Bernie Madoff

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Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

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The Sins of the Father 15. The Wheels of Justice 16. Hope, Lost and Found Epilogue Notes Acknowledgements Index CAST OF CHARACTERS THE MADOFF FAMILY Bernie Madoff, founder of Bernard L. Madoff Investment Securities Ruth Madoff (née Alpern), his wife Mark Madoff, their elder son, born 1964 Andrew Madoff, their younger son, born 1966 Peter Madoff, Bernie Madoff’s younger brother Shana Madoff, his daughter Roger Madoff, his son Ralph Madoff, Bernie Madoff’s father Sylvia Madoff (née Muntner), Bernie Madoff’s mother AT BERNARD L. MADOFF INVESTMENT SECURITIES Eleanor Squillari, Bernie Madoff’s secretary Irwin Lipkin, Madoff’s first employee Daniel Bonventre, the director of operations Frank DiPascali, the manager on the seventeenth floor Jerome O’Hara, a computer programmer George Perez, his coworker and officemate David Kugel, an arbitrage trader THE ACCOUNTANTS Saul Alpern, Ruth Madoff’s father Frank Avellino, Alpern’s colleague and successor Michael Bienes, Avellino’s longtime partner Jerome Horowitz, an early Alpern partner and Madoff’s accountant David Friehling, Horowitz’s son-in-law and successor Paul Konigsberg, a Manhattan accountant Richard Glantz, a lawyer and the son of an early Alpern associate INDIVIDUAL INVESTORS AND “INTRODUCERS” Martin J.

District Court, Southern District of New York. Each was sentenced to twenty years in prison. The case is number 1:05-cr-01036-CM-1. 148 One of his last calls from his deathbed: Confidential interview with a longtime friend of the Levy family. 148 “Bernie Madoff, trust Bernie Madoff”: Fox Business News interview with Francis Levy, “Bulls and Bears,” January 2009, from a transcript of Money for Breakfast, Jan. 9, 2009, posted on CEOWire and retrieved from BNET. 148 He had named Madoff as the executor: SIPC v. Bernard L. Madoff Investment Securities, Debtor; In re: Bernard L. Madoff, Debtor (hereafter Main Madoff Liquidation), case number 08-01789-BRL in U.S. Bankruptcy Court, Southern District of New York, “Motion for Entry of Order Pursuant to Section 105(a) of the Bankruptcy Code and Rules 2002 and 9019 of the Federal Rules of Bankruptcy Procedure Approving an Agreement by and Among the Trustee and Jeanne Levy-Church and Francis N.

He saw a different life for himself: a life married to Ruth and a career working for himself on Wall Street. On November 25, 1959, with him still shy of his university diploma and her enrolled in nearby Queens College, Bernie Madoff and Ruth Alpern were married at the Laurelton Jewish Center. She was eighteen years old. A few days later, according to family lore, he filed the papers to open his own brokerage business, although the official birth date for Bernard L. Madoff Investment Securities in regulatory ledgers is January 19, 1960. He was in his final year of university, just shy of twenty-two. He would later enrol in law school but would drop out after a single year, having spent almost every afternoon trying to drum up business for his newborn brokerage house. By Bernie Madoff’s own account, it was not until late in his university years that he seriously considered a life on Wall Street. But he certainly learned about Wall Street life in these early years—one of his close friends, Michael Lieberbaum, was the son of an early stock market success story.


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No One Would Listen: A True Financial Thriller by Harry Markopolos

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Far better that the SEC is proactive in shutting down a Ponzi Scheme of this size rather than reactive. Who: The politically powerful Madoff family owns and operates a New York City based broker-dealer, ECN, and what is effectively the world’s largest hedge fund. Bernard “Bernie” Madoff, the family patriarch started the firm. According to the www.madoff.com website, “Bernard L. Madoff was one of the five broker-dealers most closely involved in developing the NASDAQ Stock Market. He has been chairman of the board of directors of the NASDAQ Stock Market as well as a member of the board of governors of the NASD and a member of numerous NASD committees. Bernard Madoff was also a founding member of the International Securities Clearing Corporation in London. His brother, Peter B. Madoff has served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region.

If those people he interviewed responded that they were not aware of the strategy used by Madoff, after explaining the strategy he should ask questions such as: Could $20 billion plus be run by a single hedge fund manager using the strategy I just described without you having heard about it? Could this split-strike option conversion strategy be capable of earning average annual gross returns of 16 percent with only seven monthly losses during the past 14 years? But if this person had heard of Bernie Madoff, among the questions I suggested were: Do you know who Bernie Madoff trades his over-the-counter OEX index options through? Have you ever seen the footprints of Bernie Madoff’s trades in the markets that you trade? How realistic do you consider Bernie Madoff’s performance numbers to be? Have you heard any stories about Bernie Madoff going to cash ahead of major market sell-offs? If so, how do you think he manages to sell ahead of the market? In the world of numbers, it should take only a few pointed questions to figure out what’s real. If Wilke had asked these questions to several people on the list, any doubts he had about our Madoff claims would have been settled right there.

Investment: A History by Norton Reamer, Jesse Downing

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Fraud, Market Manipulation, and Insider Trading 3. Andrew Clark, “Bernard Madoff’s Sons Say: We’re Victims Too,” The Guardian, March 17, 2010, http://www.theguardian.com /business/2010/mar/17/bernard-madoff-usa; Christopher Matthews, “Five Former Employees of Bernie Madoff Found Guilty of Fraud,” Wall Street Journal, March 25, 2014, http://online.wsj.com/news/articles /SB10001424052702304679404579459551977535482. 4. Alison Gendar, “Bernie Madoff Baffled by SEC Blunders: Compares Agency’s Bumbling Actions to Lt. Colombo,” Daily News (New York), October 30, 2009, http://www.nydailynews.com/news/crime/bernie -madoff-baffled-sec-blunders-compares-agency-bumbling-actions-lt -colombo-article-1.382446. 5. Hurtado, “Andrew, Ruth Madoff Say Were Unaware.” 6. Bernard Madoff, “Text of Bernard Madoff’s Court Statement,” National Public Radio, March 12, 2009, http://www.npr.org/templates/story /story.php?

We must keep in mind that these agents of malice are certainly not good for the ethical managers who have their profession tarnished as a result of the immoral behavior. We examine the nefarious as such, fully cognizant that they are not representative of the industry at large but must nonetheless be understood, given how much devastation and disruption they produce. FRAUD Bernie Madoff We begin with fraud, or deliberate and premeditated deception undertaken for gain. Our first story starts in December 2008. It was the time of reckoning that Bernie Madoff, the man who has since become the modern embodiment of financial duplicity, hoped would never come. And yet, by July 2009 he would trade a life replete with Davidoff cigars, Patek Philippe watches, and fashionable digs in the Upper East Side for a prison cell in Butner, North Carolina.1 It was in this Upper East Side penthouse apartment that the conversation catalyzing his end took place the day before his arrest.

Someone somewhere must have an eye on the books, and if it is not a government agency, then there must be robust protocols for proper audits and very stiff penalties for noncompliance. Curiously, many people did notice, and one man in particular was persistent in trying to get the Madoff operation shut down: Harry Markopolos. In fact, it was precisely in trying to emulate what Madoff was doing that Markopolos made his discovery. Markopolos came upon Bernie Madoff as part of an assignment from his employer, Rampart Investment Management, to deconstruct Madoff’s returns.14 The very essence of Bernie Madoff’s fraud was that he contended he used a “split-strike conversion” strategy when in fact he was simply running a Ponzi scheme. Split-strike conversion is a trade where one buys an index (or some subset of it), sells call options, and buys put options. Put options increase in value when the index declines in price, so that serves to protect the portfolio against falling asset values.


pages: 428 words: 121,717

Warnings by Richard A. Clarke

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David Nakamura and Chico Harlan, “Japanese Nuclear Plant’s Evaluators Cast Aside Threat of Tsunami,” Washington Post, Mar. 23, 2011, www.washingtonpost.com/world/japanese-nuclear-plants-evaluators-cast-aside-threat-of-tsunami/2011/03/22/AB7Rf2KB_story.html (accessed Oct. 4, 2016). CHAPTER 6: THE ACCOUNTANT: MADOFF’S PONZI SCHEME 1. Enormous amounts have been written about the Madoff case, but we benefited particularly from Harry Markopolos’s own book, No One Would Listen: A True Financial Thriller (Hoboken, NJ: Wiley, 2010); Erin Arvedlund, Too Good To Be True: The Rise and Fall of Bernie Madoff (New York: Portfolio, 2009); U.S. Security and Exchange Commission Office of Inspector General, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme (Public Version) (2009); and a series of articles by Mark Seal that appeared in Vanity Fair magazine as “The Madoff Chronicles,” in April, June, and September 2009. 2. Gregory Zuckerman and Kara Scannell, “Madoff Misled SEC in 2006, Got Off,” Wall Street Journal, Dec. 18, 2009. 3. Interview with Harry Markopolos, Apr. 13, 2016.

On December 22, he went to his office, wrote notes to his wife, his brother, and his business partner, took sleeping pills, and slit his wrists with a box cutter. In 2009, Bernard Madoff admitted to eleven counts of securities and investment fraud, theft, perjury, and money laundering. Insisting that he was solely responsible for the fraud, he refused to cooperate with prosecutors investigating the possible involvement of his family or employees. He was sentenced to 150 years in a federal prison. Madoff’s sons, Mark and Andy, were never charged with criminal offenses. Bernie was presumably relieved, but not for long. On the second anniversary of his arrest, his older son, Mark, hanged himself in his New York apartment. Four years later, in September 2014, Andy died of mantle cell lymphoma, a cancer that spreads throughout the bloodstream. He was forty-eight. Today Bernie Madoff lives in Butner medium-security penitentiary, in North Carolina, in an eight-by-ten-foot cell.

