As an indicator of just how greedy the rich are, Bernard Madoff’s Ponzi scheme seems to be the high water mark. If you’re not familiar with the story, here’s the short form. Bernard Madoff, a Wall Streeter, was the creator of a investment company that promised big (as in double-digit) returns for investors. The whole thing was a scam. As new investors were brought in, that money was used to pay off the earlier investors whose investments were coming due.
Madoff’s Ponzi, now called the largest fraud in US history, is rippling through Wall Streeters, banks, investment houses and international financial services like a greed wave of global proportion. $50 Billion is the number being bruited about. Or, more than double what the Auto Industry wants as a bridge loan.
Unfortunately, it isn’t just greed heads who are getting burned. Some charities, having listened to their financial advisors who were buddies of Bernie Madoff, have also been scorched: The Jewish Community Foundation of Los Angeles, the Korean Teachers Pension Fund, the New York Yeshiva University, and even the town of Fairfield, Connecticut. have taken a beating along with banks and insurance companies worldwide.
Which is indicative of what happens when people ignore some essential economic truths. If the rest of the market is offering payback in the realm of 4%, then someone offering an 11% payback either knows something the other 6.5 billion people on the planet don’t know, or they’re getting these paydays by selling heroin to kindergarten children with your investment.
As the first probability (knowing something absolutely no one else knows) is very unlikely, the second probability comes to the fore. Not to say that Madoff was selling smack to kids; he wasn’t. He was merely taking money from newer investors and shovelling it at the earlier investors.
It is unfortunate that humans are so gullible, but we are. Magicians know that we can be fooled. Vegas is proof that humans can rationalize all sorts of madness in the name of "beating" the house. The same holds true with various governmental and charitable lotteries. The sports pages of your local fishwrap/newspaper contain hundreds of ads for ways to ‘beat’ the system along with odds and spreads as part of the editorial content. Not that anyone would actually wager on the outcome of a sporting event, would they?
There are other ways we express our gullibility, especially online. The Nigerian 419 Scam has a very long history going back to the Spanish Prisoner scam of the 1900’s. The setup is more or less the same: Person of Importance being held in jail, with access to a whack of money. If only you, as the mark, send a few thousand dollars for bribes, the prisoner will richly reward you when he/she gets out, the will is probated and the box is unlocked. Of course, everything must be kept, shall we say, hush-hush.
There are stories that during the Inquisition, the Spanish Prisoner scam was first run, using personal couriers to deliver the scam to nobility in far off lands. Just leave the money with my trusted personal manservant, the guy who brought you the sealed letter and he will make sure the money is distributed according to our wishes.
Which speaks to what might be a truth of the Human: We want a free payday, we want the payday to be mammoth and we don’t want to share it. It has to be just for us, as we’re special and unique and only we can truly see the wisdom and greatness of this plan. Madoff either knew this truth, or suspected it and stole $50 Billion.
Note to Planet: If it looks too good to be true, it is too good to be true.
There are no bank inspectors, deposed dictators, magic pills that give your car 100 miles per gallon, or special dispensations on the laws of physics that allow you to break free from the Man. Sorry.
RoadDave 