producer interests vs. consumer interests in, 250 protectionism, 247, 250, 252 reasons for agreements in, 246, 247, 249–50, 255 in recent history, 250–51, 251, 255–56 role of executive branch in, 250, 252–53, 255–56 as rules-based system, 244, 245, 247, 250–51, 252, 254–55, 256 tariffs, 244, 246–48, 252–53, 254–56 trade war, 353, 361, 371–72 and U.S. credibility, 256 investment: as accounting fiction, 228–29 debt-financed, 212 lure of personal wealth in, 93 Madoff’s Ponzi scheme in, 92–94 negative, 230–31, 231 overseas, 228 private, 204, 205, 208 progressive expenditure, 210–11 public “shovel-ready” projects, 116, 133, 205–6, 206 rate of return on, 205 uses of the term, 7 investment-savings, liquidity-money (IS-LM), 109–12, 111 invisible bond vigilante, 160–61 Iran-Contra, 300 Iraq war: based on false premises, 13, 26, 343, 381 failed reconstruction in, 299 support from Very Serious People, 157 unpopularity among voters, 27 Ireland: austerity-with-growth in (1980s), 161 banks in, 179 and Europe, 178 foreign investment in, 228 and recover, 183 irrational behavior, 132, 146 Irrational Exuberance (Shiller), 84 Irwin, Neil, 315, 316 “IS-LMentary” (Krugman), 103, 109–12, 111, 125 Israeli stabilization (1985), 127 Italy: economy of, 188 elections in, 188 Mussolini regime in, 346 “It Can’t Happen, It’s a Bad Idea, It Won’t Last” (Jonung and Drea), 184–85 “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap” (Krugman), 9, 82 Japan: Bank of Japan, 104 financial crisis in, 81–82, 103, 116, 164 jargon, avoiding, 7 Jensen, Michael, 135 jobs: creation of, 120, 293 cuts in, 107, 120 employment benefits, 286, 317 full employment, 96, 114 health insurance covered in, 39 involuntary part-time employment, 60 in knowledge-intensive industries, 292 monopsony power in, 316–17 new geography of, 292 and real earnings, 316 taken by robots, 288–89 work opportunities for less-educated men, 286, 292 see also unemployment Johnson, Lyndon B., 53, 54, 55n Johnston, David Cay, 350 Jones, Alex, 356, 357 Journal of Money, Credit and Banking, 137 JPMorgan Chase, 163 Kaiser Family Foundation, 39, 58 kakistocracy, 350 Kamin, David, 239 Kansas: education in, 293 taxes in, 216, 229, 293 Kavanaugh, Brett, 345, 346, 352 Kentucky, health care in, 68 Kerry, John, 366, 380, 381, 382 Kerry, Teresa Heinz, 380, 381 “ketchup economists,” 136, 141 Keynes, John Maynard, 81, 123, 134, 135, 143, 394, 402 The General Theory of Employment, Interest and Money, 132–33 “The Great Slump of 1930,” 137 Keynesian economics: and business cycle, 276 and Capitol Hill Baby-Sitting Co-op, 137–38 and dysfunctional finance, 147 free-market, 124, 125, 133, 394 macroeconomics, 123, 407–8 as “moderately conservative,” 4, 123, 133, 408 New Keynesian views, 129, 139–40, 143, 145, 147 and the 1980s, 129 opponents of, 4, 95, 124, 133–34, 143 re-embracing, 147–48 “khaki election,” use of term, 13 Khashoggi, Jamal, 330 Kinsley, Michael, 126 Kiyotaki, Nobuhiro, 147 Kleiman, Mark, 48 Klein, Ezra, 51, 356 Klein, Joe, 29 Koch brothers, 60, 303, 331, 336, 355 Kocherlakota, Narayana, 384 Kristol, Irving, 299 “Krugman calculation,” 267–70, 268, 272, 273, 274, 276 K Street project, 283 Kudlow, Larry, 330 Kydland, Finn, 139 Laffer curve, 385 Lancaster, Kelvin, 398 Langone, Ken, 95, 96 language: avoiding jargon, 7 specialized, 393–94 writing in clear English, 6–7 Latvia, slumps in, 162 Lazear, Eddie, 384 Lehman Brothers, 123, 146, 157 Leonhardt, David, 5 Lerner, Abba, 152–54 liberalism, 324 death of, 13 liberal professional economists, 149, 150 libertarians, 5 life expectancy, 199 liquidity, 89, 90 IS-LM, 109–12 liquidity trap, 112 Logic of Collective Action, The (Olson), 354–55 London market, banks lending in, 89 “London Whale” venture, 163 Longman, Phillip, 42 Lucas, Robert, 128, 130, 131, 138–39, 143 Maastricht Treaty, 405 macroeconomics: business cycle vs. long-term growth in, 275–76 and Capitol Hill Baby-Sitting Co-op, 137–38 Dark Age of, 131, 408, 409 as divided field, 123–25, 136–37 false peace in (1985–2007), 142 Keynesian, 123, 407–8 rational-expectation, 128 “saltwater” vs.

Ross, 245 personal savings rate, 88 Peterson, Pete, 193 Piketty, Thomas, 219 Capital in the 21st Century, 238 Pimco bond fund, 83, 89 Pizzagate, 375 Poland: Law and Justice Party in, 358 threats to democracy in, 188, 189, 344, 346, 358, 359, 360 white nationalism in, 346 polarization, 5–9, 291, 297–98, 356 policy discussion, absence of, 13 political action, 355–56 political realism, 251–52 politicization: pressures from the right, 3–4 and racism, 4–5, 226, 301, 307, 308–10, 360 roots of, 2–5 PolitiFact, 386 Ponzi scheme, 92–93 population, aging of, 16 population density, 87 population growth, 225, 271, 272 “populism,” use of term, 351–53 Portugal, economy of, 178 “positive” economics, 1 post-truth politics, 61 poverty: and cuts in benefits, 30 of elderly, 23–24 and health care, 47, 66 precious metals, 411 Prescott, Edward, 139 productivity, 283 and income distribution, 268–69, 272, 273 slowdown in, 267, 289 and technology, 289 and wages, 289 professional conservative economists, 149 profit, appearance of, 92–93 progressive expenditure, categories of, 210–11 propagandists, 149 protectionism, 353 prudence, downside of, 104, 106, 107–8, 117 “public good,” use of term, 354–55 public goods, 30 public health, 355 public works, spending on, 116, 133, 143, 205–6, 206 punditry: author’s rules for, 5–9 honesty about dishonesty, 7–8 staying with easy stuff, 6 talking about motives, 8–9 writing in English, 6–7 Putin, Vladimir, 371 racism: and hate-mongering, 54 interracial marriages, 215 and politicization, 4–5, 226, 301, 307, 308–10, 360 Rajan, Raghuram, 136 Rampell, Catherine, 5 Rand, Ayn, Atlas Shrugged, 219 rationality: assumption of, 134, 138, 139, 144–45, 148 investor irrationality, 135 limitations of, 131, 132 Rawls, John, 3 Reagan, Ronald: and economic growth, 262, 275–76 and health care, 45, 53, 322 as icon of conservative purity, 300, 302 and supply-side economics, 271 and taxes, 7, 19, 215, 299 and Voting Rights Act, 300 Reagan administration: and income inequality, 271 and Iran-Contra, 300 and private contractors, 300 “real business cycle” theory, 139 real estate: housing bubble, 82, 83–85, 86–88 land-use restrictions, 87 recessions: causes of, 138–39, 185 central banks’ roles in, 103–4, 124, 133 demand-side view of, 139 desirability of, 144, 147 “double-dip” (1979–1982), 215 effects of, 126–27 fears of, 81–82 and fiscal policy, 140, 141, 215, 275 and government debt, 124, 142 and printing money, 4, 104, 105 and unemployment insurance claims, 106 Reciprocal Trade Agreements Act (1934), 250, 252, 254–55 “Red-Baiting in the 21st Century” (Krugman), 313–14 red ink, fear of, 107, 116 Regan, Trish, 319, 320 regulation, minimal, 315 Reid, Harry, 28, 29 Reinhardt, Uwe, 35 Reinhart, Carmen, 158, 163 Repealing the Job-Killing Health Care Law Act (2011), 59 Republican Party: campaign (2020), 313 center-right delusion of, 305–7 climate denial of, 337, 365 conspiracy theorizing by, 345–46, 365 corruption in, 335–37, 343, 358, 368 dark side of, 334, 336, 368 democracy undermined by, 367–69 double standards of, 208, 209 double talk of, 225–26 economic doctrine of, 229 facts or logic ignored by, 28, 237, 366 “Flimflam Man” of, 194, 195–97, 362 frauds promoted by, 74–75, 224–26 and health care, 65–66, 69, 70, 71–72, 73–75, 76–77, 309, 338 hostility to science, 335, 337 and immigration, 303 IRS defunded by, 350 lying by, 225–26 and movement conservatism, 8, 297–98, 299–301, 302–4, 307, 343, 368 one-party rule sought by, 358–60 paranoid style in, 345–47 and party loyalty, 67, 150–51, 226, 368 policy analysis shunned by, 73–74, 77 power plays by, 359–60, 369 privatization of public assets as goal of, 338 racism of, 226 radicalization of, 189, 298, 309 realities of, 197 state governments controlled by, 65–66, 68, 77 and Supreme Court, 345, 346, 352 tax plans of, 222, 224–26, 236, 309 Trumpism of, 335–37, 343, 345–46, 359–60, 370–72 voter preferences vs., 309 workable ideas lacking in, 69, 74 retirement, economics of, 15, 22, 23–24, 31–32, 362 retirement accounts: private, 17, 19, 22–24 real rate of return on, 23 Return of Depression Economics, The (Krugman), 82 Reynolds, Alan, 273, 274 Ricardo, David, 289 risk: elimination of, 81 in financial innovation, 90–91 reward vs., 135 Rivlin, Alice, 263 Roach, Stephen, 83, 85 Roberts, David, 307 Roberts, Paul Craig, 273, 274, 279 Robin, Corey, 315–16 robot, defined, 288 Rodgers, Cathy McMorris, 60 Rogers, Will, 297 Rogoff, Ken, 158, 163 Romer, Christina, 234, 236 Romer, David, 139 Romney, Mitt, 51–52, 54, 219, 320 Roosevelt, Franklin D.: and balanced budget, 107 on health care, 46 and reciprocal trade act, 247, 250, 252, 254 and Social Security, 25, 26 Roosevelt, Theodore, 239 Roosevelt (FDR) administration, and international trade, 244 rule of law: disdain of, 252, 256, 301, 347 interpretation and enforcement of, 367–68 rules for research, 399–404 dare to be silly, 401–2, 404 listen to the gentiles, 399–400, 404 question the question, 400–401, 404 simplify, simplify, 402–4 Russia, and trade, 256 Ryan, Jack, 381 Ryan, Paul, 28, 203, 219, 363 as flim-flam man, 194, 195–97, 362 and Medicare, 225 and Ryan plan, 193–94, 195–97, 201–2 super PAC of, 225 Saez, Emmanuel, 219, 234–35, 236, 238–39 safety-net programs, 4, 224, 313, 317, 320, 321, 323, 370 Samuelson, Paul, 124, 403, 407, 408, 410 San Diego, housing in, 87 “sand states,” unemployment in, 170 Santorum, Rick, 303 Sawhill, Isabel, 280 Scaife, Richard Mellon, 380 Schultz, Howard, 212, 308, 310 Schumer, Chuck, 93 Schumpeter, Joseph A., 132, 134, 395 Schwartz, Anna, 133 SeaWorld, 352 secular stagnation, 206 Securities and Exchange Commission, 93 segregationists, 346 Seltzer, Marlene, 166 Senate, role of, 368 September 11, 2001, attacks, aftermath of, 13 Sessions, Pete, 59 Shapiro, Ben, 354, 355, 356, 357 Shiller, Robert, 84, 136, 141, 146 Shleifer, Andrei, 146 Sicko (movie), 44–45 silver and gold coins, 411, 412 “silver-loading,” 71 Simple Art of Murder, The (Chandler), 327 Simpson, Alan, 198, 199, 203, 218 Sinema, Kyrsten, 365 “Skewing of America, The” (Krugman), 259–60 “skills gap,” 159, 166–68, 290 Slemrod, Joel, 277 Smith, Adam, 132, 138, 411 Smith, Noah, 95 smoking, dangers of, 333, 334 Smoot-Hawley Tariff Act (1930), 247 snake oil, peddling, 357 Snow, John, 81 social democracy, 313–14, 317, 320–21, 323 social dysfunction, indicators of, 286 socialism, 219, 313–14, 316, 319–21, 322–24 social justice, 3 social media, see media Social Security: cuts in benefits, 17, 32 expansion of, 30, 32, 212, 240 financial condition of, 16–17, 20, 28–29 guaranteed benefits of, 24 historic success of, 21, 22, 24, 31–32 importance to voters, 14, 26, 31, 306 as independent entity, 20 “Life Expectancy for Social Security” (Web site), 26 percentage of revenues going to benefits, 22 politicization of, 25–27 privatization of, 14–15, 19–21, 22–24, 25–27, 28–29, 32, 35, 302, 306, 361, 377, 378 retirement age for, 199 supported by dedicated tax on payroll earnings, 19 threats to, 16–18, 198, 199, 200, 223, 224 Trump administration’s lies about, 225 trust fund of, 20 Social Security Act (1934), 26 Solow, Bob, 396, 405 Soros, George, 345, 346, 365 Soviet Union: central planning by, 323 economy of, 324 fall of, 177 Spain: anti-establishment forces in, 99 economy of, 178–80, 184 and euro, 177, 178–79, 181, 187, 188 housing bubble in, 181 internal devaluation in, 179 loans to, 182 public debt of, 179 unemployment in, 182, 184 speculation: destructive, 135 short-term, 133 stagflation (1970s), 124, 133 Stalin, Joseph, 239, 324 “State of Macro, The” (Blanchard), 130 statistics, uses and abuses of, 262 Stein, Herbert, 271 Stiglitz, Joseph E., 5, 396–98, 403 “Stimulus Arithmetic” (Krugman), 104, 113–14 stock market bubble, 83, 84, 86 Stokes, Leah, 305, 306 Stone Center for the Study of Socioeconomic Inequality (CUNY), 259 Stross, Charlie, 357 sugar, import quotas on, 250 Summers, Larry, 136, 145–46 “Sum of All Fears, The” (Krugman), 81 supply-side economics, 128, 275–76, 299 Supreme Court, U.S.: on Affordable Care Act, 65, 68, 77 Kavanaugh appointment to, 345, 346, 352 moral authority destroyed, 345, 360 partisanship in, 346 sustainable growth rate, 153–54, 204 Sweden, economy of, 239, 323 Switzerland, health care in, 37 system overhaul, 210, 212 tanning parlors, tax on, 211 tariffs, 244, 246–48, 251, 252–53, 254–56 taxes: carbon tax, 339 corporate, see corporate taxes cutting, 8, 16–17, 19, 20, 116–17, 199, 201, 215–17, 218–20, 224–26, 227–29, 230–33, 231–33, 232, 236–37, 306–7, 351, 361, 370, 371 and debt, 154, 222–23, 224–26 economic effects of, 7, 222–23, 224–26, 233, 236–37 incentive effects of, 154 and income inequality, 238–39 low, 315 on middle class, 221–23 and monopoly power, 236 narrow-gauge, 211 optimal top rates of, 234–35 on payroll, 212 political trade-offs in, 153 on pollution, 339 progressive taxation, 238–40, 323 raising, 185, 196, 199, 219, 229, 380 tariffs, 244, 246–48, 251, 252–53, 254–56 temporary breaks, 222 top marginal income tax rates, 236–37, 236 Trump’s frauds, 348–50 value-added, 154, 212 on the wealthy, see wealthy on working class, 20, 221–23 tax evasion, 349–50, 413, 414 tax liabilities, 414 tax loopholes, 93, 349 Tax Policy Center, 196, 202, 283 tax reform, 26, 198–99 Tea Party, 53–54, 303 technology, and income inequality, 260, 288–90 Tennessee, health care in, 68 tethering, 413–14 Thatcher, Margaret, 22, 23, 128 “That Eighties Show” (Klugman), 124 “Theoretical Framework for Monetary Analysis, A” (Friedman), 144 Thompson, Fred, 47, 52 tobacco companies, 333, 334 Toles, Tom, 333 torture, 300 totalitarianism, 324 trade theory, 399–400, 401, 403 trade war, 353, 361, 371–72 see also international trade transcription costs, 411–14 transportation, greenhouse gases from, 339–40 Treasury, U.S.: on income gains, 279–81 Office of Tax Analysis, 278 partisan functions of, 26 and Social Security, 16 Trichet, Jean-Claude, 161 “Triumph of Macroeconomics, The” (Krugman), 103–5 Trotsky, Leon, 324 trucking industry, 290 Trump, Donald: attacks on media by, 347 attitude toward truth, 364–66 belligerent ignorance of, 246, 307, 337, 345, 346–47, 352 campaigning, 309, 370 contempt for rule of law, 252, 256, 347 corruption of, 335–37, 338, 343, 349, 350, 368, 389 and cronyism, 256, 343 as deal-maker, 348–50 election of (2016), 13, 343, 372, 375, 387–89 family history of, 348–49 foreign dictators admired by, 346–47, 365, 371 humiliating others, 352–53 and inequality, 260, 291 and international trade, 245, 246, 247–48, 249, 252–53, 254–56, 353, 361 laziness of, 352 as liar, 348, 353, 364, 365 on manhood, 370, 371, 372 on neo-Nazis as “very fine people,” 365 and populism, 351–53 and racism, 246, 310, 360 and Republican Party, 335–37, 359, 372 scandals about, 388–89 and socialism, 322–23 State of the Union address (2019), 207–9, 322 supporters scammed by, 353, 372, 389 and taxes, 216, 221–23, 224–26, 227–29, 230–33, 306–7, 308, 350, 361, 371 tax returns of, 359 tough-guy posturing by, 334, 346–47, 370–72 and 2020 election, 227, 347, 361 and the wall, 370, 371 Trump, Fred (father), 348 Trump administration: anti-science views of, 332 as anti-worker, 351–53 appointments to, 352 bad faith of, 151, 332, 365 charlatans and cranks in, 149, 151, 329, 331, 333 climate change deniers in, 329–31, 332–34, 335–37 and collapse of freedom, 187 compared to that of G.