Federal Court, Southern District of New York, Dec. 11, 2008. 17. Ibid. 18. Arvedlund, Too Good to Be True, 231. 19. Portfolio Staff, “Wiesel Lost ‘Everything’ to Madoff,” Upstart Business Journal, Feb. 26, 2009, http://upstart.bizjournals.com/executives/2009/02/26/Elie-Wiesel-and-Bernard-Madoff.html?page=all. 20. M. J. Lee, “Madoff: Politics, Remorse, Wall Street,” Politico.com, Mar. 20, 2014, www.politico.com/story/2014/03/bernie-madoff-interview-104838 (accessed Nov. 10, 2016). 21. Markopolos, No One Would Listen, 127. 22. Ibid. 23. SEC’s Investigation of Failure report (2009), 37. 24. Ibid., 24. 25. Ibid., 261. 26. SEC’s Investigation of Failure report (2009), 37. 27. Deborah Solomon, “Math Is Hard,” New York Times, Feb. 25, 2010, http://www.nytimes.com/2010/02/28/magazine/28fob-q4-t.html (accessed Oct. 25, 2016). 28.


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A Man for All Markets by Edward O. Thorp

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3Com Palm IPO, Albert Einstein, asset allocation, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy low sell high, carried interest, Chuck Templeton: OpenTable, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, compound rate of return, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, statistical arbitrage, stem cell, survivorship bias, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

Ten years after I discovered the Madoff fraud, at a hedge fund investing conference sponsored by Barron’s, a weekly publication by The Wall Street Journal presenting financial data and in-depth stories, the headline article was about the investment manager who wasn’t there, the manager with the best record of all—Bernie Madoff. Better yet for investors, he didn’t charge the typical hedge fund fees of 1 percent of assets per year plus 20 percent of any new net gains. Supposedly he made his money from charging small fees on the huge trading volume that was flowing through his brokerage firm from the orders he placed on behalf of his investment clients. Even with the well-publicized doubts expressed in the Barron’s story, and the suspicions of fraud now being voiced by many, the regulators slept on. So did Madoff’s thousands of investors and the fiduciaries they paid to protect them. How did the fraud end? When it became clear that there wouldn’t be enough money to keep paying investors, which is how all Ponzi schemes end, Bernie Madoff (pronounced MADE-off, as in “with your money”) turned himself in on December 11, 2008.

his best investment If Madoff is really gaining 20 percent a year and their best alternatives give, say, 16 percent a year, then they’re only out 4 percent a year. to destroy documents Rothfeld, Michael and Strasburg, Jenny, “SEC Accused of Destroying Files,” Wall Street Journal, August 18, 2011, page C2. the headline article Arvedlund, Erin E., “Don’t Ask, Don’t Tell,” Barron’s, May 7, 2001. in the early 1990s “Bernard Madoff Gets 150 Years in Jail for Epic Fraud (Update 7), Bloomberg.com, June 29, 2009. $65 billion News Release, “Bernard L. Madoff Charged in Eleven-Count Criminal Information,” U.S. Attorney for the Southern District of New York, March 10, 2009. One individual reportedly One Jeffry M. Picower, according to The New York Times, Sunday, July 5, 2009, page B2. According to a later report in The New York Times by Diana B. Henriques, October 2, 2009, page B5, the trustee liquidating the Madoff assets, Irving H.

Taking to heart the lyrics of the song “Enjoy Yourself (It’s Later than You Think),” Vivian and I would make the most of the one thing we could never have enough of—time together. Success on Wall Street was getting the most money. Success for us was having the best life. It was by chance during this time that I discovered the greatest of all financial frauds. On the afternoon of Thursday, December 11, 2008, I got the news I had been expecting for more than seventeen years. Calling from New York, my son, Jeff, told me Bernie Madoff confessed to having defrauded investors of $50 billion in the greatest Ponzi scheme in history. “It’s what you predicted in…1991!” he said. On a balmy Monday morning in the spring of ’91, I arrived at the New York office of a well-known international consulting company. The investment committee hired me as an independent adviser to review their hedge fund investments. I spent a few days examining performance histories, business structures, and backgrounds of managers, as well as making onsite visits.


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Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson

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Lots of brokers had NYSE-listed stocks on hand that they would have liked to buy or sell directly to one another, or to investors, in order to avoid the high fees charged by the NYSE middlemen. But it was difficult to get around the fact that the NYSE was the dominant meeting place for NYSE-listed stocks—among the largest public companies in the world. What’s more, the NYSE’s powerful interests erected all kinds of roadblocks, including lawsuits, to keep brokers from trading its stocks with one another. Still, these firms—including Bernie Madoff’s broker dealer, Bernard L. Madoff Investment Securities—kept trying. As such, Instinet had been founded in 1967 as Institutional Network (it was open only to “institutional” firms such as Fidelity and Merrill Lynch) in order to trade NYSE stocks. It had largely failed at its original goal, but it eventually became the largest electronic trading network for over-the-counter stocks (that is, non-NYSE stocks).

An eighteen-wheeler truck equipped with air-conditioning units was called in to funnel a hose into the basement as Island’s tech team scrambled to get the backup system online. Despite what might have been a perfect storm, Island continued to trade smoothly—and users were deeply impressed. They’d watched as nearly every other ECN choked and wheezed through the turmoil, even as Island kept humming like a jet engine. Andy Madoff, Bernie Madoff’s oldest son and an executive at Bernard L. Madoff Investment Securities—a big user of Island—lavished Levine’s system with praise in an April 7, 2000, e-mail. “Every day that goes by without your system going down builds my respect,” he wrote. “REDI, ARCA, B-Trade have all been plagued with almost continuous problems at crunch times during the last 2 weeks.” Island was building a reputation as the most reliable pool in the stock market.

In April 1998, future Nasdaq CEO Robert Greifeld, then chief of financial software giant SunGard Data Systems, started an ECN called BRUT that capitalized on volumes traded through SunGard’s computer system for trading Nasdaq stocks, BRASS (BRUT was short for BRASS Utility). An operation called Strike Technologies leveraged the high-speed trading volumes of Chicago quant-trading behemoth Hull Trading (which had recently employed data-mining expert Haim Bodek). Future Ponzi schemer extraordinaire Bernard Madoff, head of Bernard L. Madoff Investment Securities, helped develop Primex Trading, backed by firms such as Merrill Lynch and Goldman, whose electronic trading tentacles were suddenly everywhere. Bloomberg, the financial-data firm owned by the future New York City mayor Michael Bloomberg, had jumped in with Bloomberg Tradebook, called B-Trade for short. Big money—the biggest money—was rolling into the pools like monster waves on Hawaii’s North Shore.


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Planet Ponzi by Mitch Feierstein

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Footnotes Chapter 1: The scheme 1 Mary Darby, ‘In Ponzi we trust,’ Smithsonian Magazine, Dec. 1998. 2 ‘The Madoff scam: meet the liquidator,’ CBS News, 60 Minutes, June 20, 2010. Note that there is still some uncertainty about the exact scale of the losses. 3 The Federal Bureau of Prisons is kind enough to make Madoff’s exact projected release date available online. Just go along to their website – www.bop.gov – and pop the name ‘Bernard L. Madoff’ into their Inmate Locator. 4 ‘Bernie Madoff baffled by SEC blunders,’ New York Daily News, Oct. 31, 2009. 5 I haven’t sought to update The Economist’s data. The relatively low number for Manhattan real estate is eye-catching, but you can verify this from the NYC FY12 Tentative Assessment Roll, published Jan. 14, 2011. 6 Graph available direct from the Federal Reserve, www.federalreserve.gov. 7 Data from Reuters, extracted Aug. 19, 2011. 8 All book value ratios extracted from Reuters, Aug. 16–19, 2011.

That question is the one we turn to next. 5 How to win friends and influence people One of the notable features of Ponzi schemes‌—‌the point of them, in fact‌—‌is that they make their promoters very, very rich. Charles Ponzi bought a bank and thought about buying a battleship. (He wanted to turn it into a floating shopping mall.) Bernie Madoff wasn’t daft enough to buy a battleship; he was simply content to live the gilded life of New York’s super-rich, without a care for those whose stolen money he relied upon. If we’re claiming that the US government and (as we’ll come to see) Wall Street are running huge Ponzi schemes, we should expect to find some beneficiaries: the Charles Ponzis, the Bernie Madoffs. Following the collapse of the mortgage market in 2008, it’s been common enough to point an accusing finger at the bankers who caused it. I don’t disagree with that accusation‌—‌quite the opposite‌—‌but a Ponzi scheme as wide and as deep and as old as the one we’re considering is hardly likely to have been promoted by a mere handful of bankers working in one subsection of the financial markets.

