In mathematics QED Quod Est Demonstrandum is used at the end of a proof. It means that which was required to be proved has now been provided for all to see. I have been arguing for the last two years that the US Financial System has gone off the rails because of unmitigated greed (I have timidly called it Greedy Guts). Well former NASDAQ President Bernard Madoff has provided the $50Billion dollar Ponzi proof for my arguments. Read the Streets own reaction:
Business Week – How to Make a Madoff? Spectacular investing frauds like the one allegedly created by the New York financier typically happen during investing bubbles—and only get exposed once they pop….Bubbles provide the cover the crooked need to perpetrate their scams. When the market’s heading up, any investment seems possible. Go back to 1720 and England’s South Sea Bubble. Shares became so frothy, investors snatched up stock in a company whose business was so secret it could not be revealed in a prospectus. Banking stocks were the investment of choice in 1792, when William Duer, a respected investor close to Secretary of the Treasury Alexander Hamilton, rapidly drove up shares of the Bank of New York, only to be unable to meet his obligations. “The greediness of a bubble is a breeding ground for bad actors.”
Forbes – The SEC’s fiscal year 2008 authorized spending budget: $906 million. The estimated financial toll from the alleged Madoff swindle: $50 billion.The price of regulatory reform? At this point, probably worth the money….The SEC had been tipped as early as 1999 that Madoff, a former Nasdaq chairman and fixture on Wall Street for decades, was running his private investment vehicles as a Ponzi scheme. The SEC sent examiners to the firm twice, including an enforcement team last year, but came up with nothing.
MarketWatch – This isn’t some Internet bubble or housing bubble, blowing up in everybody’s face at the same time as a collective grasp for easy money turns against the crowd. This is one man, allegedly conning friends, family, religious contacts and charities, one by one, over decades…The basic concept of faith in the U.S. financial system, eroded by the spread of the credit crisis, has been brought to its knees by Madoff. Turns out that pretty much anybody could be a crook.
NYTimes – 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. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.
The Economist – One is tempted to ask how anyone could be suckered by so clearly suspicious an operation, until one recalls that until recently, the whole of the global economy was resting on securities built on loans that exploded unless prices rose by a distinctly ahistorical amount each year.
WSJ – Mr. Madoff’s investors will in retrospect kick themselves for not asking more questions, especially about the remarkable consistency of his returns over the years, his apparently fly-by-night auditing shop, and his small trading book despite having so much money under management. But the broker’s long record of showing gains and years of rising stock prices no doubt provided reassurance. The 70-year-old Mr. Madoff wasn’t some dot-com upstart but a pillar of the community and philanthropist. The best con men are always those you least suspect. The real lesson here is about men, not markets. Human nature doesn’t change, and crooks will always be with us. For investors the lessons are the eternal ones of diversification and diligence. Don’t trust your life savings with any single money manager or investment. Don’t assume that passing some new federal law will banish financial fraud, any more than “campaign finance reform” will stop the likes of Rod Blagojevich from trading political favors for money. As Shakespeare understood, the fault is not in our stars, but in ourselves.
I think Paul Krugmans assessment at the NYTimes comes closest to my own. And why am I not amazed that the WSJ and Forbes are bitterly complaining that the taxpayers did not get their money’s worth from the SEC? Hmmm … and then both ask for due personal diligence as the main and only barrier to being defrauded again by the Masters of the Universe. The latter , of course, always can count on cashing in on the Go Scott-Free for any White Collar Crime – because really, the SEC and any other regulators will be incompetent as Forbes and the WSJ will dutifully point out time and again.
But the real losers here are the US and its Financial community. Like the Republican intellectual elites being silent before a totally incompetent Bush Administration, the US Financial intelligentsia let it all happen – bowing before the Bubble-powered Masters of the Universe. So now when the US has all but given up its manufacturing base and engineering prowess; when the World needs massive investment and innovation to stave off several environmental and energy catastrophes; and when the US has put all its money on a near-vanished educational competitive advantage – the US has also gone out and frittered away its Brand of being the Financial Leaders in the World. Curiously, Forbes and the WSJ, who take great pride in covering the Financial Industy so closely – are too closely entwined to see this larger issue.