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

Amazingly, not one of the quants, despite their chart-topping IQs, their walls of degrees, their impressive Ph.D.’s, their billions of wealth earned by anticipating every bob and weave the market threw their way, their decades studying every statistical quirk of the market under the sun, saw the train wreck coming. How could they have missed it? What went wrong? A hint to the answer was captured centuries ago by a man whose name emblazoned the poker chips the quants wagered with that night: Isaac Newton. After losing £20,000 on a vast Ponzi scheme known as the South Sea Bubble in 1720, Newton observed: “I can calculate the motion of heavenly bodies but not the madness of people.” Just past 5:00 A.M. on a spring Saturday in 1961, the sun was about to dawn on a small, ratty casino in Reno, Nevada. But inside there was perpetual darkness punctuated by the glow of neon lights. A blackjack player sat at an otherwise empty table, down $100 and exhausted.

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. Peter Muller, working at a quant factory in California, was itching to branch out and start trading serious money.

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: 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.

Crusades 16, 17, 18 currencies 100 da Gama, Vasco 29 da Pisa, Leonardo see Fibonacci da Vinci, Leonardo 7, 27, 32, 47, 60, 65, 80–2, 84, 87–8 Dafforne, Richard 120–3 Dandolo, Enrico 52 Dark Ages dark arts 35, 83 Darwin, Charles 139, 165 Das Kapital (Marx) 165 Dasgupta, Sir Partha 231–2, 237, 238, 239 Datini, Francesco 23–6, 52, 96 de’ Barbari, Jacopo 79 de’ Belfolci, Folco 34, 44 De divina proportione (Pacioli) 66, 82, 84, 85–6 De ludo scacchorum (Pacioli) 87–8 De pictura (Alberti) 60, 117 De quinque corporibus (Piero) 66 De viribus quantitatis (Pacioli) 83 Dean, Graeme W. 203 debit and credit entries 13, 55, 93–4, 100 difficulties 101–2, 122–3 The Decline of the West (Spengler) 167 Defoe, Daniel 127–8 della Francesca, Piero 7, 32, 34, 44–5, 46, 47 mathematical treatises 45, 66, 75 perspective painting 60, 64, 76–7 della Rovere, Giuliano 59 Deloitte, William 145 Deloitte Touche Tohmatsu 217 demand management 185 democracy 15 depreciation 148, 149, 231 Der moderne Kapitalismus (Sombart) 161–2, 171 derivatives market 198, 200 Descartes, René 40 d’Este, Isabella 83, 84, 88 dividends 144, 146, 147, 148, 149, 202 Doge’s Palace 50, 56 Domenici, Pete V. 191 domestic accounts 15–16 double-entry bookkeeping 8, 115, 120, 166 Badoer’s system 55 and capitalism 159–60, 161–75 and decision-making 126–7 earliest surviving 20–1 to improve the mind 125 link with rhetoric 172–3 in modern era 135–6, 249 origins 6–7, 16, 21–2 Pacioli’s definition 92–3 six essential features 20–1 texts on 117, 136 use by Datini 24, 26 Venetian 55, 67, 97–100, 123–7, 131 see also Particularis de computis et scripturis du Pont, Irénée 156 ducats 50, 55 Dürer, Albrecht 79–80 earnings per share (EPS) 219 earth see planet Earth Earth Summit 2012 248–9 East India Company 142 Ebbers, Bernie 213 eco-accounting 249 economic growth 192–3, 225, 227, 233, 242, 245, 248 economics 185 political economy 171 ecosystems 239–40, 247 education 245 Euclid’s Elements 37–8 quadrivium 36, 38, 43 trivium 38, 43 Egypt 35, 36 Eisenstein, Elizabeth 116–17 Elements (Euclid) 37–8, 39, 67, 68, 84 Elgin Marbles 15 Engels, Friedrich 162, 164, 165 England 116, 121, 131, 133, 147 Enron 3, 173, 194–9, 201, 207, 212–13, 214–16, 222–3 environmental accounting 233–8, 245, 247 environmental damage 222–3, 224–5, 232–3, 240, 241–2, 248 equity 21, 243 Erasmus of Rotterdam 68, 84–5 Erlich, Everett 235 Ernst & Young 209, 210, 216, 217 Espeland, Wendy Nelson 172–3 Euclid, Elements 37–8, 39, 67, 68, 75, 84 Eugenius IV, Pope 34 Europe 17, 20, 21, 22–3, 40, 116, 156, 188 accounting associations 153 currencies 25 medieval 26, 70–1 universities 30, 40, 42 vernacular languages 41 European Environment Agency 247 Evans, John H. 173–5 exchange rates 55 externalities 236 factory system 136–7, 138, 139–41, 165, 166 Farolfi ledger 20–1 Fastow, Andrew 213 Fells, J.M. 140–1 Fibonacci 18–19, 75 Fibonacci numbers 19–20 Liber abaci 19–20, 22, 39–41, 63, 66, 67, 75 Financial Accounting Standards Board (US) 206, 213 financial information 203–6 financial statements 5, 143, 144, 146, 200, 205, 214, 215 Fitoussi, Jean-Paul 243–4 Florence 6, 17, 34, 61, 64, 84 abbaco schools 41 bank ledger 20 expansion of commerce 21 Flugel, Thomas 127 Fondaco dei Tedeschi 56 Ford Motor Company 250–1 forests 240, 241 Forster, E.M. 154–5 Forster, Nathaniel 137 France 147 Franciscans 62, 65, 88, 89 Frankfurt Book Fair 95 Frederick II 95 Freiburg 27 Friedman, Milton 221 fund transfers 54 G20 249 Galileo 116, 166 Geijsbeek, John B. 157–8 General Electric 204 The General Theory of Employment (Keynes) 177–8, 179, 183, 185–6 Genoa 6, 17 geometry 36, 37, 38, 63, 73, 75, 81 Germany 56, 68, 183 Gertner, Jon 244 Giovanni, Enrico 244 Giovanni Farolfi & Co. 20 Glitnir 5 Global Biodiversity Outlook 3 (Sukhdev) global financial crisis (2008) 3, 5, 197, 215, 242, 243–4 globalisation, of finance 206–7, 219, 221 Goethe, Johann W. von 128–31 golden ratio 66, 86 Goodwin, Sir Fred 197 governmental accounting 120 grammar 38, 43 Great Depression 177, 178, 179, 180, 227 Greece, ancient 15 mathematics 34–5, 37–8, 61 philosophers 37 green accounting 244 Green Economy Report (Sukhdev) 248–9 Greenspan, Alan 227–8 Gross Domestic Product (GDP) 3, 180–2, 225, 227–30, 232–3, 235, 237–8, 242–3, 246 alternatives to 243–7, 249 failings of 246 Gross National Product (GNP) 1–3, 181, 190, 231 Groves, Eddy 208–9 Guidobaldo, Duke of Urbino 66, 72, 79, 92 Gutenberg, Johann 68, 77 Hagen, Everett 186 Hamilton, Alexander 22 Hammurabi’s Code 14 Haq, Mahbub ul 245 Henry VIII 25 Herodotus 36 HIH 208, 209, 213, 215 Hindu–Arabic arithmetic 34, 41, 62, 67 Hindu–Arabic numerals 18–19, 21, 26–7, 38, 44, 52, 71, 75 Hoenig, Chris 246–7 honeybee pollination 237 Hoover, Herbert 177 Hopwood, Anthony housework, unpaid 229 How to Pay for the War (Keynes) 182–3 Hudson, George 142–3 human capital 231, 248 Human Development Index 245 Humanism (Florence) 43–4, 59–60, 68 Huxley, Aldous 32–3 income measurement 218–19, 226 income statements 5, 202, 203, 219 in ancient Rome 16–17 see also profit and loss accounts India 29, 238 trade/double entry 22 Indonesia 240 industrial revolution 131, 133, 139, 200, 226 inflation 182, 183 information processing 203 Institute of Accountants and Bookkeepers of New York (IABNY) 156, 157 Institute of Chartered Accountants in England and Wales (ICAEW) 153, 205–6 Insull, Samuel 202, 214 Insull Utility Investments 201–2 interest payments 25, 54, 96 international accounting 189, 207 International Accounting Standards Board 207, 214 International Monetary Fund 187 internet 204 inventory 97–9, 101 Islam 22, 39 Italy 6, 7, 16, 19, 28, 167–8 mathematics 34–42, 62 Jerusalem 17 joint stock companies 133, 136, 142, 147, 148 Joint Stock Companies Act 1844 144, 149 Jones, Edward T. 133–6 Jones’ English System of Book-keeping 133–6 journal 99, 100, 101, 103, 118, 203 Julius II, Pope 59 Kennedy, Robert F. 1–3, 229–30, 246 Keynes, John Maynard 8, 176, 177–80, 182–7, 190, 250 Klein, Naomi 221, 233 KPMG 210, 214, 217 Kreuger, Ivar 201 Kreuger & Toll 201 Kublai Khan 18 Kuznets, Simon 2, 177, 180–1, 189, 229 Lanchester, John 4, 198 Landefeld, Steven 228 Landsbanki 5 Latin 35, 41, 63, 71, 72, 73, 74, 116, 220 Lawrence, D.H. 154–5 Lay, Kenneth 195, 196, 197, 212–13, 214 ledgers 20, 93, 99–100, 103–4, 118, 203 14th century 24, 93 Badoer’s 52, 55 balancing 111 closing accounts 111–13 Farolfi 20–1 Lee, G.A. 20–1 Lee, Thomas A. 203 Lehman Brothers 5, 216 Liber abaci (Fibonacci) 19–20, 22, 39–41, 63, 66, 67, 75 limited liability 147–8, 149 Littleton, A.C. 17, 140, 146, 147, 158–9 Liverpool and Manchester Railway 141 Lives of the Most Eminent Painters (Vasari) 46 Living Planet Survey 241–2 Lloyds-HBOS 5 London and North Western Railway 141 Louis XII 82 Machiavelli 30 Mackinnon, Nick 79–80 Madoff, Bernie 142 Madonna and Child with Saints 47 magic 35, 40, 83, 220 Mair, John 118, 125, 130 Malatesta family 33–4, 43 Malthus, Thomas 171 Manchester cotton