The financial mathematics are bad and getting worse all the time, but you can’t tell how bad a Ponzi scheme is by how you experience the ride. It’s not the ride that matters, it’s the way it ends. Now, you’d be right to think that Ponzi’s investors were dumb. If you think you’d be smarter than them‌—‌relax, you would be. But just as investors have become shrewder over time, so Ponzi schemes have become a little smarter too. The most outrageous recent example of a Ponzi scheme was the one operated by Bernie Madoff, under the guise of a hedge fund. When his scheme hit the wall in 2008, investors had accumulated losses of $18 billion.2 Whereas Ponzi had been sent to federal prison for just five years, Madoff was sentenced to jail for a term of 150 years, the maximum allowed. If he gets time off for good behavior, he can look forward to being released on November 14, 2139. At the time of writing, Madoff is seventy-three years old.3 Madoff wasn’t some sleazy, undereducated, illegal immigrant.


pages: 375 words: 105,067

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry by Helaine Olen

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Moreover, much is made of the fact that the chief whistleblower in the Iceland fiscal fiasco was a woman, leaving one to wonder if whistleblowers such as Bernard Madoff–nemesis Harry Markopolos and Lehman Brothers’ practically forgotten Matthew Lee (who lost his job for his troubles) should be considered chopped liver. After all, many men are quite conservative with money (I know, I’m married to one of them) while many women are quite capable of engaging in risky investment strategies, being greedy, and committing out-and-out theft. This is something many women’s cheerleaders would rather not acknowledge. But how then to account for Lehman Brothers CFO Erin Callan, who went on television less than a week before the venerable bank crashed to assure investors that all was right with her books; JPMorgan Chase’s Ina Drew, the supervisor of the infamous “London Whale” trader who lost the bank billions of dollars; or alleged Bernard Madoff accomplice Sonja Kohn who, according to a lawsuit filed against her by Madoff bankruptcy trustee Irving Picard, “masterminded a vast illegal scheme”?

Yet Orman seems in recent years to have problems with other people’s perfection. As our collective finances got tighter over the first decade of the millennium, Orman’s New Age–oriented financial advice became increasingly hectoring. She yelled at people who got themselves into too much debt, whether it happened via a bout of unemployment or by taking on too much in college loans. She blamed the victims of Bernie Madoff for the fact that they had invested their funds in what turned out to be a Ponzi scheme by telling them, “You walked right into that financial concentration camp.” She lectured people on her popular “Can I Afford It?” and “1 on One” segments on her CNBC show, weighing in on people’s desires to do such things as purchase a Porsche (denied) or even the desire to have a second child (also denied).

As a result, automatic defaults were hurting many they were supposed to help, because higher income individuals who would likely have chosen to defer even more of their salary for retirement no longer did, according to the Employee Benefits Research Institute, proving nothing so much as how hard it is to manipulate us into doing the right thing. Third, there was actually no proof any of this was going to play out as we thought it would. THE CONVENTIONAL WISDOM MIGHT WELL BE WRONG Investing is risky and there are no guarantees. This is not something very many people will tell you. You can invest your heart out, do all the right things (You didn’t put all your money in Enron! You avoided Bernie Madoff!), diversify properly, not get laid off at a bad time like Carol Friery, and still, at the end of the day, end up way, way short of your goals. The mutual fund industry and many personal finance columnists are fond of quoting statistics, usually ones that reflect well on putting your money in stocks. The average annual return for the S&P 500 from 1927 to 2011 is 9.75 percent (that number, of course, does not include fees).


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

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Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

Might not the managers of Bear Stearns, who banked large bonuses each year, been inspired to do this because they could reshape financial contracts to produce high yields through option-like structures, with the consequences of their excess seemingly never to be felt due to the salutary effects of inflation, or deferred to some indistinct future moment? What is intriguing is that to attract prodigious amounts of investment capital, hedge funds no longer needed to post eye-popping returns, just 22 ENDLESS MONEY a constant stream of respectable profits and maybe a few mildly down months, a model that shysters like Bernie Madoff mastered to the pleasure of their sheep. How were derivatives used to enhance return in a way suggestive of fake alpha? An oft-quoted example is the case where a small hedge fund set up a subsidiary backed by a paltry $4.6 million guaranteed $1.3 billion of subprime mortgages for the Swiss banking giant UBS. When it was called upon to put up additional collateral, it failed. However, the hedge fund had posted attractive returns of some 44 percent annually through the leverage on the fees while things were going well, making them an exquisite example of a legitimized producer of fake alpha that fed off the option premium collectible from the credit default swap gravy train.4 But this gross example trivializes the systemic practice.

Operational Risk Operational risk accounts for a significant category of investor losses; it is fraud or more often the case plain old mismanagement (think of the preposterous assumptions of Long-Term Capital Management). We are told it is hard to guard against it and that there are no software packages that can avert it. Of course, the disinfectant of transparency goes a long way, but common sense is the most effective tool at our disposal to avoid being sucked into such schemes. The centerpiece of operational risk for our time has to be the Bernie Madoff scandal, which broke in December 2008. However, the continual financial market meltdown has revealed other giant Ponzi schemes, such as the failure of the $50 billion Stanford Group in February 2009. Oddly, most mainstream professional money managers had never heard of Madoff, yet he had raised over $50 billion. The public response will likely be a vociferous demand for yet more intensive regulation of the financial industry (a topic examined in detail later in this book), yet Madoff ’s operation was not in fact a hedge fund.

In so doing, they release themselves of guilt should anything go wrong (which happens to some percentage of any risky investment by nature), but investors learn to ignore this rubbish and even associate the better-run firms with the most official looking and weightiest paperwork. In the end, the despot takes his cut, the investors lose out and honorable money managers are burdened. Fraudsters such as Bernie Madoff or Allen Stanford, both major Democratic Party supporters, might escape the long arm of the law indefinitely unless a super-bear market exposes missing funds when redemptions are requested, especially if they make well-placed donations to political campaigns as did Marc Rich (through his wife), earning him a pardon by the ultimate wizard of relativism, President Bill Clinton. For his part, in the last election cycle Stanford placed contributions to numerous Democratic politicians for over $30,000, but covered all bases by also making a $28,000 one to the National Republican Committee.


Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

The more volatile asset B is the U.S. stock market. Asset D is Pfi zer, the pharmaceutical company. Fi nally, asset C is one you may not have heard of, the Fairfield Sentry fund. What’s the Fairfield Sentry fund? It was one of the feeder funds for the Bernie Madoff Ponzi scheme, the decades long, multibillion-dollar Finance Behaving Badly • 333 $18 $16 Cumulative returns $14 $12 $10 D $8 $6 C $4 B $2 A $0 Figure 10.2. Cumulative returns of a one-dollar investment in each of four financial assets over an unspecified time period. Source: author’s calculations. fraud. If you ever wondered how Bernie Madoff could fool so many people for so long, think about your own choice just a few minutes ago. In case you’re wondering, figure 10.3 contains the subsequent performance of these four assets. On February 14, 2008, just 10 months before all his schemes came crashing down, Madoff flew down to Palm Beach, Florida, to celebrate the ninety-fift h birthday of his mentor, friend, and business associate, Carl Shapiro.1 Madoff was almost a son to Shapiro, the “cotton king of the garment industry” turned philanthropist.

Schwartz, Robert A., and David K. Whitcomb. 1977. “The Time-Variance Relationship: Evidence on Autocorrelation in Common Stock Returns.” Journal of Finance 32: 41–55. Seal, David. 2009. “Madoff ’s World.” Vanity Fair. March 4. http://www.vanityfair.com /news/2009/04/bernard-madoff-friends-family-profi le Securities and Exchange Commission (SEC). 1969. 35th Annual Report for the Fiscal Year Ended June 30th, 1969. Washington, DC: Government Printing Office. –––. Office of Investigations. 2009. Investigation of Failure of the SEC to Uncover Bernard Madoff ’s Ponzi Scheme. Public version. Report OIG-509. August 31. Washington, DC: Government Printing Office. –––. 2014. Agency Financial Report: Fiscal Year 2014. Washington, DC: Securities and Exchange Commission. Sharpe, William F. 1964. “Capital Asset Prices—A Theory of Market Equilibrium Under Conditions of Risk.”

His reputation was more than sound and, until the very bitter end, his clients were delighted with his service. 334 • Chapter 10 $25 Cumulative returns $20 U.S. Treasury bills Stock market Pfizer Fairfield Sentry $15 $10 $5 $0 Nov–90 Nov–93 Nov–96 Nov–99 Nov–02 Nov–05 Nov–08 Nov–11 Nov–14 Figure 10.3. Cumulative returns of one-dollar investment in each of four assets from December 1990 to December 2015: U.S. Treasury bills, the CRSP valueweighted stock market index, Pfizer, and Fairfield Sentry fund, which was the feeder fund for the Bernie Madoff Ponzi scheme. In fact, Madoff was engaging in what is known as “affinity fraud,” deliberately courting investors who felt they had a personal connection with him. Charities were a popular target. Madoff claimed to invest in proprietary strategies, but in reality, he hadn’t traded since the early 1990s. The basis for his wealth management scheme was simple. First, take in money from trusting investors, and second, keep it for himself.


pages: 311 words: 130,761

Framing Class: Media Representations of Wealth and Poverty in America by Diana Elizabeth Kendall

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Bernie Madoff, blue-collar work, Bonfire of the Vanities, call centre, David Brooks, declining real wages, Donald Trump, employer provided health coverage, ending welfare as we know it, fixed income, framing effect, Georg Cantor, Gordon Gekko, greed is good, haute couture, housing crisis, illegal immigration, income inequality, lump of labour, mortgage tax deduction, new economy, payday loans, Ponzi scheme, Ray Oldenburg, Richard Florida, Ronald Reagan, Saturday Night Live, telemarketer, The Great Good Place, Thorstein Veblen, trickle-down economics, union organizing, upwardly mobile, urban planning, working poor

Subsequent investigation reveals that the victim “was trapped inside the car’s windshield after the accident and that the driver—a high profile publicist—left the man dying in her garage” before disposing of the body.71 “Darwinian” uses what Law & Order refers to as a “rippedfrom-the-headlines” plot that combines two real criminal cases, one in which a woman (of more modest means than in the TV show) left a man to die on her windshield after hitting him with her car and a second involving a wellknown society publicist convicted on a felony charge of leaving the scene of an accident after she backed her Mercedes SUV into a group of people going to a night club. This episode is characteristic of the bad-apple messages that Law & Order and other crime dramas send to viewers.72 When Bernard (“Bernie”) Madoff was accused of perpetrating a $65 billion fraud in a Ponzi scheme, set up through Bernard L. Madoff Investment Securities, that cost many investors their life savings, a Law & Order episode combined elements of his crimes with the murder of a television reporter: While investigating the murder of television reporter Dawn Prescott, detectives Lupo and Bernard discover that she was involved in a love triangle involving 9781442202238.print.indb 75 2/10/11 10:46 AM 76 Chapter 3 another reporter at the station.

