Thursday, December 18, 2008

The Madoff Debacle

There's been a lot of coverage about financial advisor/guru Bernie Madoff, and how a whole lot of folks, many of them real rich, have now gotten burned:

... “The level of devastation, both financial and on a human level, is astounding,” said Robert J. Ivanhoe, a lawyer who is representing 10 developers and investors who lost $5 million to $50 million each with Mr. Madoff ...

“They knew him from golfing in the Hamptons. They knew him from the locker rooms,” [lawyer Jerry] Reisman said. “He was considered a wizard.” ...

See, there's the problem right there. Wizards exist in "Harry Potter" novels and other books, but they aren't real. Anytime somebody thinks they've come across a wizard, what they've actually encountered is something too good to be true.

You can't really go on earning 10% or 15% a year when everything is tanking. It's just not possible. I have a friend who's a big believer in Bob "Market Timer" Brinker, a knowledgeable but fallible financial advisor who dispenses investment wisdom on the radio. Good old Bob, who's shtick is getting his followers in and out of the stock market with their money stash intact when things get dicey, completely missed the Fall meltdown of the stock market.

And his followers, many of whom thought he was the end-all and be-all, ate it.

So how is this possible? What with old Bob's proprietary systems for gauging where the equity markets are going? With his vast knowledge of how everything fits together and works?

Because nobody, not a living soul, can predict with certainty what hundreds of millions of people will do with their money on any given day. Oh, they can consult past economic histories and models and make educated guesses, but they can't know.

So what does this have to do with the animation community? Simply this. Many artists out there have built up assets over the course of lengthy careers, and a lot of them say:

"I don't know a thing about investing. I'm an artiste. Show me a good financial advisor who will take care of my 401(k), IRAs, and investment money for me. Show me somebody who will handle all this icky money stuff."

So here's my two cents: Don't rely on outside "wizards" who claim to have the stock market wired and know what you should do with your loot. Educate yourself. Spend a half hour every day boning up on investing, looking at the business section of the paper or intertubes. Give yourself an education on investing. It's cheap and not particularly strenuous. You don't have to end up being Warren Buffett, you just need to own some basic knowledge of market fundamentals and different investment classes.

Then make your own investment decisions. Ask for outside opinions when you need them, but make the calls about where your money goes by yourself. If you're most comfortable putting everything in CDs or money market funds because you freak out at the idea of losing money in the stock market, go do it. If you're okay with the higher risk of stock markets to get higher returns, then do that.

But know what you're about and why you're about it. Rely on yourself. Don't buy into magic pie in the technicolor sky, because that stuff is, in the end, fantasy fiction.

As people who believed in Bernie Madoff's wizard potions and spells are now finding out. Because "wizards" all too often end up being crooks.


Jeff Massie said...

Last week, screenwriter Eric Roth learned he had received a Golden Globe nomination for The Curious Case of Benjamin Button ...

... and the same day, he found out that he had lost his entire retirement savings because of Madoff.

Talk about good news, bad news ...

Anonymous said...

More sad news from the bush economic meltdown.

Less than ONE month to go of the worst "presidency" in U.S. History.

Good Riddance.

Unknown said...

It has NOTHING to do with the Bush presidency. Madoff is a crook who has been running this scheme since 1992.

the really compelling fact is that thew people who kept their money with him had established an incredible suspension of disbelief about profits that no one could possibly garner in the market.

i.e. they knew that Madoff was crooked and were happy to turn a profit from his racket because they weren't committing the crime.

the smell started coming off of him in 1999 when the first report to the SEC was filed. Maybe you aren't old enough to remember, but Bush wasn't president then. what in the world are you going to do when you can't blame every injustice you see on big bad Bush.

Anonymous said...

>>what in the world are you going to do when you can't blame every injustice you see on big bad Bush.<<

It will still be blamed on Bush for the next term. Or at least until the next republican comes along.

Anonymous said...

"It will still be blamed on Bush for the next term. Or at least until the next republican comes along."

Well, considering how much stuff Clinton's been blamed for during the last eight years...

