December 13, 2008

Sometimes, there are good reasons for a liquidity crisis ...

The revelation of the non-existence of $50 billion in funds supposedly managed by Bernie Madoff is a reminder of why there is a liquidity crisis, in which financial institutions are terrified to lend money because who knows which respected Wall St. entity will next turn out to be based on nothing?

Here's an interesting question: How many other Ponzi schemes and similar frauds of which we are as of yet unaware have managed to survive so far due to the trillions of bailout dollars handed out?

Can you see how this question undermines the effect of Helicopter Ben Bernake's strategy of dumping cash out of a helicopter -- why the effect of stimulus has widely been described as pushing on a noodle? With Madoff, the bailouts may have delayed the final reckoning by a couple of months. For less colossal scams, it may delay them for even longer. But there will be a reckoning, so who (besides the government) wants to pour good money after bad?

My published articles are archived at iSteve.com -- Steve Sailer

16 comments:

AllanF said...

Very true regarding the credit crisis, and also explains T-bills are currently yielding 0.0%. All the banks that were given TARP money appear to be buying T-bills instead of re-lending it. If you can't trust an old-timer and generous, charitable guy like Madoff, who can you trust?

AllanF said...

Any in case anyone missed my comment on Madoff from the other, "smart money" knew he was stealing, they just thought it was from someone else:

The interesting angle with Madoff is that "smart money" knew he was stealing, his returns were too steady for otherwise, but they figured he was stealing from other people for his investors. His other business was being a market maker, so it seemed reasonable he was front-running and insider trading. ("Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here's the best part: That's why they invested with him." from http://finance.yahoo.com/tech-ticker/article/145115/I-Knew-Bernie-Madoff-Was-Cheating--That%27s-Why-I-Invested-with-Him?tickers=%5Edji,&gspc,%5Eixic )

Lots of lessons to be (re)learned in that regard. Foremost, never trust a thief or a traitor. If he will double-cross another master, he can double-cross you.

Anonymous said...

I've heard the saying before that a market downturn will detect cases of fraud that auditors never even suspect.

A fun aspect of this is that the MBS/CDO/housing bubble collapse was built largely on the same thing. Didn't everyone playing in that market know, ultimately, that stated-income loans were an invitation to fraud, or that a lot of loans were being made to people who probably weren't going to pay them off? But the returns were good, so plenty of people somehow silenced that little voice in their heads that told them they were doing something stupid. And the ones willing to silence that voice did very well for many years, before often wiping their entire companies out.

David said...

Allan F is right.

The credit crisis is a general moral failure, not a technical glitch in the financial system. The remedy is not tweaks and more trillions pumped in. Bernie the financial star was a crook catering to would-be crooks. The fault is not in our stars, but in ourselves.

Or, turning from Shakespeare to W.C. Fields: "You can't cheat an honest man."

Jubilee Year Now said...

Indeed, the banks are the source of the economic problems. The banks are economic parasites in the best of times, now, they are actually causing the destruction. The whole country is drowning in debt, and our economy is imploding because of the failure of banks to do their jobs. For one, we need to cancel our debts, to reset the financial system. Then, we need to run banks like utilities, for the sake of the public good.

J said...

Madoff was so highly positioned and so well connected that his fund should have been in the priority list of funds in trouble to be ¨rescued¨ by Paulson. Maybe there is so much to rescue that even 700 billion are not enough for everybody?

skokie said...

No way in hell Madoff did this caper by himself. This is a family operation, at the very least.

It's probably an extended family operation.

Madoff's surrender to the police via a supposed confession to his two sons reeks of stagecraft.

Now the public is supposed to come to a logical conclusion like a Pavlov dog:

A. The two sons are on the straight and narrow.

B. The rest of the family are straight shooters.

C. It was a lone wacko operation.

D. Leave the family in peace to heal their private wounds.....and continue doing business in the future.

Yup.

Anonymous said...

Yeah, but Steve didn't mention his theft involved ethnocentrism on a grand scale. Who do you think was involved with him?

But it's not just his tribe.

Other groups like the Mormons - tight knit who shun outsiders - have also had their fair share of finance related shenanigans. Just not on this scale.

There's another saying on Wall Street: Don't catch a falling knife.

