Tuesday, December 23, 2008

It Never Ends ...

Today, I received an e-mail from the ACLU. Many charities ask for money at the end of the year, and pretty much any time of year. What makes this one particularly troubling is the reason they say they're coming up short:

In the last couple of weeks, however, we've been hit hard in a way that no one could forecast. You have, no doubt, heard about the Bernard Madoff Ponzi scheme in which investors have been horribly defrauded of up to $50 billion. What you may not know is that two foundations that have been incredibly generous and longstanding supporters of our national security and reproductive freedom work have been victimized by the Madoff scandal -- forced to close their doors and terminate their grants.

That means that $850,000 in support we were counting on from these foundations in 2009 simply won't exist. We're dealing with that reality and remain committed to continuing our critical work in these areas. But, as you can imagine, the year-end donations of you and other ACLU supporters are now more important than ever.

Please help the ACLU meet critical civil liberties needs in early 2009. Please make a year-end donation now.

I was not familiar with this particular fraud. I was aware that this is one of the many ways that the Bush Administration have been falling down on the job. Enron continued under their watch, and the banking crisis started on theirs. Both of these frauds, and others, were due to the deregulation and neglect of the agencies charged with enforcing regulation that the Republicans have been responsible for. Screwing the ACLU and other progressive nonprofits must be a real plus from their perspective.

A New York Times article on the Madoff scam explains:

Then, [Madoff] and his promoters set sights on Europe, again framing the investments as memberships in a select club. A Swiss hedge fund manager, Michel Dominic√©, still remembers the pitch he got a few years ago from a salesman in Geneva. “He told me the fund was closed, that it was something I couldn’t buy,” Mr. Dominic√© said. “But he told me he might have a way to get me in. It was weird.”

Mr. Madoff’s agents next cut a cash-gathering swath through the Persian Gulf, then Southeast Asia. Finally, they were hurtling with undignified speed toward China, with invitations to invest that were more desperate, less exclusive. One Beijing businessman who was approached said it seemed the Madoff funds were being pitched “to anyone who would listen.”

The juggernaut began to sputter this fall as investors, rattled by the financial crisis and reaching for cash, started taking money out faster than Mr. Madoff could bring fresh cash in the door. He was arrested on Dec. 11 at his Manhattan apartment and charged with securities fraud, turned in the night before by his sons after he told them his entire business was “a giant Ponzi scheme.”
Mr. Madoff’s game was ... [t]he first worldwide Ponzi scheme — a fraud that lasted longer, reached wider and cut deeper than any similar scheme in history, entirely eclipsing the puny regional ambitions of Charles Ponzi, the Boston swindler who gave his name to the scheme nearly a century ago.

“Absolutely — there has been nothing like this, nothing that we could call truly global,” said Mitchell Zuckoff, the author of “Ponzi’s Scheme: The True Story of a Financial Legend” and a professor at Boston University. These classic schemes typically prey on local trust, he added. “So this says what we increasingly know to be true about the world: The barriers have come down; money knows no borders, no limits.”

Madoff Scheme Kept Rippling Outward, Across Borders

The magnitude of this scam is breathtaking. In an editorial, the Hartford Courant writes of this scheme:

Losses from financier Bernard L. Madoff's alleged Ponzi scheme could total $50 billion, a number that could set a new record for fraud on Wall Street, and maybe in the world. At least as astonishing is the extent to which Mr. Madoff was able to exploit trust as an essential currency.
Mr. Madoff's client list included film director Steven Spielberg's charity; trusts tied to real estate magnate and New York Daily News owner Mortimer Zuckerman and DreamWorks partner Jeffrey Katzenberg; the foundation of Nobel laureate Elie Wiesel; pension funds; and several European banks.

Mr. Madoff's Ponzi Scheme

What's a Ponzi scheme? Elizabeth Eng at Associated Content explains in context:

A Ponzi scheme, defined as a "fraudulent investment scheme that involves promising high returns to early investors out of the money paid in by later investors" (says Ignatius Reilly at Right Pundits), was named for Charles Ponzi, the infamous 1920s swindler. A modern day Ponzi scheme was apparently perpetrated by investor Bernard Madoff -- by his own admission -- as the head of a hedge fund off Wall Street was arrested today for allegations of the financial fraud.
To elaborate a bit more on the workings of a Ponzi scheme, it entails seeking a continuous flow of investors. The business makes money when you get more investors to sink their money into the Ponzi scheme, under the false pretense that they are investing in a business that will be generating profit, continuing to produce money for them in the long term.

Bernard Madoff: 'Ponzi Scheme' Defined

If this sounds a lot like how Amway works, you're close. Amway is typically described as a pyramid scheme, since the early investors need more investors to follow them in order to profit.

Where was the Securities and Exchange Commission while this was going on? Fast asleep in its office, it would seem:

The Securities and Exchange Commission, however, dropped the ball. On Tuesday, Chairman Christopher Cox acknowledged that the SEC had credible, specific allegations about the scheme nine years ago, but "relied on information voluntarily produced by Mr. Madoff and his firm" rather than its subpoena powers.

Mr. Madoff's Ponzi Scheme

They waited nine years for the bottom to fall out.

It never ends, does it? In a way, it feels like the whole economy is one big Ponzi scheme right now - keep shoveling enough money into it and hope that it doesn't leak more through corruption and stupidity. How many more years will we have to pay for what these greedy little bastards and the corrupt politicians they sent to DC have done? The rest of our lives, probably.

Meanwhile, there are a whole bunch of charities and others who are going to be strapped for cash in the short term. So, since it's the holiday season, why not give a little to try to restore our freedoms. I hope my relatives will appreciate my giving on their behalf in lieu of presents they probably wouldn't have liked, anyway.


Dana Hunter said...

When the fat cats play, the mice get eviscerated. Rotten bloody crooks. And yes, I'm including our deregulation-happy government in that crowd.

The free market fundies can bite my butt. These buggers need watching - just like children who will push the limits unto destruction if a responsible adult isn't keeping an eye on them.

Cujo359 said...

Anyone who thinks that markets stay free naturally hasn't been paying attention. Most tend to have economies of scale, which seems to inevitably lead to markets concentrated into the hands of the greediest bastards in it. At least, it does if history is any guide. I'm sure that's not explained by libertarian economic theory, but it's an established trend nevertheless.

IBOFB said...

Without wanting to take away from the thrust of your post, I'd like to correct a misconception about Amway that you're unfortunately propogating. You say-

If this sounds a lot like how Amway works, you're close. Amway is typically described as a pyramid scheme, since the early investors need more investors to follow them in order to profit.

When the FTC investigated Amway in the 1970s, Amway was found NOT to be a pyramid scheme. One of the reasons why is that anyone who joins Amway, whether an "early investor" or not, does NOT "need more investor to follow them in order to profit".

It's perfectly possible to profit without recruiting anyone at all, and many folk do.

You are correct that it's often described as a pyramid scheme, but that's because many folk have the same misconception you do. It isn't helped by the fact that many real pyramid scams try to give themselves an air of legitimacy by falsely claiming "they're just like Amway".

The Truth About Amway

Cujo359 said...

Yes, it's technically possible to make a profit at Amway without having your own distributors. I'm sure that's how Amway's escaped prosecution. Nevertheless, the only way to make any serious money at Amway is to have distributors. This makes it, for all intents and purposes, a pyramid scheme.