mill (Engels) 165 Mandela, Nelson 221 Mantua 83, 84 manufacturing 136–41 manuscripts 61, 70, 77 Manutius, Aldus 84 Manzoni, Domenico 118–19 maritime insurance 53 Mark the Evangelist 51–2 marketplace, 15th century 95 markets, impact on politics 221, 228 mark-to-model 213 Marshall Plan 188 Marx, Karl 162, 163–5, 171 mass production 138 mathematics 7, 22, 28, 47, 89–90 ancient Greek 34–5, 37–8, 63 Arab 18–19, 63 and art 85–6 Hindu 39–40 in Italy 34–42 and magic 35, 40, 220 medieval European 63, 251–2 taught as astrology 29–30, 42 universal application 73, 116–17 see also arithmetic Mattessich, Richard 12–13, 186 Maurice, Prince of Orange 120 Maxwell Communications 207 McDonald’s 224 Meade, James 183–4 measurement 23, 218–19 Medici of Florence 26, 64, 80, 168, 171 Mehmed II 57 Mellis, John 121 memorandum (waste book) 99, 101, 118 entering transactions 105–7, 118, 122 merchandise 104 merchant bankers 21, 26, 69 merchants 10, 23, 35, 41 Arab 18–19, 25 Indian 22 Italian 40, 42 Phoenician 36 Venetian 18, 27, 55–6, 69, 94–5, 149 Mesopotamia 12, 13, 14 metaphysics 36–7 Middle Ages 60, 251–2 Milan 30, 34, 47, 61, 80–3 Millennium Ecosystem Assessment 239 Monsanto 222 Monteage, Stephen 124, 126 Morgan, John Pierpont 156 multiplication 74, 75–6 music 36, 38 Naples 50, 61–2 Napoleonic War 145 national accounts 175, 179–88, 190–3, 226–7, 230, 242, 244 natural capital 230–1, 235–9 navigation charts 23 Neighborhood Tree Survey (NY) 241, 244 Netherlands 119, 120 New Deal (Roosevelt) 177, 202 New York Light Company 155 New York Stock Exchange 155, 176, 201 New Zealand 153, 230 Nicholas V, Pope 61 No Royal Road: Luca Pacioli and his times (Taylor) 46–7 Nordhaus, William D. 180, 191, 227 numbers 37, 218, 219–20, 249 Obama, Barack 215, 246 O’Grady, Oswald 208 Oldcastle, Hugh 121, 124 Olmert, Michael 168 One.Tel 208, 209, 213, 215 Organisation for Economic Co-operation and Development (OECD) 190, 242 Organisation for European Economic Co-operation (OEEC) 188 Ormerod, Paul 244 Ottoman Empire 29, 34, 50, 51, 56, 57, 116 Pacioli, Luca 7, 8, 27–8, 34, 35, 161, 219 abbaco mathematics 40, 41 as academic 65, 80, 84, 89 astrologer 42 birth 30 bookkeeping treatise see Particularis de computis and Piero della Francesca 45–6, 47–8 education 43–8 encyclopaedia see Summa de arithmetica on Euclid 84–5 games/tricks 83–4 itinerant teacher 61–6 last years 88–90 and Leonardo da Vinci 80–2, 84 in Milan 80–3 portrait 47, 79–80 and the printing press 66–72 remembered in Sansepolcro 31–2 in Rome 58–61 in Venice 49–58 Paganini, Paganino de 67–8, 71–2, 78, 85 painting 60, 64, 81 Pakistan 224, 245 Paris 23, 50 Particularis de computis et scripturis (Pacioli) 29–30, 78, 90–114, 117–18, 121 and capitalism 163 foundation of modern accounting 30, 75, 131, 157–9, 166 profit calculation 146–7 partnerships 108–9, 147 Patel, Raj 222, , 224 Patient Protection and Affordable Care Act 2010 (US) 246 patronage 59, 67, 70, 72 Paul II, Pope 59 Payen, Jean-Baptiste 139–40 Peking 18 Perspectiva (Witelo) 64 perspective 23, 42, 45, 60, 64, 76–7, 80, 82 Perugia 62–3, 64, 65 Petty, William 180 phi 86 Philip VI 23 philosophy 37, 40 Phoenicians 36 pi 36 Piazza San Marco 56 Pinto cars 250–1 Pisa 6, 17 Pitcher Partners 209, 210, 211–12 plagiarism 63 planet Earth 8–9, 248 accounting for 254 effects of cost-benefit approach 175 health of 224–5, 239 Plato 37 Platonic solids 45, 79, 86 Pliny the Elder 16 pollution 244 Polly Peck International 207 Polo, Marco 18 Ponzi scheme 142 Postlethwayt, Malachy 124 poverty 237, 246, 248, 249 Prato 23–4 Price, Samuel 145 Price Waterhouse 201, 207 PricewaterhouseCoopers 217 principlism 173–4 printing 29, 45, 60, 63, 66–72, 77–8, 90, 115–17 profit 21, 24, 97, 102–3, 127, 146–8, 159, 161, 167, 169 profit and loss accounts 55, 109–11, 112, 166 Pythagoras 35, 36–7 quadrivium 36, 38, 43 quant nerds 220 railways 141–3, 231 Ramsay, Ian 211 Ratdolt, Erhard 68, 116 record-keeping 15 Reformation 33 regulation 206–14, 215 Reid Murray Holdings 207–8 religion 24, 96, 116, 124–5, 220 see also Christian Church; Islam Renaissance 7, 8, 23, 26, 36, 59, 80, 86, 89, 168 art 6, 7, 44, 60, 86 Resurrection (Piero) 32, 33 retained-earnings statements 5, 219 rhetoric 172–3 Rialto 50, 55, 108 Ricardo, David 171 Rich, Jodee 213 Rinieri Fini & Brothers 20 Ripoli Press 70 Robert of Chester 39 Rockefeller, John D. 156 Roman numerals 19, 26–7, 38, 40, 71, 116 Romantic poets, English 131, 154 Rome 58–61, 64, 89 ancient 15–16 Rompiasi family 57, 58, 97 Roosevelt, Franklin D. 177, 178, 181, 202, 214, 215 Rose, Paul L. 71 Ross, Philip 209–10, 211 Rothschild banks 133 Royal Bank of Scotland 173, 197–8 royal estate management 16–17 Rule of Three 38, 41 Russia 153–4 salt 51 Samuelson, Paul A. 191, 227 Sansepolcro 30–4, 43–4, 48, 65, 77, 88–9, 168 Sanuto, Marco 66, 72 Sarbanes, Paul 191 Sarbanes-Oxley Act 2002 212, 215 Sarkozy, Nicolas 242–3, 245 satellite accounts 234–5 scandals/fraud 194–203, 206, 207–12, 215, 225 Schmandt-Besserat, Denise 11–12 Schumpeter, Joseph 169–70 science 35, 37, 40, 42, 67, 76, 116, 166–7 Scotland 27, 147, 150, 153 Scott, Sir Walter 150–1 Scuola di Rialto 58 Second World War 32, 181–5, 187, 227 Securities and Exchange Commission (US) 202–3, 213, 214 Sen, Amartya 243–4, 245 Sforza, Ludovico 80, 81–2, 85, 86, 168 Sikka, Prem 216, 217 Silberman, Mark 213 Simons, James 220 Sistine Chapel 65 Sixtus IV, Pope 59 Skidelsky, Robert 178, 182, 187 Skilling, Jeffrey K. 196, 197, 212, 214 Smith, Adam 171 social sciences 171, 175 socialism 171 Society of Accountants, Edinburgh 152 Sombart, Werner 161–2, 164, 165–6, 166–8, 169, 170, 171–2, 173 Spain 22, 39 Spengler, Oswald 167 Sri Lanka 232–3, 240 State of the USA 246 Stevin, Simon 120, 121, 166, 169 Stiglitz, Joseph 243–4 Stiglitz-Sen-Fitoussi Commission 243–4 stock markets 143 stocktaking 166 Stone, Sir Richard 183–5, 188–9, 190 sub-prime mortgages Sukhdev, Pavan Summa de arithmetica (Pacioli) 57, 61, 62–3, 64, 72–7, 80, 82 printing 66–8, 71–2 publication 32, 77–9 sustainability 232, 243, 249 System of Integrated Environmental and Economic Accounting (UN) 234 System of National Accounts (UN) 189–90, 247 tabulae rationum 16 Taleb, Nassim N. 220 tariffs 63 Tartaglia, Nicholas 76 Taylor, R.


pages: 497 words: 123,718

A Game as Old as Empire: The Secret World of Economic Hit Men and the Web of Global Corruption by Steven Hiatt; John Perkins

addicted to oil, airline deregulation, Andrei Shleifer, Asian financial crisis, Berlin Wall, big-box store, Bob Geldof, Bretton Woods, British Empire, capital controls, centre right, clean water, colonial rule, corporate governance, corporate personhood, deglobalization, deindustrialization, Doha Development Round, energy security, European colonialism, financial deregulation, financial independence, full employment, global village, high net worth, land reform, large denomination, liberal capitalism, Long Term Capital Management, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, Naomi Klein, new economy, North Sea oil, offshore financial centre, oil shock, Ponzi scheme, race to the bottom, reserve currency, Ronald Reagan, Scramble for Africa, statistical model, structural adjustment programs, too big to fail, trade liberalization, transatlantic slave trade, transfer pricing, union organizing, Washington Consensus, working-age population, Yom Kippur War

For example, Kamal Adham borrowed $313 million, including the money to buy his shares. Ghaith Pharaon, the son of an adviser to King Fahd, was also a BCCI investor as well as a front man for the bank’s illegal purchase of three U.S. banks. He got loans of $300 million. The loans of the Arab backers were written off the books or paid on paper by moving money among offshore banks. BCCI was, in effect, a huge Ponzi scheme. While the Pakistani bankers and their friends took money out, money was paid in by 1.4 million depositors, many of them South Asian small businesspeople or immigrants. The Arabs’ interest in the bank was more than financial. A classified CIA memo on BCCI in the mid-1980s said that “its principal shareholders are among the power elite of the Middle East, including the rulers of Dubai and the United Arab Emirates, and several influential Saudi Arabians.