Anonymous said...

I also hate, maybe not Bush himself, but the dangerous, greed-centered free market fairy tale he promotes and believes in like religion. Since the dawn of the industrial revolution,(remember, "What's good for General Motors is good for America"?), whenever any part of the American suddenly started to boom it usually meant that some great crime or swindle was being committed in search for easy quick money, and we were heading for disaster.

However, I have to concede the point: Bush had nothing to do with Madoff. It had everything to do with the old American vice-trying to get something for nothing. It's only unfortunate that charities got swindled as well. For that, they should lock this guy up and throw away the key.

My favorite part of the story is that investors had to be specially invited to give him their money. He wouldn't take just "anyone."

Imagine how the people who were turned down by Madoff feel now.

Anonymous said...

Actually the SEC had been warned repeatedly about Madoff and chose to do nothing.

Hmmm...who appointed Cox the chairman of the SEC...?

Jeff Massie said...

Best Article Ever About Madoff.

The only remarkable thing about Madoff is that, at least up to this point, he appears to have admitted his crimes.

Steve Hulett said...

It has NOTHING to do with the Bush presidency. Madoff is a crook who has been running this scheme since 1992 ...

Sadly, Daniel, it has a great deal to do with Bush (not that fingers can't be pointed -- to an extent -- at Clinton).

The Bush Administration's SEC repeatedly failed to execute serious oversight with Bernard Madoff. They had multiple warnings, and they did minimal checking up.

It's, uh, kind of the record that's out there. Even the SEC admits it dropped the ball.

So yeah. The Bush administration is plenty culpable, because they failed to oversee what they had a responsibility to oversee.

Anonymous said...

"Hmmm...who appointed Cox the chairman of the SEC...?"

Yes, that was in 2005 and the first suspissions of Madoff predate the 1999 notifications about him.

Steve, the SEC is independent of the US government. Yes, its chairman is a republican because the president appoints him and we have had a republican president for EIGHT years. (you are surprised it isn't a democrat?) The fact of the matter is that there are five people in charge of the SEC ad there can only be a majority of 3 to 2.
furthermore the SEC is directly held to oversight by the senate.

But I digress...

lets get political with the whole thing:
there is a reason why red flags started going up in 1999. that is because the rollback of regulations that would have stopped this kind of fraud was signed into law by BIll Clinton. If we're blaming presidents(and the posters in here want to do that), I'm happy to point out the deregulation named
"Gramm-Leach-Bliley Act". I would suggest the monday monring quarterbacks in here look that up.

there is a nice little piece on wkipedia about it. Its the kind of deregulation that known as "letting the genie out of the bottle", meaning it fundamentally changes the investment landscape and its irreversible. it is directly responsible for almost all of the fraud we have seen in this last year and specifically the Madoff case and Fannie and Freddie Mac.

Look it up. Look who passed it.

Then look at Arthur Levitt, who chaired the SEC for the entirety of our previous president's term, and actually appointed him as a member of an advisory board to the SEC shortly before the sweeping deregulations went through.

As with most cases, the culprits are on both sides of the aisle... and the collective memory of this nation is withering away. I heard someone say that Bush was responsible for media deregulation the other day and I almost spit out my drink. The idiocy never ends. Instead of thinking(or god forbid researching) the facts there is a lock step of people heaping blame on the biggest target.

Am I saying that the democratic party is responsible for Madoff. No. thats the kind of moronic diatribe that I will leave to partisan dunderheads who put their political affiliation before the good of the country. They are the worst citizens of this nation. They drag us all down.

The economy has ZERO instances where failures in policy show themselves immediately. Remember that, because you can take it to the bank. The foundation of economic catastrophes are laid years and years in advance. You, of all people should know that Steve.

This doesn't mean that I don't like the gist of your original post. I though it was superb.

Steve Hulett said...


I don't let Clinton, and especially Rubin, off the hook. I agree with you it's a bi-partisan problem.

I'm not the one saying it's BUSH BUSH BUSH to blame for everything, far from it.

