Wall Street's Culture of Corruption

Now that the largest Ponzi Scheme in history has blown up, and the victims are tallied, questions are finally being asked about Bernard Madoff that should have been asked a long time ago. Like "who was minding the store?"

The answers aren't pretty.

For instance, yesterday it was revealed that Madoff's daughter was married to the SEC compliance examiner, Eric Swanson.

Swanson was at the commission in 2003 when the agency was examining the madoff firm. More importantly, he was also part of the SEC team that was conducting the actual inquiry into the firm.

Even worse, the SEC was warned repeatedly as far back as 1999, that Madoff was running a Ponzi scheme.

Bernard Madoff's firm managed $17.1 billion in assets, he declared this past January in his investment adviser filing with the SEC. He also checked the box showing that he had between one and five employees who performed investment advisory functions, including research, at the firm.

"That's unheard of," Peter Henning, a former SEC attorney and prosecutor, told ProPublica. "You wouldn't have a mutual fund run by one person. You have to have someone out there doing the research."

But there's no evidence that anyone paid much attention to the filing. According to reports, the SEC never inspected Madoff's firm, which first registered as an investment adviser in September 2006. That's despite years of suspicion of Madoff's remarkably consistent returns.

One whistleblower, a former exec at a rival firm, wrote the SEC as early as 1999 to warn that Madoff was running the "world's largest Ponzi Scheme." He repeated his warnings to the SEC through this past April. There were other critics and naysayers, including a 2001 article in Barron's questioning Madoff's unrealistically consistent returns.

Before I go any further I want to put this entire scam into perspective.

In 1995 the 233-year old Barrings Bank failed with $1.5 Billion in losses due to a rogue trader named Nick Leeson. The same year Toshihide Iguchi nearly crashed Resona Holdings with $1.1 Billion in losses. In 2003 John Rusnak got seven years in prison for bank fraud at Allfirst bank at a cost of $691 Million. Chen Jiulin bankrupted China Aviation Oil after $550 Million in losses from insider trading. He also got 51 months in jail. And earlier this year Jerome Kerviel has sent Societe Generale to the brink of collapse with $4.9 Billion in losses.

Now compare that to Madoff's $50 Billion Ponzi Scheme.
This dwarfs anything else on record. To put it another way, this is a larger amount than the government spends on the EPA, Department of Labor, Department of Interior, and NASA combined.

Too Big To Jail

Bernard Madoff was not some "rogue trader" like the other ones I listed above. Madoff was the former chairman of NASDAQ. He was a multi-decade icon on Wall Street.
Madoff was just like everyone else on Wall Street, or at least what everyone on Wall Street wanted to be. That's why his downfall is so disturbing and should cause people to question the very institutions that we trust our life savings with. It's almost as if people are willing participants in a widely known scam.

But before one cries too big of a river for those who lost it all in what appears to be the biggest Ponzi Scheme of all time, one should note that a number of people interviewed said they figured Madoff was "cheating" since he was a market maker and had returns they couldn't explain - they just didn't think he was cheating them! A knowing scam? You decide.

The true scam here isn't Madoff though. Its that this sort of attitude - bed, bribe, lie, browbeat and cajole - has become all of what Wall Street is about over the last ten years.
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Is all this an accident? Or is it racketeering?

What sort of denial does it take to give your money to a known crook and yet still think that the crook will only take other people's money? It's because they knew Madoff was a crook is why they invested with him.

It's harder to define where the corruption ends than it where it begins. As the blogger Jesse puts it:

Bernard Madoff was exposed because declining prices crippled the mechanism of his fraud, as they always do. To his detriment he was not an integral segment of the banking system. If he had been, he might have merely been declared insolvent, retained his honor and his bonuses, been backstopped by the NY Fed, and put into an arranged merger.

Bernie Madoff's mistake was in not incorporating his fraud on a broader scale....

We believe that there are much greater deceptions being covered up now as we speak, not involving individuals so much as entire companies who have engaged in wanton accounting and securities fraud for the past twenty years.

