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Posts Tagged ‘ponzi’

Just requoting Paul Kedrosky’s post today:

What people don’t get about sovereign debt is that countries are sharks when it comes to debt and default. That is the real lesson of research and writing and history in this area – that countries have been messing around, defaulting and restructuring in debt markets for hundreds and hundreds of years. Defaults, busted banks and the like is what happens when you lend to countries that have much more experience and cynicism about their use of debt than you think they do.

This blogger through firsthand experience in a commercial bank’s risk and asset division, is witness to the financial wizardry the modern financial system employs to build the mountain of debt on which our capitalist societies exist on. In the news we are also witness to the horrors that mismanagement of debt and currency can create.

Kedrosky is not a lone voice here. We’ve captured the sentiments of others
like Gerald Celente, Max Kaiser, and Peter Schiff all of whom have put up credible arguments about how tentative and fragile a system based on debt is.

Not all who understand the system are speaking up vehemently against it. Our favorite speculator George Soros certainly understands the goings-on but is content to “game” the system for profit (and successfully too).

What this blogger finds interesting is despite all these critiques, the system continues unabated–notwithstanding the ever increasing magnitude of crises that recur. The arguments put forth by the pundits are actually dated–these sentiments have been around for as long as a monetary system has been around. Our favorite skeptical empiricist, Nassim Taleb, blames moral hazards for perpetuating the flawed system, but even the question of moral hazards isn’t new.

After all isn’t rewarding someone for “bad” behaviour the crux and aspiration of prosperity and decadence? The whole system is rigged to feed on itself! So far the common alternatives to the flawed system, barring a return to primitive times, propounded by the pundits range from a form of “modified capitalism” (shades of the Austrian School) to more “radical socialism” (e.g. Zeitgeist, Venus Project).

Which is why it far from surprises this blogger that “experience and cynicism” are the placeholders that Kedrosky chose to describe what underpins the motive of governments regarding debt. There are those who complain and those who game, but the last bucket are those who still choose to participate in the system–maybe in a fit of realism, maybe fatalism.

Meanwhile someone please buzz this blogger when and if we decide to let go of this monetary system and its sydstem of debt.

“Sent from my BlackBerry® wireless handheld”

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I found a perfect encore to my recent reference to the scandalous ponzi scam of Bernard Madoff: Natalie Angier of the New York Times recently described evidence that deceitful behaviour is a product of evolution:

Deceitful behavior has a long and storied history in the evolution of social life, and the more sophisticated the animal, it seems, the more commonplace the con games, the more cunning their contours.

In a comparative survey of primate behavior, Richard Byrne and Nadia Corp of the University of St. Andrews in Scotland found a direct relationship between sneakiness and brain size. The larger the average volume of a primate species’ neocortex — the newest, “highest” region of the brain — the greater the chance that the monkey or ape would pull a stunt like this one described in The New Scientist: a young baboon being chased by an enraged mother intent on punishment suddenly stopped in midpursuit, stood up and began scanning the horizon intently, an act that conveniently distracted the entire baboon troop into preparing for nonexistent intruders.

Biologists distinguish between such cases of innate or automatic deception, however, and so-called tactical deception, the use of a normal behavior in a novel situation, with the express purpose of misleading an observer. Tactical deception requires considerable behavioral suppleness, which is why it’s most often observed in the brainiest animals.

See more of this fascinating take here.

So lying Madoff was no low-life scum–he was the worst and best example of human development.

For me this begs the larger question: if deceit is an ability gained through evolution, then honesty is a primitive attribute? If so does this place evolution on a moral compass? We are evolving to a propensity for less ethical or immoral behaviour?

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In just a week, Bernard Madoff has reinserted the term ponzi scheme back in the public vocabulary. As we discussed earlier, these schemes are a lopsided business model and have been victimizing investors and the public for decades. Various financial commentators such as Peter Schiff and Max Keiser are beginning to echo sentiments that the U.S. economy is, in hindsight, resembling a larger scale ponzi scheme itself.

Shifting our focus back on the man who brought back our attention to this economic phenomenon, one has to wonder at the motivations and circumstances that created the Madoff scandal. Ponzi schemes are nothing new but every new incarnation doesn’t cease to disturb me. This Madoff caper in particular has three things I find bothering.

The first thing that disturbed me about the Madoff case is the high-profile nature of the parties that were affected by it. Madoff’s client list reads like a who’s-who-of-the-elite in the U.S.

Fox News reported that wealthy socialites comprised Madoff’s list of ruined clients:

Many of his investors came from the enormously wealthy enclaves of Palm Beach, Florida and Long Island, New York, where people had invested billions in Madoff’s firm for decades. He was a fixture on the Palm Beach social scene, and was a member of some of its most exclusive clubs, including the Palm Beach Country Club and Boca Rio Golf Club, where he drummed up much of his business.

The Wall Street Journal describes Madoff as a household name among elite circles:

During golf-course and cocktail-party banter, Mr. Madoff’s name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff ” ‘the Jewish bond,’ ” says Ken Phillips, head of a Boulder, Colo., investment firm. “It paid 8% to 12%, every year, no matter what.”

Evidently, the ability to make money grow consistently is a somewhat of a nectar to the rich folk, and arguably was the key in creating the brownie points for Madoff’s pedigreed credibility. In an analysis that Andy Kessler of Forbes on the Madoff tale, he drew some similar points in qualifying Madoff’s motivations in this context: (more…)

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Bernard Madoff’s record-breaking fraud case made the headlines recently. Here’s the news item in the unlikely case you missed it:

NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion “Ponzi scheme” in what may rank among the biggest fraud cases ever.

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.

Madoff told senior employees of his firm on Wednesday that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme,” with estimated investor losses of about $50 billion, according to the U.S. Attorney’s criminal complaint against him.

See more here.

This is not the first time ponzi scams have hit the public eye nor will it be the last. This latest affair with Madoff, although the amounts are larger and the victims include high profile individuals and institutions, the logic (or shall we say, illogic) of investment scams remain the same. About a year ago I started an internet thread on investment scams, and in light of this recent news item, I’ll repost a short discussion on high-yield investment scams, pyramid ponzi scams, and multi-level marketing schemes: (more…)

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