But let's look at the issue clearly. The people who have been screaming for deregulation for YEARS have been, by and large, Republicans. Mitt Romney, as recently as the Republican convention, was pounding the podium for less regulation.

And all three of Bush's appointments for chairman of the SEC were lousy, and all three whiffed as regards Madoff.

Are Democrats culpable too? Of course. Robert Rubin still bobs and weaves when fingers are pointed at him over the current mess, but come on already, Rubin bears responsibility. And Clinton signed on to the deregulation that Rubin and Gramm were pushing.

But when you take credit for the fine economy and how well the markets are doing -- as Bush did from 2003 to 2007 -- you end up taking the blame when things tank.

That's the way politics in this country work, the way they have always worked.

Herbert Hoover didn't cause or lay the groundwork for the Great Depression, he wasn't in the government when that was going on. But he gets the blame because it happened on his watch.

And sure, the Senate has oversight of of the SEC. And for most of the period you're talking about, 1999-2007, the Senate was controlled by the GOP.

Just to, you know, get political.

Anonymous said...

"But he gets the blame because it happened on his watch."

Somehow I doubt the media is going to adhere to that for the next year. But by all means Steve, blame everything bad that happens in 2009 on Obama. Its happening on his his watch and I'll hold you to that.


Steve Hulett said...

Dan --

You keep missing the small reality that I'm not blaming Bush. (Not entirely anyway.)

I'm willing to bet that we've got two to three years of misery. We're going to get a big stimulus bill. The GOP, suddenly "fiscally conservative" now that it has no power, will scream about it, but go along.

Why? Because Senators and congressmen are not going to say no to big construction projects in their states and districts. Simple reality.

I'm wagering that Obama, if that timeline happens, will get a second term.

Obviously I'm not a psychic.

Anonymous said...

No, this has everything to do with the bush economic meltodown and the gop culture of corruption. The idea that deregulating everything and the myth of total free market capitalism being the cure for all that ails has once and for all ben exposed for the fallicy it is. Much like what happened to communism.

Anonymous said...

No, this has everything to do with the bush economic meltodown and the gop culture of corruption."

Once again, I can only give you the benefit of the doubt and assume you are too young to remember the facts about deregulation:

The Gramm-Leach-Bliley Act was signed (and praised) by Bill Clinton, and yes it was passed by a republican held congress, but the vote in the senate was 90-8. Almost all of the democrats voted for it too. Like Steve mentioned, Clinton's treasury guy Robert Rubin pushed the bill through.

After that he took a cushy job at... Citibank! After all, they had the most to gain since they had already started a merger with Travelers Group insurance. Clinton gave the pen he used to sign the bill to Sandy Weill, the CEO of Citibank, it is now displayed in their headquarters.

But don't take my word for it, look at the documents written by the Clitnon/Gore administration right here:
It states:
"the laws that governed America's financial service sector were antiquated and anti-competitive. The Clinton-Gore Administration fought to modernize those laws to increase competition in traditional banking, insurance, and securities industries to give consumers and small businesses more choices and lower costs."

They deregulated the financial sector and they are taking credit for it right there in their own words.

As for Madoff, the overwhelming majority of his political contributions have been to the democratic party. Including:
Charlie Rangel
Hillary Clinton
Chuck Schumer
Christopher Dodd
Robert Abrams
and democratic campaign committess in general.

Anonymous said...

Daniel, I am so tired of your "gotcha" gasbagging, I followed your suggestion and looked up Gramm-Leach-Bliley. Surprisingly enough, you are totally mis-representing the bill, its purpose, it's effects, and , most significantly, its sponsorship. It was a financial institution regulation reversal left over from the depression, totally sponsored and promoted by Republicans. In fact, it was initially rejected by congress. Not a single Democratic senator voted for it. Later, after significant modifications, it finally passed. To hang it on Clinton and therefore the Democrats, is disingenuous at best. It was never intended to be a validation of Lese-Faire Free Market economics. The bill has a relatively narrow focus; allowing financial institutions to merge vertically as a way to stay solvent, and to make credit more accessible. The fact is that some of those institutions abused the privilege by turning to predatory credit practices. If anything, it's an argument for more scrupulous regulation. Perhaps the Democrats were complicit, for reasons completely unrelated to general economic philosophy, but they were in no way "responsible."