Elissa Gootman, “Publicist Gets Jail Sentence and Scolding,” New York Times, October 24, 2002, A28. 73. Lawrence B. Ebert, “‘Law & Order’ Plotline Follows Larry Mendte Story and Madoff Scam,” IPBIZ, March 25, 2009, http://www.ipbiz.blogspot.com/2009/03/ law-order-plotline-follows-larry-mendte.html (accessed October 17, 2010). 74. Steve Fishman, “Bernie Madoff, Free At Last,” New York Magazine, June 14–21, 2010, 35. 75. Alex Kuczynski, “For the Elite, Easing the Way to Prison,” New York Times, December 9, 2001, ST1, ST2. 76. Fishman, “Bernie Madoff, Free At Last,” 35. 77. Warren St. John, “Advice from Ex-Cons to a Jet-Set Jailbird: Best Walk on Eggs,” New York Times, July 13, 2003, ST1. 78. Juan A. Lozano, “Judge Vacates Conviction of Kenneth Lay,” Washington Post, October 18, 2006, http://www.washingtonpost.com/wp-dyn/content/article/2006/ 10/18/AR2006101800201_pf.html (accessed October 15, 2010). 79.

“Miner Chord: Is a Working-Class Hero Still Something to Be?” ADWEEK Southwest, August 5, 2002, 9. “Finding Third Places: Other Voices, Different Stories.” Pew Center for Civic Journalism. 2004. www.pewcenter.org/doingcj/videos/thirdplaces.html (accessed July 6, 2004). Firestone, David. “4 Dead and 9 Missing in a Pair of Alabama Mine Blasts.” New York Times, September 25, 2001, A14. Fishman, Steve. “Bernie Madoff, Free At Last.” New York Magazine, June 14–21, 2010, 35. Fitzgerald, F. Scott. “The Rich Boy.” In The Short Stories of F. Scott Fitzgerald, edited by Mathew J. Brucoli, 317–49. New York: Scribner, 1995 [1926 in Redbook magazine]. Florida, Richard. The Rise of the Creative Class: And How It’s Transforming Work, Leisure, Community and Everyday Life. New York: Basic, 2002. Fountain, John W. “Chicago Looks for Home for Shelter for Homeless.”


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The Village Effect: How Face-To-Face Contact Can Make Us Healthier, Happier, and Smarter by Susan Pinker

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assortative mating, Atul Gawande, Bernie Madoff, call centre, cognitive dissonance, David Brooks, delayed gratification, Edward Glaeser, epigenetics, Erik Brynjolfsson, estate planning, facts on the ground, game design, happiness index / gross national happiness, indoor plumbing, invisible hand, Mark Zuckerberg, medical residency, Menlo Park, meta analysis, meta-analysis, neurotypical, Occupy movement, old-boy network, place-making, Ponzi scheme, Ralph Waldo Emerson, randomized controlled trial, Ray Oldenburg, Silicon Valley, Skype, Steven Pinker, The Great Good Place, The Wisdom of Crowds, theory of mind, Tony Hsieh, urban planning, Yogi Berra

Thirty-five others were forced to accept handouts to pay for rent, food, Ensure, and adult diapers from the charities they had not long before supported with their own donations.1 No one wants to spend their golden years financially vulnerable and dependent on others. And for a proud generation of savers, most of whom had cut their teeth during the Depression and who had spent their adult lives intent on being self-supporting, becoming penniless was the ultimate disgrace. How did Earl Jones pull it off? As was the case with Bernie Madoff, the trust inherent in a tightly knit, homogeneous social network helped Jones build a legitimate career at first. As a member of the community, it’s easy to establish one’s bona fides. And once he had earned other members’ confidence, he no longer had to prove himself. The pressures and temptations built. “I can see him sitting in that chair,” Mary Coughlan said, pointing to where I was sitting.

But trading in honest signals—the lingua franca of close social contact—is not always a force for good. Getting up close and personal can swing both ways, especially in business. While face-to-face contact can bring increased performance, customer loyalty, satisfaction, and profits, it can also lead to big-time betrayal. Affinity Fraud How could so many people fall for the outsized promises of Earl Jones—or Bernie Madoff, for that matter? As social animals, “the default is to trust until there’s a reason not to,” said the late Robyn Dawes, a psychologist at Carnegie Mellon who was one of the pioneers of behavioral economics.7 When it comes to having confidence in other people, our group or religious affiliations work as a stand-in for family relationships. Trusting others who look and sound like us feels natural; there’s a visceral satisfaction that accompanies letting down one’s guard.

They trusted an elder with their savings, as did about 2,500 other members of the plain community, as the Mennonites and Amish call themselves. Monroe Beachy, now in his late seventies, was a respected financial advisor who lived a modest lifestyle and acquired his financial bona fides in H&R Block classes. Through his company, A&M Investments, Beachy took in about $33 million from his community over twenty-odd years. Much like Bernie Madoff and Earl Jones, Beachy promised a rate of return that was better than the bank’s—and all through risk-free government bonds. “Word spread about his safe, steady returns. Parents encouraged their children to practice thrift by opening A&M accounts, too,” wrote business reporter Diana Henriques. When the Ponzi scheme broke, Beachy’s own family members and more than a dozen churches, nonprofits, and charities lost their shirts.


pages: 455 words: 138,716

The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi

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banking crisis, Bernie Madoff, butterfly effect, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty

The government similarly decided not to press forward with cases against a number of other prominent financial fraud targets. In early 2010 the DOJ decided to end the investigation of AIG Financial Products chief Joe Cassano, the patient zero of the financial crisis, whose half-trillion-dollar portfolio of unsecured credit default swaps imploded in 2008, forcing the government to bail out AIG and sending the world economy into a tailspin. Cases involving Ponzi scheme artists Bernie Madoff and Allen Stanford were restricted to a few defendants apiece, while banks and other institutions that aided their frauds got off clean. It would be years before the Obama administration would begin again to look at the role played in the Madoff scandal by JPMorgan Chase, Madoff’s banker. Meanwhile, after the first trial of baseball great Roger Clemens ended in a mistrial, the government pushed forward, keeping dozens of agents and lawyers on the case and deciding ultimately to retry the arch-villain, accused of lying about taking steroids.

The situation was tenable so long as housing prices kept rising and these teeming new populations of home borrowers could keep their heads above water, selling or refinancing their way out of trouble if need be. But the instant the arrow began tilting downward, this rapidly expanding death-balloon of phony real estate value inevitably had to—and did—explode. In other words, it was a Ponzi scheme, no different than the Bernie Madoff caper, only executed on an exponentially huger scale. The scheme depended upon the ability of a nexus of large financial companies to factory-produce and sell these magic home loans fast enough, and in big enough numbers, to continually keep more money coming in than going out. Once the bubble burst, lawsuits were filed everywhere and whistle-blowers emerged by the dozen, showing, in graphic documentary detail, how nearly every major financial company in America had chosen to participate in this enormous fraud.

Hedge funds, basically big pools of money managed by professional traders, are almost totally unregulated. A fund often begins as a one-man operation, run by a smooth-talking Wall Street front man who trolls the very rich, hustling for seed money. There are no real regulatory audits of hedge funds, and no government body checks hedge funds’ trades or verifies their claims. It even came out, in the famous Bernie Madoff case, that despite numerous complaints to the SEC over the years from reputable sources, nobody in the government even checked to make sure Madoff’s hedge fund even made trades at all. Madoff actually went more than thirteen years without making a single stock purchase and yet somehow survived several SEC investigations—that’s how flimsy government regulation of hedge funds has been and still is.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

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Andrei Shleifer, asset allocation, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, fixed income, follow your passion, Gordon Gekko, high net worth, index fund, John Meriwether, Long Term Capital Management, mail merge, margin call, mass immigration, merger arbitrage, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, Silicon Valley, the new new thing, too big to fail, transaction costs, Vanguard fund, Y2K, Yogi Berra, zero-sum game

As these funds had extremely high minimums, the fund of hedge funds model would bundle together smaller orders that would then be invested directly into the funds. Fund of hedge funds version 2.0 came when the industry added the bells and whistles of analytical research and portfolio resource allocation. Suffice it to say, the industry was crushed during the 2007 to 2009 economic crisis, which was further intensified by the devious acts of fraud of managers like Bernie Madoff. No wonder there is a tremendous cabal in the investment industry aligned against funds of hedge funds. Today, there are over 2,018 funds of hedge funds in the world. Many estimates show that close to 22 percent of all new investments into hedge funds are coming from funds of hedge funds. Since their advent, funds of hedge funds have been the vehicle of choice for new entrants into the hedge fund space.