Robert Bench was associate deputy comptroller of the currency in the Treasury Department when he was sent a copy of a CIA report on BCCI. He quit to go to work for Price Waterhouse on the BCCI account.13 It wasn’t until 1991 that Price Waterhouse UK told the full truth. At the request of the Bank of England, PW wrote the confidential Sandstorm Report, which detailed the phony records and shell companies, the use of Middle Eastern nominees, the Ponzi schemes. Another failure in oversight was the work of a committee from eight countries set up in 1987 by the Basel Committee, the central club of the world’s big banks, to look at BCCI’s operations in the wake of rumors of funny dealings and big losses. The committee was next to useless: It took no action even after the Tampa charges became public knowledge. In 1988 and 1989, the Bank of England learned of BCCI’s involvement in the financing of terrorism and in drug money laundering, but it didn’t shut BCCI down.

Index Abacha, Sani 44, 125 Abedi, Agha Hasan 69, 70, 75, 77, 86, 87 Abu Dhabi 69, 73, 75, 76 Adham, Kamal 75, 86, 87, 88 Afghanistan 26 drug trade in 70 civil war in 70–71 African Development Bank 251 Africa Oil Policy Initiative Group 119 Akbayan 192–93 Alamieyeseigha, Diepreye 121, 123 Algeria 15, 200, 266 Allende, Salvador 27 al-Qaeda 77, 89 and offshore banks 24 al-Taqwa Bank 71, 89 Altman, Robert A. 78, 79, 86, 88 American Express Co. 268 American Mineral Fields 99 Amin, Idi 27 Annan, Kofi 126 AngloGold 244 Anglo-Iranian Oil Company 14 Angola 27, 95 foreign debt 243, 244 Aquino, Benigno 26 Aquino, Corazon 190 Arbusto Energy, Inc. 76 Argentina 236 defiance of IMF 273 foreign debt 228, 230, 233, 241, 244, 273 popular movements in 276 World Bank lending in 169–73 Asari, Alhaji 121, 123, 128–29 Asian “tiger” economies 21, 229, 257n16, 258n27 Azerbaijan 200 Bahamas, as offshore banking haven 45, 89 Baker, Howard 100 Baker, James 239, 256n12 Baker Plan 228, 239–40 Balfour Beatty 211 Banca del Gottardo 71 Banca Nazionale del Lavoro 72 Banco Ambrosiano 71 Bank of America 69–70, 74, 77 Bank of England 84 Bank of Credit and Commerce International 24 accountants and 83–84, 86 arms trade and 72–73, 90 CIA and 69, 70, 71–72, 73, 76 drug trade and 70, 80, 87, 90 indictments 86–88 Iran-Contra 72 money laundering 69, 79–81, 90 operations 73–75, 86 owners 69–70, 75, 76 as Ponzi scheme 75 terrorism and 70, 72, 73, 88–90 U.S. operations 77–79 Bank of New York-Inter-Maritime Bank 83, 88–89 Barrick Gold Corp. 99, 244 Bath, James R. 76 Bechtel Corp. 3, 99, 138, 278 Belgium 101, 104 Bello, Walden 186–87, 273 Ben Barka, Medhi 26 Benin, foreign debt of 249 Berlusconi, Silvio 54 Bernabe, Riza 191 “big-box” stores, campaigns against 278 bin Faisal al-Saud, Prince Turki 75, 78 bin Laden family enterprises 71–72, 89 bin Laden, Haydar Mohamed 89 bin Laden, Osama 26, 77, 88, 89, 42 and BCCI 71 Binladen, Yeslam 89 bin Mahfouz, Khalid 76, 77, 78, 86, 87, 88, 89 bin Sultan al-Nahyan, Sheikh Zayed 69, 75 Blair, Tony 219, 250 Blandón, José 80 Blum, Jack 79–81, 85–86 Bolivia 236, 273 foreign debt 230, 246, 247, 249 gas industry 154, 208 water privatization in 277 Boro, Isaac 122 Brady, Nicholas 80, 256n12 Brady Plan 221, 227, 228, 240–41, 259n35 Brazil 18, 27, 130, 208, 216, 236 foreign debt 227, 228, 230, 241, 244 Bretton Woods agreements 63 Bretton Woods institutions see World Bank, International Monetary Fund British Gas 139 British Petroleum 139, 144, 153 British Virgin Islands, as offshore banking haven 54 Brown & Root 99 Brown, Gordon 126, 127, 219, 250 Burkina Faso, foreign debt of 246, 249 Burundi 95, 247, 249 Bush, George H.W., and administration 27–28, 69, 72, 77, 80, 87, 88, 91n10, 100, 138, 206, 271, 272 Bush, George W., and administration 66, 271, 278 and Iraq War 13, 28 Bush Agenda, The (Juhasz) 4, 275 Cabot Corporation 104, 112n32 Cameroon, foreign debt of 249 Canada 99, 101, 201, 268, 271 Canadian Export Development Corp. 201, 202, 203, 204, 206 capital flight 24, 43–44, 231–36, 253, 258n27 Carter, Jimmy 76, 140 Casey, William 70, 82, 90 Cavallo, Domingo Felipe 238 Cayman Islands, as offshore banking haven 65, 72, 73, 74, 75, 86 Center for Global Energy Studies 145 Center for Strategic and International Studies 119, 120 Central African Republic 231 Central Intelligence Agency 3, 5, 15 Afghan rebels and 70–71 BCCI and 69, 70, 71–72, 73, 76, 78, 79–82, 85 Saudi intelligence services and 75 Chad, foreign debt of 249 Chavez, Hugo 3, 25, 273 Cheney, Dick 28, 133 Chevron Oil 135, 138, 139, 144, 153 in Nigeria 123–24 Chile 236 1973 coup in 27 China 4, 229, 236 foreign debt 222–23 Third World resources and 5, 117–18, 120–21, 124, 126–27, 130 Chomsky, Noam Hegemony or Survival 4 Christian Peacemaker Team 96, 106–8 Citibank, Citigroup 75, 100, 130, 138, 226, 238, 268 Clifford, Clark 78–79, 85, 86, 88 Clinton, Bill, and administration 119, 120, 126, 212, 271 Coalition of Immokalee Workers 272, 280 COFACE 201, 205, 212 Cogecom 100 cold war 4 and decolonization 16–17 Colombia, human rights in 107 colonialism, decline of formal 13–14 coltan: efforts to control 5, 26, 95 shortages of 95 uses for 94 Commission for Africa 251 Communism: appeal of 14 fall of 4, 13, 27, 137–38, 238 Confessions of an Economic Hit Man (Perkins) 1–4, 6, 17 Congo, Democratic Republic of (Zaire): civil war in 26, 94–96, 108n3 corruption in 24, 254 foreign debt 220, 230, 247, 249 human rights in 107–8 rape as a weapon of war in 93, 96–98 Western role in 98–105, 109n4, 111n29 World Bank and 158 Congo Republic 230, 247, 249 cooperatives 276–77 corporations, as legal persons 277 CorpWatch 278 corruption: culture of 51–54 IMF/World Bank and 24–25, 157–74 offshore banking and 44–45, 52- power and 24 privatization and 24–25, 256n12 COSEC 209–10 Council on Foreign Relations 119–20 dam projects, 209–12 Dar al-Mal al-Islami 89 Daukoru, Edmund 125–27, 128 Davos see World Economic Forum DeBeers Group 101, 103 decolonization 13, 16–17 debt/flight cycle 231–36, 253, 258n27 debt relief, campaigns for 246, 252–55, 268 in U.S. 235 debt, Third World 32, 35 amount of relief 224–29 banks and 226–27, 229, 232–34 business loans 35–37, 227 cold war strategy and 17 corruption and 230, 231, 232, 253, 254, 257n23 1982 crisis 39, 55 disunity among debtor nations 237–39 dubious debts and 230, 235, 247, 253, 257n23, 261n68 growth of 18–19, 181, 229–36 as means of control 17, 23, 183–84 payments on 19, 190–91, 223, 228, 231, 247–48, 275 relief plans 220–22, 225–29, 239–52, 274 size of 221–24, 259n37, 260n46 social/economic impacts of 190–91, 231–36, 247–48 democracy: debt crisis and 236 economic reform and 276–79 global justice and 279–81 in Iraq 151–54 Deutsche Bank 226 drug trade 70, 80, 87 Dubai 73 Dulles, Alan 15 Eagle Wings Resources International 104 East Timor 205 economic development strategies: “big projects” and 16–17 debt-led 18–19 state-led 16–17, 19 economic forecasting 3 economic hit men 5 definition 1, 3, 18 John Perkins and 1–4, 17 types of 5, 18 Ecuador 236, 266 foreign debt 244 Egypt 14 Suez Crisis 15–16 Eisenhower, Dwight, and administration 15 elites, wealthy 4, 18, 57, 176, 183, 228, 232, 253 use of tax havens 43–44, 54–56, 65–66, 226, 232–34 El Salvador 26 empire see imperialism Eni SpA 144, 153 Enron 53, 54, 208–9 Ethiopia 230, 249 European Union 51 agricultural subsidies 22 environment degradation: development projects and 199, 200–211, 257n23 oil production and 115–16 export credit agencies: arms exports and 204–5 campaigns against 209–16 corruption and 200, 202–3, 205, 207–8 debt and 200 environmental effects 199, 200–211 nuclear power and 202, 205–6 operation of 197–201 secrecy of 205, 210–12 size of 201 World Bank and 199, 201, 202, 204 Export Credit Group 210, 215 Export Credits Guarantee Department 201, 205, 211 Export Finance and Investment Corp. 203, 204 export processing zones 178 Export Risk Guarantee 203, 211, 213 ExxonMobil 144 fair trade movement 280 Faisal, Mohammad al-89 Faux, Jeff Global Class War, The 4 Federal Bureau of Investigation 71 Federal Reserve Bank of New York 87 Federal Reserve System 78, 82, 88 Ferguson, Niall 13 First American Bankshares 78, 79, 82, 83, 85, 88 First Quantum Materials 101 First, Ruth 26 Focus on the Global South 187, 273 foreign aid 19 in Congo civil war 99–100 France 236, 244 empire 13 Suez Crisis and 15 free trade 4, 19, 21–23, 268, 271 British development and 21 U.S. development and 21 Free Trade Area of the Americas 271 Friends of the Earth 104, 269 G8 summits 212, 213, 219–20, 221, 246, 250, 271, 275 Gambia 243, 249 García, Alan 74 Gates, Robert 85 Gécamines 100, 104 General Agreement on Tariffs and Trade agricultural trade 186–87 establishment of 267 TRIPS 23 Uruguay Round 23, 267 General Union of Oil Employees 135–36, 141–44 Georgia 207 Germany 212, 213, 216, 236 export credit agency 201, 202, 203, 205, 206, 207, 209–11, 212, 215–16 Green Party 206, 215 Ghana 16 development projects in 16, 207 foreign debt 230, 247, 249 impact of IMF SAP 5, 22 Giuliani, Carlo 271 Global Awareness Collective 278 Global Class War, The (Faux) 4 Global Exchange 278 globalization 3 alternatives to corporate 275–79 economic 176–79, 230, 236 impacts of 185–90, 234, 236, 263–65 of the financial system 55, 63–66 Globalization and Its Discontents (Stiglitz) 3, 4 Global justice movement: achievements of 276–79 campaigns 269–72, 274–75 in Global North 268–69, 271–72, 274 in Global South 271–74 origins of 268–69 proposals of 275–79 protests by 265–66, 270–71 Global South see Third World Gonzalez, Henry 72, 90 Gorbachev, Mikhail 137 Goulart, João 27 Groupement pour le Traitment des Scories du Terril de Lubumbashi 104 Guatemala 14, 236 Arbenz government 26 Guinea, foreign debt of 249 Guinea-Bassau 26, 247, 249 Guyana: export credit agencies and 203 environmental problems 203 foreign debt 241, 243, 244, 246, 247, 249 Haiti 236, 249 World Bank and 158 Halliburton 3, 133, 278 Hankey, Sir Maurice 145 Harken Energy Corp. 77, 78 Heavily Indebted Poor Countries initiative 221, 225, 226, 230, 242–48, 275 conditions of 243–45 results of 248–50 Hegemony or Survival (Chomsky) 4 Hekmatyar, Gulbuddin 70 Helms, Richard 82 Henwood, Doug 23, 177–79 Heritage Foundation 121 Heritage Oil and Gas 100 Hermes Guarantee 201, 202, 203, 205, 206, 207, 209, 211, 212, 215–16 Honduras, foreign debt of 249 Hope in the Dark (Solnit) 281 Hungary, Soviet intervention in 16 Hussein, Saddam 28, 90, 141–42 and BCCI 72 Hutu people 94–96 Hypovereinsbank 209 Ijaw people 116, 121–23, 128 Illaje people 123 immigrant rights movement 281 imperialism 13–14 coups d’état and 27 divide-and-rule tactics 25, 26, 265 post-cold war changes 4–5 pressure on uncooperative countries 25, 142 resistance to 28, 115–17, 121–30, 143–44, 151–54, 176, 191–92, 265–66 resources and 98–106, 118–21, 133–34, 136, 139–40, 145 as system of control 17–28, 176 use of force 5, 25–28, 111n22, 113–14, 115–17, 123, 111n22 India 16, 119, 229, 236, 266 foreign debt 222, 223 export credit agencies and 206, 208 Maheshwar Dam 209–10 Indonesia 236 corruption in 202–3 