Sounds silly.

But it really means: don't buy too soon.

So, everyone will wait, and wait for some time, for other financial land mines to blow up.

beowulf said...

Whats astonishing is how lenient the bailout terms have been. If an insolvent company files Chapter 11, all assets are placed in the custody of the bankruptcy court, the existing shareholders are wiped out, creditors take a haircut (or are themselves wiped out) and employee compensation plans can be voided (and the court can clawback any payout within the prior two years). Good thing Secretary Paulson is such a soft touch, I guess.

I wonder how many Ponzi schemes haven't yet been discovered only because their latest mark is the US taxpayer?

Anonymous said...

There's a sleeping giant still waiting it's turn in the derivative swap market, and that involves bad credit card debt.

It's a complete fricking mess.

Everybody who matters knows this, and those who can are day-trading, rather than "investing."

Everyone should do one of those free credit checks, and start taking care of any negative variables that may have inadvertantly damaged their credit score, since once this gets the squawker's on cnbc pitching fits, congress will respond, then banks will start cancelling credit cards for everybody who doesn't have excellent credit.

Make sure you aren't one of them. Start right away, because fixing a mixed up credit report takes time, and when banks start behaving irrationally, everyone is going to converge on their credit score reports, and notice all their problems on their reports at once. They'll all be trying to get it fixed at once, thereby overloading the good folks everywhere who CAN help get it fixed.

Do it now, before next years rush. Then if you lose your job, or some other unfortunate circumstance, you have more options than if you lose it with no credit cards at all.

Next year will be a hellride. Get your ducks in a row now, before the massive, desperate rush.

Fix your credit now.

Anonymous said...

I have to agree with Skokie. The claim that he confessed to his two sons sounds like a cover story. But I’d guess if it is a cover story that they will get away with it. After all, lots of people in the known thought Madoff was running some kind of scam, either as an insider trader or something. They just didn’t think he was running a simple Ponzi scheme.

Anonymous said...

The ultimate Ponzi-scheme is the continued acceptance of massive, unskilled immigration into the west and in particular Mexicans to the USA).
The usual justification given by the WSJ, The Economist and others (who unfortunately have -or had- the ear of government and all the real power), was that the tax revenues garnered from the immigrants would pay the social security of native retirees who did not produce sufficient progeny to pay into the system.
That this assumption is erroneous - ie Mexicans take out throughout life more tax than they put in - and has been proven so by many exhaustive learned studies, failed to register with the elites and their in-house journals.it'still the 'conventional wisdom'.

Mr. Anon said...

"Anonymous said...

The claim that he confessed to his two sons sounds like a cover story. But I’d guess if it is a cover story that they will get away with it."

I agree. As Lawrence Auster noted, how could the firm's employees (including Madoff's sons) not have known it was a Ponzi scheme. They spent all day managing investments that did not actually exist. Surely, they would have noticed.

headache said...

True points. If there are enough Maddoff's, basically all that Bernakne money just gets sucked up with zero effect for the common good. Maybe Ben knows a thing or two which we are unaware of. So maybe he's helping out his financial friends here and was not really thinking of us when he announced all that bailout money. The average goy is stupid enough to think it’s for the good of the country and all that.

DissidentMan said...

skokie,
it is possible that it was a lone whacko operation. There is a precedent for that. Nick Leeson managed to bring down an investment bank singlehandedly. I'm just saying that it's too early to conclude one thing or another about who knew what. I don't think that Madoff intended to wipe anyone out (especially the Jewish charities that invested with him). He probably hoped to gamble his way back into good fortune (making riskier and riskier investments), which is the typical pattern of behaviour of failed stock market players.

However the Jewish aspects of this are troubling, contrary to what others say. He was giving investor money away to Jewish charities and the Democratic party (which is heavily favoured by Jews). Imagine the media furore that would have errupted if Nick Leeson had been forking megabucks over to Jared Taylor. There is a flagrant double standard here that can't really be swept under the carpet.

AllanF said...

I've heard the saying before that a market downturn will detect cases of fraud that auditors never even suspect.

On the contrary, I suspect many a fraudster will use the downturn as his cover story for where all the money went: "Ooops, I had it all in Citigroup and GM, who couldda' known?"