Some of the requirements imposed by regulators include releasing their holdings and performance to the general public, providing daily liquidity, valuing shares accurately and daily, and providing investors with a prospectus prior to investing. Conversely, hedge funds are loosely regulated and currently do not have to register with the SEC or the Commodity Futures Trading Commission. And, let’s face it, registration doesn’t mean a hell of a lot these days considering that Bernard L. Madoff Investment Securities LLC was once registered with the SEC. (Allow me a quick soapbox moment: Although the media tag Madoff as a hedge fund guy, the irony was that he wasn’t running a mutual fund or a hedge fund; he was running a separate account business that made tons of money and thousands of clients bucketed him in the world of alternatives. Regulation never stopped Madoff . . . the recession did.)

In fact, we started this chapter with one of the richest men in America saying that they aren’t! He might be right, but then again he may be wrong. After all, at the time of this writing, Protégé Partners is ahead of the Oracle from Omaha. It may end badly for the fund of funds folks on this bet, but one thing is irrefutable—funds of hedge funds just flat out perform better in down markets. Madoff Factor Bernard L. Madoff Investment Securities LLC wasn’t a hedge fund or a fund of hedge funds. Madoff was a broker-dealer who did more damage to the hedge fund industry than any actual manager in history—even more damage than the now-defunct Trader Monthly magazine! Year in and year out, he would grind out consistent and low double-digit returns so as not to drawn attention to his devious plan and keep his clients happy.


pages: 180 words: 61,340

Boomerang: Travels in the New Third World by Michael Lewis

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Berlin Wall, Bernie Madoff, Carmen Reinhart, Celtic Tiger, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, fiat currency, financial thriller, full employment, German hyperinflation, Irish property bubble, Kenneth Rogoff, offshore financial centre, pension reform, Ponzi scheme, Ronald Reagan, Ronald Reagan: Tear down this wall, South Sea Bubble, the new new thing, tulip mania, women in the workforce

They lent money to American subprime borrowers, to Irish real estate barons, to Icelandic banking tycoons, to do things that no German ever would do. The German losses are still being toted up, but at last count they stand at $21 billion in the Icelandic banks, $100 billion in Irish banks, $60 billion in various U.S. subprime-backed bonds, and some yet to be determined amount in Greek bonds. The only financial disaster in the last decade German bankers appear to have missed was investing with Bernie Madoff (perhaps the only advantage to the German financial system of having no Jews). In their own country, however, these seemingly crazed bankers behaved with restraint. The German people did not allow them to behave otherwise. It was another case of clean on the outside, dirty on the inside. The German banks that wanted to get a little dirty needed to go abroad to do it. About this the deputy finance minister has not that much to say, though he does wonder, idly, how a real estate crisis in Florida ends with massive financial losses in Germany.

“I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever. This wasn’t a hypothetical scary situation, said Reed. “It’s a mathematical inevitability.” In spirit it reminded me of Bernard Madoff’s investment business. Anyone who looked at Madoff’s returns and understood them could see he was running a Ponzi scheme; only one person who had understood them bothered to blow the whistle, and no one listened to him. (See No One Would Listen: A True Financial Thriller, by Harry Markopolos.) In his negotiations with the unions, the mayor has gotten nowhere. “I understand the police and firefighters,” he says.


pages: 318 words: 87,570

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio by Sal Arnuk, Joseph Saluzzi

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algorithmic trading, automated trading system, Bernie Madoff, buttonwood tree, commoditize, computerized trading, corporate governance, cuban missile crisis, financial innovation, Flash crash, Gordon Gekko, High speed trading, latency arbitrage, locking in a profit, Mark Zuckerberg, market fragmentation, Ponzi scheme, price discovery process, price mechanism, price stability, Sergey Aleynikov, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, transaction costs, two-sided market, zero-sum game

Insider trading cases, including the recent, high-profile prosecution of Raj Rajaratnam from Galleon Group, certainly protect us from those gaining unfair advantages at the expense of long-term investors. However, the Rajaratnam case—the largest insider trading scandal in our nation’s history—centers around only $53 million in ill-gained profits. Compare that to the SEC’s failure to stop the $68 billion Bernie Madoff Ponzi scheme, despite being tipped multiple times. Although we praise the SEC for going after Rajaratnam, we can’t help but be disappointed in the agency’s seeming lack of action around HFT and the conflicts of interests in our market structure. HFT firms generate between $8 billion and $21 billion a year in profits. Tradebot, an HFT firm based in Kansas City, Missouri, in 2008 said it had not had a losing day in four years.6 The last few years have shown quarterly earnings from big banks engaged in HFT.

Levitt and the SEC were energized after their Order Handling Rules and Reg ATS victories. The SEC was now eyeing the NYSE. In a prescient September 1999 speech at Columbia Law School, Levitt telegraphed his next battle: “One way or another, Rule 390 should not be part of our future.”3 With pressure mounting from the large brokerage houses, the NYSE heeded Levitt’s threat and voluntarily removed the rule in May 2000. One brokerage house that was thrilled was Madoff Securities. Bernie Madoff commented, “This will very quickly change the landscape positively by giving [brokerages] more flexibility to execute orders most efficiently for their customers.”4 Another supporter was former SOES Bandit and Island ECN executive Josh Levine. “The elimination of Rule 390 is a good step toward competition in the listed-stock world,” he said.5 Both Madoff and Levine were chomping at the bit to access more NYSE order flow electronically.

The attack on the Trade Through exception was about to begin. The witness list read like a who’s who of Wall Street and included exchange executives, brokerage executives, specialists, and academics. Without Grasso to organize a coordinated defense, the NYSE auction market was dead. Tower Research, an automated trading firm, complained that Trade Through created “an unfair advantage for slower market centers.”10 Bernie Madoff stated at the hearing that the SEC should “require all ‘quoting’ market centers to employ an automated order execution facility for inter-market orders.”11 Professor Daniel Weaver of Rutgers, an associate of David Whitcomb, who was one of the original high frequency traders, demanded that “price priority should be established in all markets.”12 In December 2004, the SEC relented to the pressure from the HFT community and submitted a new Reg NMS proposal that significantly altered the Trade Through proposal, which was renamed the Order Protection Rule.

All About Asset Allocation, Second Edition by Richard Ferri

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activist fund / activist shareholder / activist investor, asset allocation, asset-backed security, barriers to entry, Bernie Madoff, capital controls, commoditize, commodity trading advisor, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, Long Term Capital Management, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

When young people make investing mistakes, they are not too damaging because these people typically have little in the pot and they have years of work and savings ahead. However, when an older person makes the same mistake, it can be devastating. The papers are full of sad stories about retirees’ life savings being wiped out because they put all their eggs in one basket and lost, or perhaps they were taken by the likes of a Bernie Madoff. Enron Corporation was a highly publicized corporate bankruptcy that resulted from accounting fraud that ruined the financial lives of many people nearing retirement age. You could not pick up a newspaper or popular magazine without seeing an article about a former Enron employee who lost nearly all his or her savings as a result of the company’s collapse. Some former Enron workers considered selling their homes just to pay bills.

Since the barrier of entry into the investment field is so low, it should not be surprising when the Wall Street Journal publishes a long list of brokers and advisors each week who have been disciplined by the regulatory authorities for gross negligence, misappropriation of client funds, and outright fraud. I do not want to be too critical of the brokers and advisors in the investment industry because there are many outstanding people out there. The problem you have is separating the good from the bad. There is no easy shortcut to doing this. Even those with the best credentials have fallen. And it takes only one bad decision by an investment advisor to wipe out your entire life’s savings. Bernie Madoff’s former clients know that too well. Planning for Investment Success 9 THE ASSETS IN ASSET ALLOCATION At its core, asset allocation is about dividing your wealth into different places to reduce the risk of a large loss. One hundred years ago, that may have meant your burying some cash in Mason jars around the barn in addition to hiding money in your mattress and the cookie jar. If your house went up in flames, at least the buried Mason jar money would survive.

There will be poor months, quarters, and occasionally years. There is no getting around this fact. Unfortunately, there is also a large market for financial fraud. Many unethical and unscrupulous investment experts will say that they have found a risk-free road to wealth. They are lying. High x INTRODUCTION returns do not come without risk. Many experts who said that they had the secret to success in the markets went to jail in 2008 and 2009. Bernard Madoff was the most famous person, followed by many other less famous crooks. There is no free lunch on Wall Street. There is risk. This risk can be controlled to some extent through good investment policy and prudent execution of that policy. Disciplined investors who follow their well-defined investment policy will come out far ahead over those who drift aimlessly from strategy to strategy, hoping for a lucky break.


pages: 258 words: 73,109

The (Honest) Truth About Dishonesty: How We Lie to Everyone, Especially Ourselves by Dan Ariely

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accounting loophole / creative accounting, Albert Einstein, Bernie Madoff, Broken windows theory, cashless society, clean water, cognitive dissonance, Credit Default Swap, Donald Trump, fudge factor, new economy, Richard Feynman, Richard Feynman, Schrödinger's Cat, shareholder value, Steve Jobs, Walter Mischel

Everyone nodded and laughed, appreciating his enthusiastic, non-buttoned-down approach. “Is anybody here rich?” he asked. “I know I am, but you college students aren’t. No, you are all poor. But that’s going to change through the power of CHEATING! Let’s do it!” He then recited the names of some infamous cheaters, from Genghis Khan through the present, including a dozen CEOs, Alex Rodriguez, Bernie Madoff, Martha Stewart, and more. “You all want to be like them,” he exhorted. “You want to have power and money! And all that can be yours through cheating. Pay attention, and I will give you the secret!” With that inspiring introduction, it was now time for a group exercise. He asked the students to close their eyes and take three deep, cleansing breaths. “Imagine you have cheated and gotten your first ten million dollars,” he said.