export credit agencies and 200, 202–3, 205, 207, 216 foreign debt 228, 230, 244 inequality 44 Institute for Policy Studies 278 International Bank for Reconstruction and Development 157 International Development Association 157, 242 International Forum on Globalization 266 International Monetary Fund 3, 4, 19, 135, 275 conflicts of interest 244 debt relief and 221–22, 224, 226, 237, 240, 243–46, 250–51, 252 Iraq and 151–53 Malaysia and 273 neoliberalism and 176–79, 222 offshore banking and 43, 234 protests against 266 structural adjustment programs 22, 23, 245, 265–66 Rwanda and 100 Uganda and 100 International Tax and Investment Center 134–35, 138–39, 144–54 International Trade Organization 267 Iran 14, 90, 145, 200 coup against Mossadegh 14–15 nationalization of oil industry 14 Iran-Contra affair 71–72 Iraq: BCCI and 72 foreign debt 152 Gulf War and 28, 72, 140, 141, 146 human rights in 105–6 oil production and reserves 135–36, 139–54 production sharing agreements in 147–54 sanctions against 72, 142 social conditions in 135, 142, 143 U.S. occupation of 28, 140, 141–42, 146, 250, 275, 278 Israel: and Suez Crisis 15 Yom Kippur War and 17 Ivory Coast 230 foreign debt 244, 249 “jackals” 25–26 James, Deborah 273 Japan 216, 236 Japan Bank for International Cooperation 201, 202, 203, 241 Jersey 88 banking boom in 46–47 impact on island 46, 51–52, 56–62 as offshore banking haven 43, 45, 56–61 Johnson, Chalmers Sorrows of Empire 4 Jordan 241, 266 Jordan, Vernon 100 JPMorganChase 226, 238 Jubilee South 190 Jubilee 2000 268 Juhasz, Antonia Bush Agenda, The 4, 275 Juma’a, Hassan 135–36, 140, 142–44, 154 Kabila, Joseph 96 Kabila, Laurent 94, 96, 99 Kagame, Paul 94, 98–99 ties to U.S. 99 Kazakhstan 138, 139, 144, 150 Keating, Charles 83 Kenya 236 foreign debt 243, 244 Kerry, John 76 investigation of BCCI 79–83, 87, 89 Kirchner, Nestor 273 Korea, Republic of 229, 272 Korten, David When Corporations Rule the World 4 KPMG 52 Krauthammer, Charles 13 Krushchev, Nikita 16 Kurdistan 211–12, 214 Kuwait 133, 141, 146, 152, 154 labor exports 235–36 Lake, Anthony 119–20 Lance, Bert 77 Lawson, Nigel 242 Lawson Plan 221, 242 Lee Kyung Hae 272 Liberia, World Bank lending to 159–67 Liberty Tree Foundation 276 Li Zhaoxing 117–18, 124 Lu Guozeng 117 Lumumba, Patrice 26 Luxembourg, as offshore banking haven 72, 73, 74 Madagascar, foreign debt of 249 Mahathir, Mohamad 273 Malawi 254 foreign debt 243, 249 Malaysia 41–43, 229 defiance of IMF 273 Mali, foreign debt of 246, 249 Marcos, Ferdinand 31, 48, 175, 176, 181–85 markets, corporate domination of 16 Martin, Paul 54 mass media, manipulation of 25 Mauritania, foreign debt of 247, 249 McKinney, Cynthia; hearing on Congo 98–99, 110n11 McLure, Charles 137–39 mercenaries: in Congo 111n22 in Nigeria 5, 25–26, 113–14, 115–17 Mexico 207, 256n14, 273 foreign debt 55, 227, 228, 230, 233, 240–41, 244 labor exports 236 Zapatista uprising 272 Middle East, and struggle for oil 27–28 military-industrial complex 99 military interventions 27–28 Mizban, Faraj Rabat 141 Mitterand Plan 221 Mobutu Sese Seko 24, overthrow of 94 Mondlane, Eduardo 26 Mongolia 207 Morales, Evo 277 Morganthau, Robert 69, 84–87 Moscow, John 58, 87 Mossadegh, Mohammad 3, 14–15, 27 Movement for the Emancipation of the Niger Delta 122–24, 129 Movimento dos Trabalhadores Rurais Sem Terra (Landless Workers’ Movement) 272 Mozambique 26, 27, 230 foreign debt 241, 246, 249 Mueller, Robert 87 mujahadeen (Afghanistan): and BCCI 70 and drug trade 70 Mulroney, Brian 100 Multilateral Agreement on Investment 269–70, 281 Multilateral Debt Relief Initiative 222, 225, 230, 250–52 Multilateral Investment Agreement 269 multinational corporations: export credit agencies and 209–11 export processing zones and 178 globalization, pressure for 138, 268, 275 mercenaries, use of 25–26, 111n22, 113–14, 115–17, 123 resources and 101–6, 111n29, 112n31, 112n32 scandals 5 transfer mispricing by 49–51 offshore banks, use of 24, 49–51 patents, control of 23 Museveni, Yoweri 95 Myanmar, foreign debt of 230 Nada, Youssef Mustafa 71–72 Namibia 95 export credit agencies and 207 Nasser, Gamal Abdel 15–16 National Commercial Bank of Saudi Arabia 88–89 National Family Farm Coalition 272 nationalism: pan-Arab 15 Iranian 14 Nehru, Jawaharlal 16 neocolonialism see imperialism neoliberalism 4, 19 critique of 176–79, 190–92, 234, 236 defined 176–77 economic development and 176–79, 232 economic strategies 178–81, 222, 230, 231, 236 Netherlands, overseas empire of 13 Newmont Mining Corp. 244 New World Order 27–28 Nicaragua 207 foreign debt 225, 230, 247, 249 U.S. proxy war against 26, 27, 79 Nicpil, Liddy 190–91, 192 Nidal, Adu 73 Niger, foreign debt of 241, 249 Niger Delta People’s Volunteer Force 121, 123 Niger Delta Volunteer Service 122 Niger Delta region: attack on oil platforms 116–17 as “Next Gulf” 118–21 pollution from oil production 115–16 struggle against Shell 115–16, 121–24 Nigeria 200, 266 China and 117–18 colonial rule 115 corruption in 44–45, 230 foreign debt 223, 230, 233, 243, 244 oil production 115–16, 125–27 World Bank lending in 158, 167–69 Nkrumah, Kwame 16 nongovernmental organizations 239, 250 Noriega, Manuel 80 and BCCI 72, 79 North American Free Trade Agreement 4, 268, 272 nuclear power 205–6, 210 Obasanjo, Olusegun 125, 127 Obiang, Teodoro 48 O’Connor, Brian 144–45 OECD Watch 105 offshore banking havens: arms trade and 71–73 campaign against 62–64 central role in world trade 44, 47–48, 64–65 corruption and 24, 44–45, 52–56, 64, 231–33, 253 drug trade and 70 extraction of wealth 43, 54–56, 64–65, 226, 231–33, 253, 258n58 financial centers and 234, ignored by academia 44, 234 secrecy and 47–48, 53, 66 tax evasion and 43, 48, 49–51, 54, 57–59, 64–65, 226, 232 terrorism and 71, 88 Ogoni people 122–23, 125 Okadigbo, Chuba 116 Okonjo-Iweala, Ngozi 118 Okuntimo, Paul 123 Oil Change International 278 oil price spikes 236 oil production and reserves: future shortages of 28, 140 Indonesia 207 Iraqi 135–36, 144–54 Nigerian 113–14, 128–29 strategies to control 25–26, 27–28, 139–40 OM Group, Inc. 104, 112n31 OPEC 125–26, 128 1973 oil embargo by 17 dollar deposits in First World 17–18 Organisation for Economic Co-operation and Development 135, 269 “Action Statement on Bribery” 216 export credit agencies and 210, 215 Guidelines for Multinational Enterprises 101, 102, 105–6, 112n31 “OECD Arrangement” 215 Overseas Private Investment Corp. 204, 206–9 Oxfam 43, 62–63, 250 Pakistan 90 Afghan mujahadeen and 70–71 BCCI and 70 export credit agencies and 207 foreign debt 244 Panama 3, 26, 72 as offshore banking haven 73, 74 Papua New Guinea: export credit agencies and 204 mining and environmental problems 204 Paris Club of creditors 220, 225–26, 227, 228, 242, 252 Peru 74 foreign debt 241 impact of IMF SAP 22 petrodollars, recycling of 17–18 Perkins, John 19 Confessions of an Economic Hit Man 1–2, 17 Pharaon, Ghaith 76, 77, 86, 87, 88 Philippines, the 31–34, 35–36 corruption in 181–82 democratic movements in 182–85, 236 economic decline in 187–89 emigration from 189, 236 foreign debt 181, 190–91, 230, 241, 244 Marcos regime 31, 34, 175, 176, 180–85, 261n61 martial law in 180–85 social conditions in 179–80, 185–86, 189–91 U.S. rule 175–76 World Bank and 158, 178–81 Pinochet, General Augusto 27, 45–46, 48 PLATFORM 140, 156n28 Portugal 209–10 Posada Carriles, Luis 26 poverty reduction strategy programs see structural adjustment programs Price Waterhouse 83–84 privatization 191 production sharing agreements 147–54 protectionism 21, 181, 186–87 proxy wars 27, 70–71 Public Citizen 269, 273 public utilities, privatization of 191, 261n61, 277 Rahman, Masihur 85 Reagan, Ronald, and administration 19, 79, 87, 136–37, 239 Iran-Contra affair 72 Rich, Marc 90 Rights and Accountability in Development 101, 104, 105 Rio Tinto Zinc 204 Ritch, Lee 79–80 Robson, John 138 Roldós, Jaime 3, 26 Roosevelt, Kermit 15 Rumsfeld, Donald 138 rural economic development 183, 186–87 Russia: debt relief and 225 oil industry 154 transition to capitalism 137–39, 258n28 Rutledge, Ian 149 Rwanda 94–96, 98, 249 massacre in 94, 99 SACE 201 Sachs Plan 221 Saleh, Salim 95 Saõ Tomé, foreign debt of 247, 249 Saud al-Fulaij, Faisal 86, 87 Saudi Arabia 3, 88 and BCCI 70, 75 Saro-Wiwa, Ken 125–26 Scholz, Wesley S. 104 Scowcroft, Brent 72 Senegal 16, 249 Senghor, Léopold 16 September 11, 2001, terrorist attacks 71 Shell Oil 144 Nigeria and 113–15, 122, 123, 125–29 at World Economic Forum 127 Shinawatra, Thaksin 54 Sierra Club 269 Sierra Leone 247 SmartMeme 276 Solnit, Rebecca Hope in the Dark 281 Somalia 251 Sorrows of Empire (Johnson) 4 South Africa 236 military interventions 27 Truth and Reconciliation Commission 26 Soviet Union 13, 14 de-Stalinization 16 Hungary, intervention in 16 influence in Third World 14 U.S. and 137 Stephens, Jackson 76, 77 Stiglitz, Joseph 24 Globalization and Its Discontents 3, 4 structural adjustment programs (SAPs) 19, 229–30 in Ghana 5, 22 in Peru 22 in the Philippines 176–79, 183–85, 190–92 in Zambia 22 Sudan 230, 251 Suharto 200, 202–3 Syria 211 Switzerland, as offshore banking haven 45, 65, 72 Taco Bell, boycott of 280 Tanzania, foreign debt of 247, 249 tax evasion 43, 48, 49–51, 54, 57–59, 64–65 Tax Foundation 137–38 tax havens see offshore banking havens Tax Justice Network 63 Tax Reform Act of 1986 138 Tenke Mining 99 terrorism: as EHM strategy 26, 72 financing of 42, 88–89 inequality and 44 Islamist 71–72, 89 Palestinian 73 Thatcher, Margaret 19, 138 Third World: as commodity producers 17, 23 conditions in 5, 96–97, 106–8, 116, 179–80, 185–90, 234, 236 development strategies 176–79 divisions among countries 265–68 elites in 25, 28, 43–44, 176, 226, 232–34 emergence of 14 lack of development in 232, 237 terms of trade and 22, 178–79 Third World Network 269 Tidewater Inc. 113 Torrijos, Omar 3, 26 Total S.A. 144, 153 trade unions 135–36, 141–44, 180, 186, 269, 274 transfer mispricing 49–51 cost to Third World 50 Transparency International 45 Turkey: export credit agencies and 206 Ilisu Dam 211–14 Turkmenistan 200 Uganda 94–96 foreign debt 241, 246, 249 Union Bank of Switzerland 57, 58, 77, 226, 250 United Arab Emirates 69, 73 United Fruit Company 15 United Kingdom 213 NCP for Congo 102–3 empire 13–14, 115, 129, 145 Iran and 14–15 Iraq occupation and 146, 151, 152 offshore banking and; Suez Crisis and 15 United Nations: trade issues and 265, 276 Panel of Experts, Congo 100–106, 112n32 United Nations Conference on Trade and Development 220, 265, 267 United States: agricultural subsidies 22 aid 98 as empire 13, 28 cold war strategy of 16, 17, 24, 26 in Congo 99, 104, 105 debt-led development strategy of 176–79 Iran coup and 14–15 Iraqi oil and 133–34, 136, 139–40 Iraq wars 72, 133, 141–42 Islamists and 26 Nigerian oil and 118–21 Philippines and 175–76, 180 strategic doctrines 27–28, 118–19 support of Contras 72 trade deficit 23 trade policies 267 U.S.


pages: 960 words: 125,049

Mastering Ethereum: Building Smart Contracts and DApps by Andreas M. Antonopoulos, Gavin Wood Ph. D.

