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Tuesday, June 30, 2009

Bernard Madoff Sentencing Fnord

I was watching the comedians on the Communism Channel, and they said "Hooray! Bernard Madoff was sentenced to 150 years in jail!"

The fnord is "Bernard Madoff did something wrong and was punished. Therefore, everyone who does something wrong gets caught and punished. Therefore, there are no structural flaws in the economic system."

The mainstream media also focuses on punishment-based justice instead of compensation-based justice. "Bernard Madoff spends the rest of his life in jail!" is completely separate from "Restitution must be paid to the victims!" In the criminal trial, it's "State vs. Madoff" and not "victims vs. Madoff".

Who should be responsible for reimbursing the victims?

  1. the accountants who worked for Bernard Madoff (Some of them did get arrested and charged with fraud.)
  2. all the people who worked for Bernard Madoff
  3. all the brokers and hedge fund managers who invested in Madoff's fund, or advised people to invest in Madoff's fund
  4. all the people working at the SEC, who are responsible for overseeing security industry fraud
  5. Madoff's relatives; Madoff gave them property over the course of his life, and allegedly he sent them a bunch of property just before he turned himself in (That's a tough calculation. If you're one of Bernard Madoff's children, then how much of your personal property was directly received from your father?)
If all of the above people had their personal assets confiscated, and were required to work the rest of their lives to repay the loss, then the victims would receive much greater compensation. In the present, there is no incentive for a financial advisor to notice a fraud, collecting huge commissions in the meantime.

People can claim "I was just working for Bernard Madoff! I was tricked also! I shouldn't be responsible!" That is false. Whether a broker knew (or should have suspected) that Madoff's fund was a fraud, or if he was just plain stupid, he should be responsible either way. If "I was stupid!" is a valid defense, then what incentive is there for anyone to behave intelligently?

There are simple precautions that would have uncovered the fraud. A statistical analysis of returns would have shown very high returns with very low volatility, which is a fraud tip-off. An SEC investigor could have requesting trading records, and would have noticed the fraud.

The SEC and Federal government have a monopoly for enforcing the security industry. Whenever the State fails, via "Problem! Reaction! Solution!", the end result usually is that State bureaucrats are given more power and more resources. Via SIPC insurance, some victims are being partially repaid. However, the SIPC money comes from other tax revenue collected. Due to this huge payout, SIPC insurance fees were raised. Anyone with a brokerage account or mutual fund or 401(k) pays higher commissions and fees to pay for the reimbursement to Madoff's victims.

There is no requirement that the SEC investigators personally reimburse the victims. They get to keep their cushy jobs and high salaries, even though they failed miserably. They can say "I was tricked!" as a valid defense.

Based on what I read, Bernard Madoff had the parasitic personality type, and was very skilled. I can't prove it, since I'm not a parasite, but skilled parasites usually are consciously aware of what they're doing. Very skilled parasites are usually aware of their manipulations. It's too well coordinated for it to be an accident. Most likely, Bernard Madoff isn't sorry that he did something wrong; he's only sorry that he got caught.

Bernard Madoff was a skilled parasite. If an SEC investigator started asking tough questions, then Madoff could have used his evil jedi mind tricks and said "There's nothing to see here!", and it would have worked. If necessary, Madoff could have used his political connections at the SEC to get an honest investigator fired. The SEC investigators were consciously or subconsciously aware of this, and refrained from asking tough questions.

Whenever an investor started asking Madoff tough questions, he merely gave them their money and forced them out of the fund. A skilled parasite refuses to deal with people who can see through his manipulations. Many people thought that they were lucky to be allowed to invest with a genius like Madoff, and eagerly handed over their money. If you have the abused productive personality type, it's easy to be manipulated by someone like Madoff. If you have the parasitic personality type, you'll just read Madoff's emotional state, which said "I am super-awesome!"

Politicians and banksters and CEOs and hedge fund managers are criminals as much as Bernard Madoff. They just aren't as flagrant as Bernard Madoff. The key point is the Principal-Agent problem or the "other people's money" problem. Whenever you control resources that you don't own, the incentive is to line your pockets at the expense of the people who are trusting you with their property. Bernard Madoff went too far and crossed the line. Most members of the parasite class only loot a couple of percent a year. Bernard Madoff had a 100% looting rate. When a CEO grants himself and his friends equity in the corporation, diluting shareholders, he's stealing as much as Bernard Madoff; the only difference is the rate of the theft.

In a true free market, it'd be unlikely for someone to build up a huge $50B+ investment fund. There would be no barriers to entry, and there would be many small funds. If someone was running a dishonest fund, then the incentive would be for their competition to say "That guy is running a fraudulent business!" A private police agency would probably pay a fee to someone who uncovered a fraud, for helping to protect their customers' property. In the present, libel laws prevented anyone who suspected Madoff from publicly criticizing him. If I wrote a "Madoff is running a dishonest fund!" post before his fraud was uncovered, then I probably would have been sued for libel. Also in a true free market, all of Madoff's accountants and employees and brokers would be personally liable. There would be no incentive for them to look the other way and ignore the fraud. If Madoff's books were backed by the reputation of an accounting association, then *EVERY* member of the accounting association would be personally liable. A private police agency would probably also sell insurance in the event of investment fraud; they would have an incentive to notice problems.

In the present, it's impossible to buy insurance against the possibility that you will be ****ed over by your investments. I bought shares of Citigroup and Bank of America, and suffered a huge loss. I'm the victim of fraud as much as Bernard Madoff's victims. Now I know better. In the future, I'm planning to invest more of my savings in physical gold and silver. For *ANY* State-licensed paper investment, you will lose your savings to theft/fees/fraud/waste/inflation.

Whenever an insider is caught doing something wrong, there's an evil fnord. "This person did something wrong and got caught. There are no structural flaws in the economic system that need to be addressed!" A common evil fnord is "Blame the evildoer, and not the corrupt system that enabled him." Whenever there's a big disaster, blame is deflected from the corrupt system and focused on the individual who was exploiting a corrupt system for his personal benefit.


Barry Broome said...

If "I was stupid!" is a valid defense, then what incentive is there for anyone to behave intelligently?

Hey FSK... and Amen to that. I think Bernie's grandfather pulled the same shit back in his day. I read or heard that on NPR or something. Anyway I'm still following your blog and hope you are doing well my friend....


Anonymous said...

Although a Agree with your previous postings that the bulk of the blame lies with the investors themselves for not diversifying there assets, as well as not questioning there ultra high returns, I can't agree with #2.

2. all the people who worked for Bernard Madoff

It's been well documented that the employees that Madoff had working for him had little experience or knowledge in the investment world. The bulk of them with the exception of a few accountants didn't have a clue what Madoff was doing. The clerks, IT staff and other supporting workers can't be blamed any more, then the decisions CEO's made at Worldcomm or Enron.

K_Yew said...

FSK, you might like this post:

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