This first study showed that creativity and dishonesty are correlated, but that doesn’t necessarily mean that creativity is directly linked to dishonesty. For example, what if a third factor such as intelligence was the factor linked to both creativity and dishonesty? The link among intelligence, creativity, and dishonesty seems especially plausible when one considers how clever people such as the Ponzi schemer Bernie Madoff or the famous check forger Frank Abagnale (the author of Catch Me If You Can) must have been to fool so many people. And so our next step was to carry out an experiment in which we checked to see whether creativity or intelligence was a better predictor of dishonesty. Again, picture yourself as one of our participants. This time, the testing starts before you even set foot in the lab. A week earlier, you sit down at your home computer and complete an online survey, which includes questions to assess your creativity and also measure your intelligence.

Maybe it was his sickness, my fear of catching something in general, sleep deprivation, or just the random and amusing nature of free associations that made me wonder about the similarity between the germs my seatmate and I were passing back and forth and the recent spread of corporate dishonesty. As I’ve mentioned, the collapse of Enron spiked my interest in the phenomenon of corporate cheating—and my interest continued to grow following the wave of scandals at Kmart, WorldCom, Tyco, Halliburton, Bristol-Myers Squibb, Freddie Mac, Fannie Mae, the financial crisis of 2008, and, of course, Bernard L. Madoff Investment Securities. From the sidelines, it seemed that the frequency of financial scandals was increasing. Was this due to improvements in the detection of dishonest and illegal behavior? Was it due to a deteriorating moral compass and an actual increase in dishonesty? Or was there also an infectious element to dishonesty that was getting a stronger hold on the corporate world? Meanwhile, as my sniffling neighbor’s pile of used tissues grew, I began wondering whether someone could become infected with an “immorality bug.”


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Therefore if enforcement choices are sensitive to political pressure, firms with strong political connections should be less deterred by regulatory enforcement and exhibit lower accounting quality. Many of the firms involved in accounting scandals were known for their strong political connections. Enron, Global Crossing, Halliburton, Harken, Arthur Andersen. Fannie Mae and Freddie Mac had a lot in common with Bernie Madoff in this respect. Indeed, the study finds that the less accurate companies’ accounts are, the more these companies spend on contributions and lobbying. Taking into account that the financial industry has been extremely active in terms of lobbying and contributions in the years preceding the subprime crisis, the otherwise enigmatic lack of oversight exercised by the responsible authorities is less puzzling.

In Britain, firms which are politically connected in a narrow sense make up a still staggering quota of 39 percent of market capitalization. In France, the respective number is 8 percent, in the US 5 percent, in Germany and Japan only 1 percent. If an officer or large shareholder of a corporation is entering politics, its share price and thus the value of the corporation increases significantly (Faccio 2006). In light of the scandal around the US$50 billion investment fraud by Bernard Madoff, which the Securities and Exchange Commission (SEC) had not detected despite the numerous tips it had received, another study by Correia (2009) is particularly interesting. It reveals that more lenient treatment by regulatory agencies is an important channel through which political connections raise company value. An enforcement action by the SEC is often extremely costly for affected firms and their owners.

The Senate later concluded that the SEC had not devoted sufficient resources to the case and had been overly deferential in dealing with John Mack. SEC management had delayed Mack’s testimony for over a year, until days after the statute of limitations expired, and had fired the whistleblower. No serious and credible investigation of his claims was ever conducted, according to the Senate. It is quite clear that the failure of the SEC to detect the huge Ponzi scheme of Bernard Madoff, a major contributor 218 ECONOMISTS AND THE POWERFUL to federal candidates, parties and committees, was not an isolated case but part of a pattern (Correia 2009). Conclusion: Strengthen and Protect the Political System from Itself One school of thought concludes from this that it is best to have as small a government as possible and give it as little power as possible. This is the school of thought that inspired the US Constitution as laid down by the founding fathers after suffering decades of overbearing British rule.


pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

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banking crisis, Bernie Madoff, Bernie Sanders, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, fixed income, housing crisis, invisible hand, Long Term Capital Management, mega-rich, mortgage debt, new economy, old-boy network, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, too big to fail, trickle-down economics

Of course, the top echelon of Wall Street insiders would skim the cream off, but, the argument went, the rest of the country would benefit as well. Not only would the economy be stronger, but American individuals, pension plans, and charities could all ride this dragon skyward, through investments and through donations from the mega-rich looking for tax shelters. It is no accident, then, that in each of the recent economic collapses, from Enron to Bernie Madoff, there arose the ever-present laments from charities that were suddenly defunded. The derivatives and swaps involved buying and packaging financial risk and selling it based on a system of corresponding grades. So a bank might buy up a collection of mortgages or credit card debts from lenders, who could then take this capital to bankroll even more loans. The buyers of this securitized debt would sort and slice it into levels of predicted risk; the more risk, the higher the return, of course.

As a director of Goldman Sachs, according to Forbes, he was paid $675,770 in stock in 2007 and would have come in for some questioning had the firm gone down; Liddy had sat on its audit committee during the five years before he resigned that seat to take over AIG in September 2008. As for his salary sacrifice, not to worry: In 2005, when he was still CEO and chair of Allstate Insurance, he received $26.7 million in compensation. What we have here is a rare glimpse into the workings of the billionaires’ club, that elite gang of perfectly legal loan sharks who in only the most egregious cases will be judged as criminals—Bernard Madoff, former chair of NASDAQ, comes to mind. These other amoral sharks, who confiscated billions from shareholders and the 401(k) accounts of innocent victims, were rewarded handsomely, rarely needing to break the laws their lobbyists had purchased. The dealings between AIG and Goldman would later form the stuff of scandal, as it turned out that bailout money had been passed through AIG to pay back Goldman Sachs and other clients at full value for their questionable investments.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

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asset-backed security, bank run, banking crisis, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, money market fund, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

The only way anyone can continue to have an income after they stop working is to put aside money today that they can use later in life. If the average person needs $40,000 a year to live in retirement and will on average live twenty years, that means that they need $800,000 over that period. Obviously, you and I can’t save that kind of cash. There are only two ways to solve the problem. One is pay-as-you-go ‘‘unfunded’’ government pensions like Social Security. These are classic Ponzi schemes, sort of Bernie Madoff on a much vaster scale. Today’s payroll taxes are not invested; individuals have no accounts and don’t have any legal right to a pension. Instead, people working today are taxed to pay benefits to people who are retired or on disability. As long as people mostly died before becoming eligible or didn’t live long in retirement, this worked fine. But the public doesn’t understand this scheme for what it is.

We would have demanded it. Sitting out a boom is almost impossible for a publicly traded company. The banks misunderstood their real risks and had too much faith in financial rocket science, but even if we resent the enormous salaries and perks they gave themselves, there is scant evidence of illegality or even conscious recklessness related to the collapse. The poster child of the meltdown has become Bernie Madoff, just as Charles Ponzi is still remembered from the Roaring Twenties. Madoff ’s and other Ponzi schemes by money managers were discovered when the markets plunged, but his scheme was a classic investment scam that had run for decades under the noses of the regulators and had nothing to do with the bankers and instruments at the center of the meltdown. As Warren Buffett wrote, ‘‘It is only when the tide goes out that you see who has been swimming 175 176 FINANCIAL MARKET MELTDOWN naked.’’


pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

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bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop - Herbert Stein's Law, index fund, Lao Tzu, margin call, market bubble, McMansion, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Treasuries at historically low interest rates—or even no interest rates! In December 2008, the Treasury auctioned off $30 billion of four-week Treasury bills for a yield of zero percent. It was as if the buyers were saying, “Wrap this money in foil and put it in the freezer, bury it in the lawn behind the White House, but for goodness’ sake don’t put it in the stock market, don’t give it to Bernie Madoff, and don’t buy securitized mortgages. Just give it back intact in four weeks.” In fact the panic was so great that the very appeal of U.S. Treasury debt was the printing press. Investors knew that they could get dollars back, even if the ink hadn’t dried. The scramble for the printing press guarantee was so great that in the secondary market some were willing to park their money in bonds that yielded less than zero, that is, negative rates, returning slightly less than their cost on maturity.

Dollarcollapse.com This is a very useful site, providing a daily compendium of links to commentary and breaking news about the economy, the dollar, precious metals, the real estate market, and more. www.dollarcollapse.com. Clusterstock.com Business and financial news and commentary, gossipy at times, but willing to take a close-up look at the dark side of Wall Street. No other source provided as much information about the Bernie Madoff scandal as www.clusterstock.com. Credit Writedowns Featuring news and opinion on finance, economics, and markets, the site seeks to provide early warning signals for what to expect in the global economy. Especially good at spotting European economic news that is missed elsewhere. The site’s “Credit Crisis Timeline” is a comprehensive collection of accounts of the unfolding credit crisis, while it also provides an overview called “The Dummy’s Guide to the U.S.


pages: 384 words: 118,572

The Confidence Game: The Psychology of the Con and Why We Fall for It Every Time by Maria Konnikova

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attribution theory, Bernie Madoff, British Empire, Cass Sunstein, cognitive dissonance, Daniel Kahneman / Amos Tversky, endowment effect, epigenetics, hindsight bias, lake wobegon effect, libertarian paternalism, Milgram experiment, placebo effect, Ponzi scheme, publish or perish, Richard Thaler, risk tolerance, side project, Skype, Steven Pinker, the scientific method, tulip mania, Walter Mischel

David Maurer describes one victim who, several years after falling for a well-known wire con—the grifter pretends to have a way of getting race results seconds before they are announced, allowing the mark to place a sure-win bet—spotted his deceivers on the street. He ran toward them. Their hearts sank. Surely, he was going to turn them in. Not at all. He was wondering if he could once more play that game he’d lost at way back when. He was certain that, this time, his luck had turned. The men were only too happy to comply. Even someone like Bernie Madoff went undetected for at least twenty years. He was seventy when his scheme crumbled. What if he’d died before it blew up? One can imagine a future where his victims would be none the wiser—as long as new investments kept coming in. In June 2007, Slate writer Justin Peters decided to be creative about his airfare to Italy. Short on money, he was nevertheless eager to spend a few months out of the country.