Amazon Web Services, bitcoin, blockchain, continuous integration, cryptocurrency, Debian, domain-specific language, don't repeat yourself, Edward Snowden, en.wikipedia.org, Ethereum, ethereum blockchain, fault tolerance, fiat currency, Firefox, Google Chrome, intangible asset, Internet of things, litecoin, move fast and break things, move fast and break things, node package manager, peer-to-peer, Ponzi scheme, prediction markets, pull request, QR code, Ruby on Rails, Satoshi Nakamoto, sealed-bid auction, sharing economy, side project, smart contracts, transaction costs, Turing complete, Turing machine, Vickrey auction, web application, WebSocket

The overflow-free version of the contract is: 1 library SafeMath { 2 3 function mul(uint256 a, uint256 b) internal pure returns (uint256) { 4 if (a == 0) { 5 return 0; 6 } 7 uint256 c = a * b; 8 assert(c / a == b); 9 return c; 10 } 11 12 function div(uint256 a, uint256 b) internal pure returns (uint256) { 13 // assert(b > 0); // Solidity automatically throws when dividing by 0 14 uint256 c = a / b; 15 // assert(a == b * c + a % b); // This holds in all cases 16 return c; 17 } 18 19 function sub(uint256 a, uint256 b) internal pure returns (uint256) { 20 assert(b <= a); 21 return a - b; 22 } 23 24 function add(uint256 a, uint256 b) internal pure returns (uint256) { 25 uint256 c = a + b; 26 assert(c >= a); 27 return c; 28 } 29 } 30 31 contract TimeLock { 32 using SafeMath for uint; // use the library for uint type 33 mapping(address => uint256) public balances; 34 mapping(address => uint256) public lockTime; 35 36 function deposit() public payable { 37 balances[msg.sender] = balances[msg.sender].add(msg.value); 38 lockTime[msg.sender] = now.add(1 weeks); 39 } 40 41 function increaseLockTime(uint256 _secondsToIncrease) public { 42 lockTime[msg.sender] = lockTime[msg.sender].add(_secondsToIncrease); 43 } 44 45 function withdraw() public { 46 require(balances[msg.sender] > 0); 47 require(now > lockTime[msg.sender]); 48 balances[msg.sender] = 0; 49 msg.sender.transfer(balance); 50 } 51 } Notice that all standard math operations have been replaced by those defined in the SafeMath library. The TimeLock contract no longer performs any operation that is capable of under/overflow. Real-World Examples: PoWHC and Batch Transfer Overflow (CVE-2018–10299) Proof of Weak Hands Coin (PoWHC), originally devised as a joke of sorts, was a Ponzi scheme written by an internet collective. Unfortunately it seems that the author(s) of the contract had not seen over/underflows before, and consequently 866 ether were liberated from its contract. Eric Banisadr gives a good overview of how the underflow occurred (which is not too dissimilar to the Ethernaut challenge described earlier) in his blog post on the event. Another example comes from the implementation of a batchTransfer() function into a group of ERC20 token contracts.

If external calls are required to progress to a new state, account for their possible failure and potentially add a time-based state progression in the event that the desired call never comes. Note Of course, there are centralized alternatives to these suggestions: one can add a maintenanceUser who can come along and fix problems with DoS-based attack vectors if need be. Typically these kinds of contracts have trust issues, because of the power of such an entity. Real-World Examples: GovernMental GovernMental was an old Ponzi scheme that accumulated quite a large amount of ether (1,100 ether, at one point). Unfortunately, it was susceptible to the DoS vulnerabilities mentioned in this section. A Reddit post by etherik describes how the contract required the deletion of a large mapping in order to withdraw the ether. The deletion of this mapping had a gas cost that exceeded the block gas limit at the time, and thus it was not possible to withdraw the 1,100 ether.

Thus, specifying a block number at which to change a contract state can be more secure, as miners are unable easily to manipulate the block number. The BAT ICO contract employed this strategy. This can be unnecessary if contracts aren’t particularly concerned with miner manipulations of the block timestamp, but it is something to be aware of when developing contracts. Real-World Example: GovernMental GovernMental, the old Ponzi scheme mentioned above, was also vulnerable to a timestamp-based attack. The contract paid out to the player who was the last player to join (for at least one minute) in a round. Thus, a miner who was a player could adjust the timestamp (to a future time, to make it look like a minute had elapsed) to make it appear that they were the last player to join for over a minute (even though this was not true in reality).


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

In response to the suggestion that the Federal Reserve would soon inject hundreds of billions of newly conjured dollars into the economy, the price of gold shot up by more than $20 an ounce, on its way toward $1,300 an ounce, and $1,500 not long after that. “Some economists worry about the quality and quantity of money in the economy,” said Todd. “Bernard and the Liberty Dollar people are basically operating in that reality. But it’s distorted as they practice it.” One prong of the government’s case against von NotHaus, Todd explained, is that the whole thing was a Ponzi scheme. Nestled within the discounts for signing up users, commissions, price differences between silver bought and sold, adjustable base value, and re-minting fees for a MoveUp are red flags that indicate, in the words of the prosecutors, “a scheme and artifice to defraud.” Von NotHaus vehemently denies this, of course, saying that the Liberty Dollar is a single-tier referral system, just like when people put an Amazon.com button on their websites and get a small percentage from referred sales.

See also Police Leapfrog scenario Learning Channel Legal Tender Lens array Libertarians Liberty Dollar discounts for Move Up mechanism for Liberty Services Liliuokalani (Queen) Liquid assets Loans Locke, John Longshot magazine Lott, Trent Lydia (Greek kingdom) McDonald’s Madoff, Bernie Malawi Malaysia Maldives Mann, Ronald Manta currency Mark of the Beast Mark Twain Mas, Ignacio Massachusetts Bay Colony MasterCard Media Mercy Corp Metals, prices of Mexico Microchips Migrant laborers Military Review Millennium Prize Problems Minority Report (film) Mint.com Monetary sovereignty Money creation of definition of vs. equity faith in value of(see also Currencies; confidence in) and feces functions of hoarding language of minting mobile money (see also Cellphones: used for money transactions) money clips money illusion money supply new ideas about origin of and religion as representing pure interaction and states/governments various objects as See also Cash; Coins; Currencies; Digital money; Electronic money; Paper money; Saving(s) Money Illusion, The (Fisher) Money laundering M-Pesa service Mundell, Robert Musulin, Toni Napoleonic Wars Natural disasters Nazism Netherlands New Jersey Transit train Newton, Sir Isaac New Yorker, The New York Times New Zealand Nicaragua Nickel Nigeria Nixon, Richard Non-native’s Tipping Anxiety NORFED North Korea Norway Nuclear weapons Numismatists/notaphilists Obama, Barack Oil prices Onion, The Organization for Economic Cooperation and Development Organization for Security and Cooperation in Europe Oyster cards Pain Panama Paper money burning constitutionality of as contaminated high-denomination banknotes and history/identity of issuing country inks used for legacy features of U.S. paper money manufacturing $1 bills $100 bills origin of plastic banknotes printing redeem-ability of redesign/reissue of security features for (see also Security issues) in seventeenth century Europe size of stashing varieties of See also Cash; Dollar currency Papua New Guinea Paul, Ron Pawn Stars (reality show) Payday lenders Payment technologies and small-value transactions See also Cellphones: used for money transactions; Credit cards; PayPal PayPal Pearl Harbor Survivors Association Peer-to-peer transactions Pennies Peru Peso currency Pew Research Center Philippines Central Bank Philosophy of Money, The (Simmel) Placebo effect Plasectomy Platinum Poland Police Polo, Marco Ponzi schemes Portugal Pound sterling currency Poverty. See also under Cash Power grid Precious metals. See also Gold; Platinum; Silver Presley, Telle Prices. See also Inflation Priming (psychological) Privacy issues Progressives (political) Promissory notes Prostitution P versus NP problem Pyramid schemes Quicken software Raghubir, Priya Ramsey, Dave Rapture Regulations Rejection, feelings of Religion.


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.

., 139 Finance-driven economy, 1, 72 anti-capitalism, 2 capitalism, 1 chronic debt crisis, 22 corporate America, 20 current movie artificial bank earnings, 7 asset prices, 6 banking implosions, 6 borrowers and investors connection, 10 borrowing demand, 7 catastrophic financial bubble, 10 civilization, 10 corporatism, 9 democratic crony capitalism, 9 Dodd-Frank act, 8 economic growth and social stability, 10 financial repression, 9 Glass-Steagall Act, 8 human ingenuity, 10 interbank funding markets, 6 low interest rates and easy money, 6 market collapse, 10 money market, 6 overexuberence, 6 overinvestment and speculation, 6 pre-crisis conditions, 8 printing money, 7 private capital, 7 167 168 Index Finance-driven economy (continued) profitability, 7 quantitative easing, 8 recovery, 8 regulation, 8 regulatory capital rules, 8 resources and tools, 9 shell-shocked enterprises and households, 8 end of employment, 21–22 financial leverage magic and poison CEO class, 14–15 consumer debt, 15–16 disconnection problem, 11–12 market bargain, 10 real economy, 10 wealth financialization, 13–14 working capital, 11 global financial crisis, 2 Great Moderation, 16–18 Great Panic, 18–19 household sector agony, 19–20 investor class, 22 Marx, Karl asset bubble, 5 cash nexus, 4 dot-com bubble, 5 economic revolution, 3 First World War, 4 free markets, 3 French Revolution, 3 globalization, 3 Great Depression, 5 liberalism, 3 normalcy, 4 overproduction and speculation, 3 Wall Street, 4, 5 revolutionary socialism, 2 sovereign debt, 8, 22 Finance reconstruction, 142 bank bashing, 146 “bankers”, 142 business model, challenges, 145 Citigroup, 145 cyclical businesses, 143 government management, 142 legitimacy bonus culture, 148–150 privileged opportunity, longestablished bank, 146 short-term share-price manipulation, 148 state and legal systems, 147 stock price, 147 mark-to-market price, 144 “producers”, 143 profession, definition, 163 prudence, 145, 161–163 root-and-branch transformation, 145 talent pool, 144 “the race for talent”, 143 trust cash management, 160 Financial Market Meltdown, 159 FSA, 159 hackneyed term, 159 information asymmetry, 159 non-bank financial service provider, 161 oversold/up-sold products, 159 utility Anglo-Saxon-type banking systems, 156 big data tools, 158 bills-of-exchange market, 150 branch and payment services, 157 clearinghouse creation, 158 core banking, 154 economic value transmission, 150 exchange of claims, 151 fee-income growth, 155 fiat money system, 151 financial intermediation, 150 financial transactions, 157 flexible contractor/subcontractor relationship, 158 information technology, 156 “liquidity premium”, 152 multidivisional/M-form organization, 153 non-interest income, 155 old-media companies, 157 Index overhead value analysis, 154 “privileged opportunity”, 152 quill pen–era practice, 158 sheer utility value, 155 silos, product business, 153 transaction accounts, 152 venture capital industry, 142 “War for Talent”, 143 Financial crises, 23 affordable housing, 24 banking “transmission” mechanism, 43 Basel III process, 50–51 basel process, 27–28 consumer banking(see Consumer banking) Dodd-Frank, 49–50 domestic banking system, 38 European Union, 51–53 FDIC, 40 finance-driven economy’s leverage machine, 43 Financial Market Meltdown, 25 GDP, 38 Government Policy and Central Banks, market meltdown(see Regulation process) government policy failure, 45 “government-sponsored” public companies, 24 Great Depression, 44 GSEs, 24 legal missteps, 47–48 New Deal, 43 panic-stricken markets, 40 political missteps, 45–47 Ponzi scheme, 42 postwar financial order, 25–27 printing money, 38 private profits and socialized losses, 40 private-sector demand, 43 public-sector demand, 42 quantitative approach, 25 TARP, 39 too-big-to-fail institutions, 41 Triple A bonds, 41 US Federal Reserve System, 38 Financial liberalization, 89 Financial Market Meltdown, 25, 61, 89, 109, 159 Financial repression, 9, 78, 111 Financial Services Authority (FSA), 60, 159 Food and Drug Administration (FDA), 69 Fordism, 68 Free-market capitalism, 89 Free markets, 3 French Revolution, 3 Front-end trading systems, 107 FSA.See Financial Services Authority G GDP, 11 “Giro” payments systems, 151 Global imbalance, 96 Globalization, 3 Global whirlwinds, 93 Asia, finance movement cultural differences, 110–111 Financial Market Meltdown, 109 Interest Equalization Tax, 109 language, law, and business culture, 109 primacy, 109 austerity(see Austerity) British Empire, 30 Chimerica, 97 China and United States cross-Pacific economy, 97 foreign interference and aggression, 98 headline growth rates, 97 repression revolution and series, 97–98 Second World War, 98 Smoot-Hawley Tariff, 98 surpluse trade, 97 sustainable development, 98 Chinese ascendancy, 113 clearing and settlement bottleneck, 106–107 Dynastic China, 112 169 Download from Wow!