A bad bill can be repealed or amended. A bad appointment can be replaced. But a bad economic policy is the gift that keeps on giving.

And, what exactly are you implying by that list of Madoff political contributions, some kind of conspiracy? Anything to make a point. Your guys blew it-good riddance!

Anonymous said...

Perhaps you missed the statement by the Clinton/Gore administration that I posted above where they TAKE CREDIT for the bill.

As Steve so eloquently stated, If you take credit for it then you also leave yourself open for criticism. MY intnetion is not to "hang it on Clinton and the Democrats. I am simply pointing out the facts that the democrats were just as responsible when there are numerous posts alleging that republicans crafted the situation. they didn't do it alone. it my humble contribution to the socratic discourse to point out the previous adminstration being just as culpable.

(but if we were talking about media deregulation and "the big giveaway" that created huge ineffective companies like Time/Warner and Viacom, then I would hang it solely on Clinton and the democrats. Maybe another thread though...

Anonymous said...

"Socratic," what is that, sarcasm? It's a cheap way to win an argument.

Please pardon me if I challenge your "humble contribution." If by "just as" you mean equally, you are being overly generous to those responsible. Without the Republicans, there would have been no bill.

Believe it or not, I'm not trying to demonize the Republicans per se. Neither party has a monopoly on stupidity, greed or corruption.

The target, instead, is a certain kind of economic ideology which has never lived up to its promise and has outlived its usefulness. This ideology has been far more often promoted by Republicans. It's more faith-based than practical, usually benefiting the greedy, dishonest and opportunistic.

As opposed to what? Simple pragmatism. Economically, Clinton was a centrist and a pragmatist. What other Democrat would have kept Alan Greenspan?

As far as "blaming" Clinton for the current situation, the same article you cited clearly explained that leading economists profoundly disagree about whether or not this particular bill was the direct cause of the credit crisis.

We would all be well served to pay close attention to Greenspan's recent mea culpa; "... I learned that the system doesn't correct itself."

Anonymous said...

Let's pretend for a second that Daniel is as biased as he appears to be and he might be right that all of our current problems were started by Clinton and the Dems over 8 years ago (anyone want to bet money on who Dan'l voted for in the last 3 elections?)
...WHY hasn't the obviously smarter Repubs and Bush recognized what was wrong and corrected it during the last 8 years?

Because they didn't want to and they thought - even more than Clinton and his gang - that this was the best way to run the country and if given a chance would eregulate even more. McCain almost up to the very end thought deregulation was the right way to was only after everyone was laughing at him did he change his pitch.

Anonymous said...

"Let's pretend for a second that Daniel is as biased as he appears to be "

I obviously meant "isn't as biased"

Steve Hulett said...

We cxan spread cuplability for the Madoff disaster all around. I'd gve a dose to Clinton, Rubin and Chuck Schumer.

But let's lay a heaping pile of it where a heapiing pile belongs:

it's also becoming clear that the Madoff failures didn't arise out of nowhere. In recent years, particularly under Cox, a former California GOP congressman, the SEC has pursued a policy of de-emphasizing enforcement, part of the broader anti-regulatory philosophy of the Bush years -- helping to make Madoff, and perhaps others like him, possible.

"[Cox] in many ways worked to dismantle the SEC," Ed Nordlinger, a former longtime enforcement director in the commission's New York office, told TPMmuckraker. "He slowed everything down. I don't think he believed in heavy regulation."

That view has been echoed by several others in a position to know. Ross Albert told TPMmuckraker for a post published yesterday: "Under Cox, SEC had de-emphasized the enforcement program. Cox worshipped at the same altar of de-regulation that the rest of the Bush administration worshipped at."

And a former enforcement division supervisor told Portfolio for a lengthy October story about the SEC under Cox: "It was like someone poured molasses on the enforcement division."

--From Talking Points Memo:

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