Barnum may never have said, “There’s a sucker born every minute.” (He very likely did not.) But among the con men of the early twentieth century, there was another saying. “There’s a sucker born every minute, and one to trim ’em and one to knock ’em.” There’s always something to fall for, and always someone to do the falling. Who is the victim and who, the con man? What kinds of people are the Bernie Madoffs and Captain Hansens of the world? And do a Norfleet and a Peters share some underlying traits that bind them together? Is there a quintessential grifter—and a quintessential mark? * * * Eighteen State Street. A small, two-window-wide cream house. Teal-and-white trimmed shutters. Grass sprouting in between slabs of surrounding concrete. A small teal-and-cream garage, a basketball hoop affixed to the top.

Machiavellianism, it seems then, may, like psychopathy, predispose people toward con-like behaviors and make them better able to deliver on them. Delroy Paulhus, a psychologist at the University of British Columbia who specializes in the dark triad traits, goes as far as to suggest that “Machiavellian” is a better descriptor of the con artist than “psychopath.” “It seems clear that malevolent stockbrokers such as Bernie Madoff do not qualify as psychopaths,” he writes. “They are corporate Machiavellians who use deliberate, strategic procedures for exploiting others.” So wherein lies the truth: is the con artist psychopath, narcissist, Machiavellian? A little bit of all? Demara seems to be proof of the “all of the above” choice. Doctors are often accused of playing God. Demara took that criticism to a grotesque extreme.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

In the wake of the collapse of Bear Stearns, the SEC inspector general found that the agency not only took no meaningful action under the Consolidated Supervised Entity program, but also did a poor job implementing its Broker-Dealer Risk Assessment program (created in 1992 in response to the failure of Drexel Burnham Lambert). Under that program, the SEC received quarterly and annual reports from 146 broker-dealers—but generally only reviewed six of them.95 Most famously, the SEC managed to overlook Bernie Madoff’s $65 billion Ponzi scheme, despite tips and investigations going back to 1992.96 This failure to regulate the securities markets effectively was a consequence of the deregulatory ideology introduced by Ronald Reagan as well as the political influence of Wall Street. James Coffman, a former assistant director of the SEC’s enforcement division, wrote, Elected deregulators appointed their own kind to head regulatory agencies and they, in turn, removed career regulators from management positions and replaced them with appointees who had worked in or represented the regulated industries.

., April 20, 2007), available at http://www.sec.gov/news/speech/2007/spch042007psa.htm. 95. U.S. Securities and Exchange Commission Office of Inspector General, SEC’s Oversight of Bear Stearns and Related Entities: Broker-Dealer Risk Assessment Program, September 25, 2008, available at http://www.sec-oig.gov/Reports/AuditsInspections/2008/446-b.pdf. 96. U.S. Securities and Exchange Commission, Office of Investigations, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme—Public Version, August 31, 2009, available at http://graphics8.nytimes.com/packages/pdf/business/20090904secmadoff .pdf. The total amount missing from client accounts was approximately $65 billion, including fake investment returns; the actual amount invested by and not returned to clients was closer to $20 billion. 97. James Coffman, “An Inside Perspective on Regulatory Capture,” The Baseline Scenario, August 14, 2009, available at http://baselinescenario.com/2009/08/14/an-inside-perspective-on-regulatory-capture/. 98.


pages: 194 words: 59,336

The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life by J L Collins

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asset allocation, Bernie Madoff, compound rate of return, diversification, financial independence, full employment, German hyperinflation, index fund, money market fund, nuclear winter, passive income, payday loans, risk tolerance, Vanguard fund, yield curve

This financial stuff just all seems so complex, it is not surprising that many people welcome the idea of turning it over to a professional who will, hopefully, get better results. Unfortunately most advisors don’t get better results. Investing only seems complex because the financial industry goes to great lengths to make it seem complex. Indeed, many investments are complex. But as you now already understand, not only are simple index investments easier, they are more effective. Advisors are expensive at best and will rob you at worst. Google Bernie Madoff. If you choose to seek advice, seek it cautiously and never give up control. It’s your money and no one will care for it better than you. But many will try hard to make it theirs. Don’t let it happen. When I say investment advisors, I am also referring to money managers, investment managers, brokers, insurance salespeople (who often masquerade as financial planners) and the like. Any and all who make their money managing yours.

This makes them perhaps the most aggressively recommended products advisors offer and certainly among the most costly to you. Annuities and whole/universal life insurance carry commissions as high as 10%. Worse, these commissions are buried in the investment so you never see them. How such fraud is legal I can’t say. But it is. Hedge funds and private investments all make their salespeople wealthy, along with the operators. Investors? Maybe. Sometimes. Nah, not so much. Remember Bernie Madoff? People literally begged him to take their money. His credentials were impeccable. His track record too. Only the “best” investment advisors could get you in. Mr. Madoff paid them handsomely to do so. As did their clients. Oops. If all this weren’t enough, if you’re not paying attention, there is more money to be mined at your expense by “churning” your account. Churning refers to the frequent buying and selling of investments to generate commissions.

Rule #2: You are likely to be conned in an area of your expertise. The reason is simple: Targeting and ego. When con men pick a scam they look for people to whom it will naturally appeal. Those are people in the field. People feel secure and safe in those areas they know well. They believe they will be too smart to be caught unawares. Smart people know the areas they don’t know and tend to be far more cautious there. Many of Bernie Madoff’s victims were financial professionals. Rule #3: Con men (and women) don’t look like con men. This isn’t the movies. They’re not going to have slouch hats pulled low over their shifty eyes. Successful con men look like the safest, most trustworthy, honest, stable, comforting people imaginable. You won’t see them coming. Or rather you will, and you’ll be warmly welcoming them. Rule #4: 99% of what they say will be true.


pages: 411 words: 80,925

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live by Rachel Botsman, Roo Rogers

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Airbnb, barriers to entry, Bernie Madoff, bike sharing scheme, Buckminster Fuller, carbon footprint, Cass Sunstein, collaborative consumption, collaborative economy, commoditize, Community Supported Agriculture, credit crunch, crowdsourcing, dematerialisation, disintermediation, en.wikipedia.org, experimental economics, George Akerlof, global village, Hugh Fearnley-Whittingstall, information retrieval, iterative process, Kevin Kelly, Kickstarter, late fees, Mark Zuckerberg, market design, Menlo Park, Network effects, new economy, new new economy, out of africa, Parkinson's law, peer-to-peer, peer-to-peer lending, peer-to-peer rental, Ponzi scheme, pre–internet, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Simon Kuznets, Skype, slashdot, smart grid, South of Market, San Francisco, Stewart Brand, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thorstein Veblen, Torches of Freedom, transaction costs, traveling salesman, ultimatum game, Victor Gruen, web of trust, women in the workforce, Zipcar

Williams describe these rules as “weapons of mass collaboration” and argue that they may give birth to a golden era equal to the Italian Renaissance or Athenian democracy.34 Social networking is probably the most inclusive and culturally disruptive development of our time. Even those on the isolated peripheries of our society, such as someone in Siberia or on the equator, or someone with a unique hobby such as collecting miniature Polish pipe organs, can find a group to share and connect with based on common interests. Every investigative journalist knows that the key to breaking a news story is that money always leads to the top. Whether it’s Al Capone or Bernard Madoff, taxes or Ponzi schemes, money is linked to power and control. If we apply these principles to Web 2.0, we find a surprising new relationship between money and power. The Internet is inherently democratic and decentralized. One of the first celebrated examples of this autonomous force was in 1991 when a twenty-one-year-old Finnish student posted a simple request on Usenet (a global discussion forum) for help from his mother’s Helsinki apartment.

Like Meetup, Linux, MyBO, Clickworkers, and Kickstarter, IfWeRanTheWorld it is part of a reestablishment of community relationships not just through local activities but through the vast global infrastructure of the Internet. In this sense, the very concepts of “neighbor” and “community” are being redefined and expanded as the “Me” generation is being replaced by the “We” generation.” Reconnection Beyond Consumerism On June 29, 2009, Bernard Madoff stood in front of Judge Denny Chin of the U.S. District Court in New York, pleaded guilty to an eleven-count criminal complaint, and was sentenced to 150 years in prison, the maximum sentence allowed. Madoff’s notorious crime was the creation of a $65 billion Ponzi scheme, the largest investor fraud ever committed by a single person. But while Madoff’s actions were abhorrent and the punishment was fitting, we have all in some way been a part of and fallen victim to a far greater Ponzi scheme.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

George Soros, hedge fund manager Where did all the money go? My father-in-law asked that question in the aftermath of the credit crunch of 2007 and 2008, when house prices, share prices and corporate bond prices all tumbled. It seemed a reasonable point. If all the assets in the world were worth, say, $3 trillion one year and $2 trillion the next, what happened to that missing trillion? To explain the answer, we have to turn to the career of Bernie Madoff, a convicted fraudster. Madoff was an American stockbroker who had a prominent role in the finance industry, serving as chairman of the board of directors of the National Association of Securities Dealers. On the side, he ran an investment operation, looking after the funds of clients. He claimed a near-perfect record, hardly ever losing money in a given month, and reporting steady annual returns.