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

affirmative action, Asian financial crisis, asset allocation, availability heuristic, backtesting, bank run, Black Swan, buy and hold, cognitive dissonance, colonial rule, compound rate of return, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, feminist movement, Flash crash, haute cuisine, hedonic treadmill, housing crisis, IKEA effect, impulse control, index fund, Isaac Newton, job automation, longitudinal study, loss aversion, market bubble, market fundamentalism, mental accounting, meta analysis, meta-analysis, Milgram experiment, moral panic, Murray Gell-Mann, Nate Silver, neurotypical, passive investing, pattern recognition, Ponzi scheme, prediction markets, random walk, Richard Feynman, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, science of happiness, Shai Danziger, short selling, South Sea Bubble, Stanford prison experiment, Stephen Hawking, Steve Jobs, stocks for the long run, Thales of Miletus, The Signal and the Noise by Nate Silver, tulip mania, Vanguard fund

Weaker, but still positive, evidence was found for reducing stress levels and improving overall quality of life.103 For those on the fear end of the fear and greed continuum, meditation is powerful medicine. It is perhaps no surprise to learn that meditation can reduce anxiety, but the literature suggests that it can also rewire the way that we think about and anticipate rewards. Seeking out rewards is a universal human behavior, but taken to the extreme, greed can be becoming all consuming, leading to everything from lower ratings of subjective well-being to Ponzi schemes of the Madoff variety. A study by Kirk, Brown and Downar that matched 34 meditators with 44 matched controls found that those who meditated showed lower neural activations in the caudate nucleus and ventromedial prefrontal cortex during reward anticipation when compared to their less enlightened peers. What does this all mean in plain English? The parts of the brain associated with greed – expecting and anticipating reward – are actually less active in the minds of those who meditate.

It was only when his then-girlfriend (now wife) Christina Maslach came by to interview some of the subjects that she pointed out the horrors being perpetrated and encouraged Zimbardo to shut down the experiment. The positive feedback loop that Zimbardo experienced behaviorally occurs everywhere – from financial markets to marriages to nature – and can be defined as an event that is amplified by the very event that gave rise to it. Chemical reactions cause heat that catalyzes further reactions. One cow moving causes three cows to move which causes a stampede. Ponzi schemes are better able to attract new victims as they grow and have an increased ability to make false payments. Zimbardo set the loop in motion by assigning status to the guards and prisoners, who then began to engage in guard-like and prisoner-like behavior, which further enhanced the reality of the whole enterprise. It is by virtue of just such a feedback loop that a Stanford freshman could be turned into a profane, screaming guard forcing a classmate to sleep near his own feces in just under a week.


pages: 289 words: 77,532

The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders by Kate Kelly

Bakken shale, bank run, business cycle, Credit Default Swap, diversification, fixed income, Gordon Gekko, index fund, light touch regulation, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, paper trading, peak oil, Ponzi scheme, risk tolerance, Ronald Reagan, side project, Silicon Valley, Sloane Ranger, sovereign wealth fund, supply-chain management, the market place

In the past, though, he had at least operated from one of its better-reputed offices, the Southern District of New York, where the miscreants included mobsters, terrorists, and white-collar criminals like Marc Rich who actually feared facing consequences for their actions. At the CFTC, Meister was now running a division that had lacked a permanent head for two and a half years and was known mainly for its exposure of small-fry Ponzi schemes and other retail fraud matters. Overall, it was really petty stuff. Since enforcement matters hadn’t even been listed on Gensler’s mental Post-it Note at the outset, he told Meister that if he joined the CFTC, the entire oversight program would be his to run, without undue interference from the boss. To Meister, accustomed to the groupthink of a private law firm, that was an attractive proposition.

Unmentioned but present in the public mind were fears that spikes in the price of wheat and other foods had sparked revolution in the Middle East in 2011, and that commodity index investing had contributed to high agricultural costs and the resultant global food crisis in general. Satisfied that his pet issue might finally come to fruition, Chilton announced his own plans to step down toward the end of 2013. He was writing a book on Ponzi schemes and eager to continue his television career. “It wouldn’t surprise me in the least if it was challenged legally,” Chilton said of the new speculative curbs, “but I think it’s a bulletproof rule.” But in an interview with Bloomberg news, he eviscerated the industry lobbying that had undermined his efforts at reform. “The lesson for me is: The financial sector is so powerful that they will roll things back over time,” he said.


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

When my friend tried to sell me on investing in one of Madoff’s “feeder” funds, it took me less than an hour to spot three very troubling issues with his operation. But most people failed to investigate Madoff’s business at all before investing. They assumed that someone so prestigious had to be aboveboard. He was friends with senators. He was the former chairman of NASDAQ. The idea that a man of his stature was running a $50 billion Ponzi scheme was unthinkable, so investors gave him fortunes without a second thought. If they’d only taken a few moments to study his business practices, they could have easily identified the same potential problems I saw. These red flags weren’t hidden from view. In fact, several years before Madoff’s arrest, a whistleblower sent the Securities and Exchange Commission a fifty-page report detailing the obvious fraud.

It clearly sourced all of its merchandise from overruns, remainders, or fire sales. There was no way it could return goods that didn’t sell to the manufacturers. So where did it all go? Back onto the truck and straight to the next store on its delivery schedule. That next store would then stock this rejected junk and pass its poor-selling goods on to the subsequent one and so on and so on. It was a kind of inventory Ponzi scheme. The company was relying solely on new store growth to boost its revenues. But because of that excessive growth, it couldn’t possibly bring in enough desirable new merchandise for all those locations, so it was reduced to rotating an increasingly unsellable backlog of crap among its outlets. Less than twelve months after my trip to Northgate Mall, Value Merchants filed for bankruptcy. Failed business formulas usually aren’t as mathematically precise as Value Merchants’ commitment to double in size every twelve months.


pages: 459 words: 138,689

Slowdown: The End of the Great Acceleration―and Why It’s Good for the Planet, the Economy, and Our Lives by Danny Dorling, Kirsten McClure

Affordable Care Act / Obamacare, Berlin Wall, Bernie Sanders, Boris Johnson, British Empire, business cycle, capital controls, clean water, creative destruction, credit crunch, Donald Trump, drone strike, Elon Musk, en.wikipedia.org, Flynn Effect, full employment, future of work, gender pay gap, global supply chain, Google Glasses, Henri Poincaré, illegal immigration, immigration reform, income inequality, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, James Dyson, jimmy wales, John Harrison: Longitude, Kickstarter, low earth orbit, Mark Zuckerberg, market clearing, Martin Wolf, mass immigration, means of production, megacity, meta analysis, meta-analysis, mortgage debt, nuclear winter, pattern recognition, Ponzi scheme, price stability, profit maximization, purchasing power parity, QWERTY keyboard, random walk, rent control, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, sexual politics, Skype, Stephen Hawking, Steven Pinker, structural adjustment programs, the built environment, Tim Cook: Apple, transatlantic slave trade, trickle-down economics, very high income, wealth creators, wikimedia commons, working poor

For instance, they lend to the federal government, buying up part of the U.S. national debt, and in doing so some of their money is, in turn, lent to university students as federal loans. Those students who pay back their loans with interest should, so the theory goes, more than offset those who fail to, and so the federal government can afford in future to pay back the rich individual, with interest added. But eventually such a giant Ponzi scheme has to fail, because only a tiny minority can ever be rich if we live our lives this way. The rich may not have realized the long-term folly for them of lending money to people to get an education and learn how the world works better than the rich understand, people who are usually so focused on short-term profit maximization. Some say that a national economy based on debt is essential if pension funds are to grow for the minority of people who have decent private pensions, but a debt-based economy has no mechanism for providing adequate pensions for all.

U.S. public debt, 1966–2018 (billions of dollars). (Data adapted from the U.S. Department of the Treasury, “Fiscal Service, Federal Debt: Total Public Debt [GFDEBTN],” retrieved from FRED, Federal Reserve Bank of St. Louis, accessed 29 December 2018, https://fred.stlouisfed.org/series/GFDEBTN.) Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi arrived in the United States in 1903 from Italy. If you are interested in Ponzi schemes and where such flights of fancy can lead, look him up. In a fast-changing world, many of his schemes initially worked; but none worked for very long. In a world of slowdown there should be fewer chances of any of the schemes of such gamblers getting off the ground. The only reason we know Ponzi’s name is that his many schemes failed in his lifetime, often spectacularly. The names of others who got rich in just as dubious ways, but stayed rich, are not yet held in such low esteem.

See also carbon emissions On the Origin of Species (Darwin), 189 optimism, 299, 301, 312, 319 Organisation for Economic Cooperation and Development (OECD), 310–11 Oswald, Andrew, 243–44, 304–5 Pakistan, 165, 167, 168 paleoclimatology, 123 Palmerston, Henry John Temple, 3rd Viscount, 283 Paris, 26, 263, 324 patriarchy, 319 peak human, 317 pendulums, 5, 29–30, 34–36, 35, 336 phase portraits, 29–36, 35, 336 phase space, 32 Philippines, 172, 173, 174 Piñero, Sebastión, 312 Pinker, Steven, 265–66 Planet of the Apes, 298, 365n22 Poincaré, Henri, 32 political change, 276–83; decline in number of-isms, 276; Democratic Party in New York State, 277–79, 278; London and the Conservative Party, 281–83, 282; populism and, 277; rate of autocratization, 276–77; women and, 276 Ponzi schemes, 63 population, 140–79; Africa, 157–61, 169; baby booms and, 104–5, 143, 147; beginning of slowdown (1968), 25–26, 141, 144–45, 146, 340n8; birth rates, 153, 307–13, 308; British Isles, 161–65, 164; carbon emissions and, 102–3, 106–9, 107; change versus rate of change, 27–29, 28, 36; China, 154–57, 156; colonization and, 103, 145, 147; diseases and, 147, 148, 174; Eurasia, 171–74, 172, 173; famines and, 155, 162, 166, 168, 174; fastest period of growth, 315–16; fertility (see fertility); growth transforming to slowdown and extinction (example), 12–15, 13; immigration and, 318; Indian subcontinent, 165–68, 167; interruptions in growth, 147–49, 148; of largest cities, 323–24; Oceania, 174–77, 176; poverty and instability and, 105–6; predictions of slowdown, 140–42; reduction in total numbers, 214; ROXY indexes, 326–29, 328; stabilization, 18–22, 20, 143–44; United States, 149–54, 151; World War II and, 147 Population Bomb (Ehrlich), 3, 7 Population 10 Billion (Dorling), 142 populism, 277 Portugal, fertility, 223, 224 Poverty and Progress (Wilkinson), 289 Pren, Karen, 153–54 printing, 65–66, 72–74.


pages: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Albert Einstein, algorithmic trading, Andrei Shleifer, autonomous vehicles, bank run, banking crisis, basic income, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, disintermediation, Donald Trump, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, full employment, George Akerlof, germ theory of disease, German hyperinflation, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, market bubble, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, publish or perish, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

The ad featured recent auction prices of oranges from the region as well as text about how fashionable the area was.12 In response to complaints about such marketing, the individual states of the United States put into place over the period 1911–33 a series of “blue sky laws” prohibiting the selling of “speculative schemes which have no more basis than so many feet of ‘blue sky.’ ”13 Mr. Ponzi and His Other Scheme In 1926, Charles Ponzi, who is said to have invented the Ponzi scheme in 1920, was released from jail. (Also called a circulation scheme, a Ponzi scheme is a fraudulent investment fund that pays off early investors with money raised from later investors, creating a false impression of profits to lure yet more victims.) Soon thereafter, Ponzi went back to jail for violating Florida’s blue-sky law. During the Florida land boom, he began selling small parcels of Florida land to investors without disclosing that the land was under water, in a swamp.14 Ponzi’s name, and the story of unwitting investors buying land in a swamp, went viral with his circulation scheme, and it remains famous even today, but his name is not so attached to the swamp narrative.