History informs us that most of the perpetrators will never be prosecuted, and even though exposed will eventually once again become respected members of society. This is how it was after the Crash of 1929.

The reason for this is that the frauds cut so deeply into the establishment and so far and wide beyond the financial system into the government that they are literally too big to jail.

The last bubble to fail that will expose these remaining Ponzi schemese is the US dollar and the Treasury bonds. They are the products of a nation that has been overtaken by a rogue culture of sociopaths and swindlers.

Bernie Madoff was no rogue trader. He was successful for as long as he was because he blended in, he was one of the crowd, he was an independent player within the greatest financial swindle in history, the US financial markets and ultimately the US dollar.

What Jesse is saying is that the rot of corruption extends all the way down to the very source of the American Dollar. Other well-known writers also echo this sentiment.

The rot of corruption naturally extends to Washington, where Madoff extended large campaign contributions to Democratic politicians in exchange for influence.
This culture of corruption extends all the way to the Obama Administration in the form of Timothy Geithner, the soon-to-be Treasury Secretary.

It was Geithner, not Paulson, for example, who put together the original rescue plan for the American International Group.

And, of course, Geithner also oversaw and regulated an entire industry whose decline has delivered a further blow to an already weakened U.S. economy. Under his watch, some of the biggest institutions that were the responsibility of the New York Fed -- Bear Stearns, Lehman Brothers, Merrill Lynch and most recently, Citigroup -- faltered.

If you'll recall, when the Wall Street bailout was being debated, there was a controversial phone call between the Tresaury and Wall Street executives. The overpaid CEO's were concerned about wording in the bailout that some rogue Democratic politicians had put in the bailout that would limit CEO pay. A representative at the Treasury went out of his way to assure the overpaid and corrupt Wall Street bankers that their pay was safe, and that the wording was unenforceable.
The Treasury representative on that phone call was Neel Kashkari, an Assistant Secretary of the Treasury and the guy who decides how to use the $700 Billion bailout.

Comments

what was the line from Godfather II?

At last, we finally have a real partner in government?

That is one amazing piece of intel....oh boy, change you can bank on, Geithner.

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Don't forget

Geithner invited a Wall Street CEO to the meeting when the AIG bailout was arranged. It wasn't just any CEO, it was Lloyd Blankfein of Goldman Sachs. That raised a lot of eyebrows, even on Wall Street. It's been suggested that GS had substantial exposure to CDSs with AIG as counterparty. That's a logical but unproven conclusion, but very consistent with the culture of corruption. That Goldman Sachs has been hurt the least of the all the Wall Street Investment Banks is unlikely due to the technical brilliance of its employees. I'm quite confidant that AIG has filled more than a few gaping holes in the GS balance sheet courtesy of the Chinese Government and US taxpayers.

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Somali Pirates

Got nothing on these guys.

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SEC "admits" failure

Bloomberg:

he legal developments came after SEC Chairman Christopher Cox said yesterday that his agency failed to act on “credible, specific” allegations about Madoff dating back to 1999. The Madoff affair will be at the center of planned congressional hearings on the reform of the SEC, said a senior Senate official, speaking on condition of anonymity.

The allegations “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday, without detailing the allegations. He announced an internal probe to review the “deeply troubling” revelations.

Sounds like he's just trying to cover his ass. We all know where this internal probe should be placed.

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If you were a foreign investor

would you invest in a country whose securities watchdog had been put to sleep?

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I think these people's idea of competitiveness

is to put the United States in pure 3rd world status. I guess then we have creative destruction and can be an emerging economy.

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depends on kind of investor

Many kinds of investors see themselves as people who have learned to game the system- get money without directly producing a product. That kind of investor thrives in an unregulated environment where they can take advantage of stuff like insider trading.

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Maximum jobs, not maximum profits.

Some book recomendations

I think when you all get a chance, please read Liar's Poker and Reminiscences of a Stock Operator, and The Crowd & Extraordinary Popular Delusions and the Madness of Crowds (the one with Lebon).

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