., 56 Pearl Harbor attack, memories of hearing about, 81–82 Penfield, Wilder, 53–54 perennial narratives, 107–8; nine major examples of, 113, 266–67 (see also specific examples); as works in progress, 276 permanent-income hypothesis, 307n3 “permanently high plateau,” 75–76 phantasies of Melanie Klein, 15 The Philosophy of Honest Poverty, 150 phishing equilibrium, 61 phools, 61, 62 Piketty, Thomas, 150, 210–11 Piore, Michael, 281 Plath, Robert, 38, 39 Plato, 34 policy: formulating with knowledge of narratives, 3, 287. See also monetary policy policymakers: creating and disseminating counternarratives, 278; narrative studies to infer motivations of, 281, 321n14 poliomyelitis enterovirus epidemic, 295–96 Pollack, Andrew, 204 Polletta, Francesca, 32 Pomperipossa in the World of Money (Lindgren), 49 Ponzi, Charles, 220–21 Ponzi scheme, 220 populism: inflation after World War I and, 245; opposition to gold standard and, 166 portfolio insurance, 93 post-traumatic stress disorder (PTSD), 57 “postwar,” 242–43 Pound, John, 298 poverty: decreasing basic-needs charity in today’s US, 272; Depression-era attitudes toward, 143; Dust Bowl and, 131; nineteenth-century moral views of, 117; technological advances creating, 178 poverty-chic culture, 143, 148, 149 power age, 183 predicting economic events.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

This new debt paper was then peddled to investors, who used it as collateral for “margin” loans to buy yet more stocks and bonds. At each change of hands, fees and underwriting charges added to the total claims on the original shaky mortgages. The result was a frenzied bid-ding up of prices for a bewildering maze of arcane securities that neither buyers nor sellers could accurately value. Giant Ponzi scheme? Not to worry, responded the Wall Street geniuses. By spreading risks among more people, the miracle of “diversity” was actually turning bad loans into good ones. Anyway, banks were buying insurance policies against default, which in turn were transformed into a set of even murkier securities called “credit default swaps” and marketed to hedge funds, pension managers and in some cases back to the banks that were being insured in the first place.

His answer: “Because socialism will always be used to save it.” The cause of the financial markets meltdown is simple: powerful greed fanned by fraud and reckless risk transfers. Wall Street wanted something for nothing. This fairy tale was written by an army of Wall Street lobbyists who tore down regulations and safeguards meant to protect savers and shareholders. The financial black belts who made billions from this Ponzi scheme deserve the brunt of law enforcement. But deregulation meant there was very little law, much less enforcement. Instead, the socialist superman has swept down to New York City from Washington to bail out casino capitalism on Wall Street, which is spewing forth ever more kryptonite. Every time Congress has acted in haste, it has led to a boon-doggle, from the $3 billion synthetic fuels legislation of 1980 to the Iraq War resolution of 2002.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

activist fund / activist shareholder / activist investor, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bernie Madoff, Bretton Woods, business process, call centre, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, fixed income, high net worth, interest rate derivative, Isaac Newton, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Myron Scholes, NetJets, oil shock, pattern recognition, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, systematic trading, zero-sum game

Those talks were abandoned amid the turbulence of the financial crisis, and were resumed with a new urgency in the aftermath. AHL was up in 2008 but was down 17 percent in 2009, and in 2010 was still 3.7 percent below its high-water mark. Man’s fees suffered accordingly; in March 2010, fees amounted to $97 million, down from $358 million the year before. In addition, RMF, Man’s fund-of-funds business, lost $360 million in the collapse of Bernard Madoff’s Ponzi scheme, and others strategies suffered significant losses as well. In the face of these losses, Man’s CEO Peter Clarke began the search for new assets. GLG was the first place he turned, and he found receptive listeners. Between the market turmoil of 2008 and Coffey’s departure, GLG’s stock price tanked, and the amount of assets under management fell to $17.3 billion, reportedly threatening to put GLG in breach of a covenant on a $570 million loan from Citigroup.

He also endorsed the drafting of a “special ‘Private Investment Company’ statute, specifically tailored for SEC regulation of private investment funds.” This legislation, he said, “should require registration of private funds with the SEC; provide that each such fund and its investment manager be subject to SEC inspection and enforcement authority, just as mutual funds and registered investment advisers are; require custody and audit protections to prevent theft, Ponzi schemes, and fraud; should also require robust disclosures to investors, counterparties, and lenders; require that private funds provide basic census data in an online publicly available form; require that they implement anti–money laundering programs, just as broker-dealers, banks, and open-end investment companies must do; and, for larger funds, require the adoption of risk management plans to identify and control material risks, as well as plans to address orderly wind-downs.


pages: 262 words: 83,548

The End of Growth by Jeff Rubin

Ayatollah Khomeini, Bakken shale, banking crisis, Berlin Wall, British Empire, business cycle, call centre, carbon footprint, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, decarbonisation, deglobalization, energy security, eurozone crisis, Exxon Valdez, Fall of the Berlin Wall, fiat currency, flex fuel, full employment, ghettoisation, global supply chain, Hans Island, happiness index / gross national happiness, housing crisis, hydraulic fracturing, illegal immigration, income per capita, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Kickstarter, McMansion, Monroe Doctrine, moral hazard, new economy, Occupy movement, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, quantitative easing, race to the bottom, reserve currency, Ronald Reagan, South China Sea, sovereign wealth fund, The Chicago School, The Death and Life of Great American Cities, Thomas Malthus, Thorstein Veblen, too big to fail, uranium enrichment, urban planning, urban sprawl, women in the workforce, working poor, Yom Kippur War, zero-sum game

The cost is footed by the world’s major oil-consuming economies, and the cash is shipped into the outstretched arms of oil-exporting nations like Saudi Arabia, Russia and Canada. When the world’s annual fuel bill was less than $800 billion, oil-importing nations like the United States clocked healthy economic growth year after year. Now that the world is spending more than $3 trillion a year on oil, those same economies are floundering. This isn’t a coincidence. Triple-digit oil prices turn the sovereign debt market into something resembling a giant Ponzi scheme. The investors who are buying the bonds that allow governments to roll over the debt amassing in the financial system are essentially making larger and larger bets on future economic growth. But as oil prices climb higher, the prospects for that growth become ever more tenuous. It’s like doubling down just as the odds are turning against you. Think about buying a 30-year government bond today.

A Rolex watch, to pick another example, has long been a token of wealth and status, but there’s no reason that can’t change. Judging by the protesters in the Occupy movement, a significant segment of our society has lost faith in the merits of unregulated capitalism. To them, a Rolex isn’t a sign that the wearer is an investment banker worthy of respect. Instead, it signals that the person who owns it may be about to break another securities law or make millions engineering a Ponzi scheme that will bilk suckers out of their life savings. As always, virtue is in the eye of the beholder. If values change, wearing a diamond-encrusted watch may someday send the wrong message. Consumer spending doesn’t necessarily have to be conspicuous to be unsatisfying. As per capita income increased in the postwar era, it stoked expectations of ever-larger increases in future consumption. Consider your situation if you’ve never owned a car before.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, collapse of Lehman Brothers, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial independence, financial innovation, fixed income, full employment, implied volatility, index fund, information asymmetry, Isaac Newton, John Meriwether, Long Term Capital Management, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

Ask anyone whose capital was guaranteed by Lehman Brothers (around $8 billion of investors’ money was allegedly in these structures). Hedge funds failed to deliver their ‘skill-based’ returns and were revealed in the main to be selling market exposures at usurious prices, enriching themselves at the expense of gullible investors. No more gullible than those professionals who ‘approved’ and invested in Madoff’s $50 billion Ponzi scheme, uncovered at the back end of 2008 – that list is long and undistinguished. The time has come for transparency, value for money and the fulfilment of the fiduciary responsibility of all in the industry including fund managers, product development and marketing teams, and advisers. The outlook for impartial fee-based advice and evidence-based, transparent passive investing has never been so promising, or important to us.

Tip 6: If it looks too good to be true, it probably is There are no dead certainties in investing apart from the fact that any product that appears to deliver great returns with low risks has a high chance of disappointment, usually in the form of a material reduction in the value of your investment. There are two main types of products that fall into this category: a fraud wrapped up in a good story, and a bet wrapped up in a good story. Beware the snake-oil salesman. The recent Ponzi scheme fraud perpetrated by Madoff was a classic case of someone with the ‘gift of the gab’, a semblance of credibility, a complex strategy that few investors understood (apparently a split strike conversion strategy, whatever that is) and an air of exclusivity and secrecy. The second is usually something that sounds so fantastic that you get sucked into the upside and blinded to the risks (e.g. the true cases of firms peddling freeholds to apartment blocks in Beirut at the height of the troubles there, or repossessed homes in Florida).


pages: 302 words: 80,287

When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle by Scott Wapner

activist fund / activist shareholder / activist investor, asset allocation, Bernie Madoff, corporate governance, corporate raider, Credit Default Swap, Mark Zuckerberg, Ponzi scheme, price discrimination, Ronald Reagan, short selling, Silicon Valley, Tim Cook: Apple, unbiased observer

And we basically asked 20 questions to a statistically significant number of Herbalife users and Herbalife distributors—thousands.” Sohn set out to debunk the core of Ackman’s claims—that Herbalife preyed on thousands, if not millions, of unsuspecting people, mostly lower-income Hispanic immigrants who had joined with the idea of making big money but were left financially destroyed in what amounted to an elaborate scam. “The initial short thesis was this is essentially a Ponzi scheme. No one is making any money off of it and everyone does it for the business opportunity,” Sohn said. “There are no real customers. It’s illegal.” Sohn spent $25,000 to commission a survey in both English and Spanish to make sure it was an accurate representation of Herbalife’s customer base. The survey’s first question, posed only to Herbalife distributors, read, “Would you recommend becoming an Herbalife distributor to family and friends?”

., 28, 153 Perrica, Xenia, 145–146 Pershing Square Capital Management, 5, 14, 70, 71, 75, 143, 145, 164 advisory board of, 153 assets growth/decline of, 37, 181, 210 holdings in 2016, 209 investment committee of, 16, 72 IPO of, 180 launching of, 36, 211 long-term incentive program of, 210 performance in 2015, 180, 181–182 returns in 2014, 166 as underperforming, 40 video made about Herbalife’s distributors, 196–197 Pershing Square Holdings, 180 philanthropy, 7, 212 Philidor Rx Services, 172–173, 174, 175 Philip Morris Cos., 126 Phillips Petroleum, 122–123 Pickens, T. Boone, 121, 122 Pitt, Harvey, 146 Platform Specialty Products, 182 Ponzi schemes, 135. See also pyramid schemes Porter, Michael, 153 Post Holdings, 148 “Preliminary Report on Bill Ackman” (Dietz), 5–9 Pre-Paid Legal Services, 3031, 32, 33 PricewaterhouseCoopers (PwC), 133, 139–140 Protess, Ben, 96 proxy fights, 38, 72, 118, 119, 120, 126, 128, 215 put options, 148–149, 178, 215 pyramid schemes, 13, 14, 19, 44, 138, 181 laws concerning, 17, 75, 112 and recruiting, 149 See also Herbalife: as pyramid scheme Ramey, Tim, 83, 132, 133, 200 Ramirez, Edith, 142, 143, 144, 189–190, 196, 198 Rausch, George, 28 Reagan, Ronald, 43 Real Bill Ackman, The (website), 178 “Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Industry Concentration, The,” 214 real estate investment trusts (REIT), 29, 30, 33 recessions, 119.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

He ran a series of investment funds that offered returns whose consistency, never failing to offer double-digit returns, should have been extremely suspect—in fact it was this very consistency that raised the suspicions about Madoff. When Madoff’s frauds were exposed in 2008, it turned out that he had been running a classic Ponzi scheme, in which the new money being paid into the funds is given directly to older customers, to make it look as if the investments are successful. After his arrest Madoff said that the Ponzi scheme had been running since 1991 and that he had never made any real investments with his clients’ money. He pled guilty to eleven felonies in March 2009 and was sentenced to 150 years in jail. Manias, Panics, and Crashes An amusing book by the economist Charles Kindleberger, who as I said in Part I is something of an intellectual hero of mine.


pages: 285 words: 86,174