The scheme was based on international postal coupons which, he said, could be bought cheaply in Europe and exchanged for stamps in the US.7 The scheme had some basis in fact, although it would never have worked if attempted on a large scale. However, Ponzi did not try to make it work. He simply relied on his charm to entice investors. Should a few investors want to withdraw their money, he could pay them off with the money taken from new applicants. Bernie Madoff effectively used the same system without offering returns on the Ponzi scale; it was the steadiness of his returns, not the size of them, that ought to have made investors suspicious. This kind of fraud is also known as a pyramid scheme and it is a recurrent historical phenomenon. Women Empowering Women was a British version in the 1990s. Person B pays Person A a thousand dollars; B then hopes to raise the same sum from each of Persons C and D.

Five more stages after that and the scheme would require more investors than there are people on the planet.8 The Ponzi scheme was built on a similar epic scale. With money doubling every three months, investors would have been 16 times better off in a year and 256 times better off in two. Within five years, anyone who had invested a single dollar would have become a millionaire. We know that pyramids must eventually collapse, and the higher the return (or promised return), the faster that collapse will come. (Bernie Madoff’s scheme lasted so long because he offered reliable, rather than outlandishly high, returns.) The outright frauds have no investment justification at all. But even pyramid markets based on a genuine social change (such as the creation of the Internet) are doomed to eventual failure. The Ponzi stage described by Minsky is often known as a ‘greater fool’ process. Buyers do not believe prices are justified but think they will find a gullible buyer willing to pay even more.


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

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affirmative action, Affordable Care Act / Obamacare, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, carried interest, circulation of elites, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, creative destruction, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, Gunnar Myrdal, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Kenneth Arrow, Mark Zuckerberg, mass affluent, mass incarceration, means of production, meta analysis, meta-analysis, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, Plutocrats, plutocrats, Ponzi scheme, Ralph Waldo Emerson, rolodex, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

“You have these politicians that are selling this mistrust,” he said in reference to the ceaseless rhetoric from conservatives about government’s inevitable incompetence. “And the federal government sure as hell hasn’t helped.” And yet the private sector has fared no better: from the popping of the tech bubble, to Enron, WorldCom, and Global Crossing, to the Big Three automakers, to Lehman Brothers, subprime, credit default swaps, and Bernie Madoff, the overwhelming story of the private sector in the last decade has been perverse incentives, blinkered groupthink, deception, fraud, opacity, and disaster. So comprehensive and destructive are these failures that even those ideologically disposed to view big business in the best light have had to confront them. “I’ve always defended corporations,” a Utah Tea Party organizer named Susan Southwick told me. “ ‘Of course they wouldn’t do anything they knew was harming people; you guys are crazy.’

Amid drums and whoops and chants of “We! Are! The 99 percent!” he leaned in and said, “I realize that’s scary for some people.” Beyond left and right isn’t just a motto. Those most devoted to the deepest kinds of structural reform of the system are insistent that they do not fall along the traditional left-right axis. Just as elite failure claims a seemingly unrelated number of victims—the Palm Beach retiree bankrupted by Bernie Madoff and the child left homeless after his mother’s home was foreclosed—so, too, will you find that among those clued in to elite failure, left/right distinctions are less salient than those between what I call insurrectionists and institutionalists. Paul Krugman is one prominent example of an insurrectionist. A man who was once a defender of elite competence and neoliberal technocracy against its populist foes, he has come to believe there is something very wrong with the people running the country: “At the beginning of the new millennium,” he writes in his 2004 book, The Great Unraveling, “it seemed that the United States was blessed with mature, skillful economic leaders, who in a pinch would do what had to be done.

The more you learn about the documented instances of active, coordinated conspiracy and collusion, the harder it is to dismiss even the most seemingly far-fetched allegations of wrongdoing. This applies far more broadly than to the Church. On one hand, we can view scandal and revelation as fundamental proof that ultimately the truth will out. That is how an institutionalist is disposed to interpret things. But we can just as easily take a more cynical view: If, say, Bernie Madoff was allowed to pull off his $50 billion heist for decades with no sanction, if the SEC ignored a detailed letter from a knowledgeable whistle-blower titled simply “The World’s Largest Hedge Fund Is a Fraud,” then what’s to say they’re not ignoring the next Madoff as I write this? In this way, more information and more openness can, perversely, feed more mistrust and more wild speculation: The more we know, the more we realize just how in the dark we truly are.


pages: 227 words: 62,177

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do by Kaiser Fung

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American Society of Civil Engineers: Report Card, Andrew Wiles, Bernie Madoff, Black Swan, call centre, correlation does not imply causation, cross-subsidies, Daniel Kahneman / Amos Tversky, edge city, Emanuel Derman, facts on the ground, fixed income, Gary Taubes, John Snow's cholera map, moral hazard, p-value, pattern recognition, profit motive, Report Card for America’s Infrastructure, statistical model, the scientific method, traveling salesman

From the manipulative politician to the blundering analyst, from the amateur economist to the hard-selling advertiser, we have endless examples of what can go wrong when numbers are misused. Cherry-picking, oversimplifying, obfuscating—we have seen them all. This book takes a different direction, a positive position: I am interested in what happens when things go right, which is to say, what happens when numbers don’t lie. The More We Know We Don’t Know What will we learn from Bernie Madoff, the New York–based fund manager–swindler who impoverished an exclusive club of well-to-do patrons over three decades until he confessed in 2008? Or from the Enron executives whose make-believe accounting wiped out the retirement savings of thousands of employees? Perhaps we ought to know why the reams of financial data, printed statements, and official filings yielded few clues to the investors, auditors, and regulators who fell for the deception.

Some technical language is introduced in these pages; it can be used as guideposts for those wanting to explore the domain of statistical thinking further. The interstitial sections called “Crossovers” take another look at the same stories, the second time around revealing another aspect of statistical thinking. The Discontent of Being Averaged Averages are like sleeping pills: they put you in a state of stupor, and if you overdose, they may kill you. That must have been how the investors in Bernie Madoff’s hedge fund felt in 2008, when they learned the ugly truth about the streak of stable monthly returns they’d been receiving up until then. In the dream world they took as real, each month was an average month; variability was conquered—nothing to worry about. Greed was the root cause of their financial ruin. Those who doubted the absence of variability in the reported returns could have saved themselves; instead, most placed blind faith in the average.


pages: 345 words: 87,745

The Power of Passive Investing: More Wealth With Less Work by Richard A. Ferri

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asset allocation, backtesting, Bernie Madoff, capital asset pricing model, cognitive dissonance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, endowment effect, estate planning, Eugene Fama: efficient market hypothesis, fixed income, implied volatility, index fund, intangible asset, Long Term Capital Management, money market fund, passive investing, Paul Samuelson, Ponzi scheme, prediction markets, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve, zero-sum game

On both the sell side and the buy side, a typical sales strategy used to promote actively managed products is for an advisor to talk up the potential for earning a superior return. What’s often left out of those conversations is the probability of achieving this return. Each investor is left to figure out the probability of success on their own. You’re setting yourself up for trouble if you don’t assess the risk of an investment. Investment frauds lure in their prey by creating the illusion of safety and a high return. Think of Bernie Madoff. He told clients they would earn high returns in the 8 to 10 percent range every year regardless of market risks. Apparently, Madoff followers didn’t ask how this return could be earned year after year with no risk of loss, or perhaps they didn’t want to know. The subprime mortgage meltdown in recent years is another example. The possibility of higher returns impeded the judgment of many institutional investors in that market.

In fact, in my opinion a vast majority of individual investors should avoid illiquid long-term investments and speculative investments. Trying to make money in illiquid long-term limited partnerships including hedge funds and venture capital funds requires considerable skill in sorting out a few profitable opportunities from the rest. For every successful limited partnership there are at least 10 poor to mediocre ones, including Bernie Madoff–type scams. Most individuals simply do not have access to top private management or have the expertise in selecting private funds. Highly skilled institutional investors pick off the attractive offerings long before the public is invited in. David Swensen, CIO of the Yale endowment fund, eloquently sums up the prospective results from private partnerships in his highly praised book, Unconventional Success.

They’re too busy managing money for the $5 billion dollar endowment funds. Paraphrasing Charles Ellis, it’s easy to tell a good manager from a mediocre one; the mediocre one wants to manage your money! If an active manager were talented, chances are you’ve never heard of him or her, and if you did, you’d never be able to hire them. It is a tragedy when poor investment decisions cripple the ability of a nonprofit organization to help others. Bernie Madoff had almost everyone fooled that he was a top hedge fund manager. He took everyone’s money, literally, and his high reported returns kept rolling in regardless of the amount he managed. Many nonprofits lost millions of dollars when Madoff’s Ponzi scheme collapsed. Other organizations lost a large portion of their assets during the global recession because the investment committees made ill-timed asset allocation decisions.


pages: 346 words: 101,763

Confessions of a Microfinance Heretic by Hugh Sinclair

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accounting loophole / creative accounting, Bernie Madoff, colonial exploitation, en.wikipedia.org, end world poverty, financial innovation, financial intermediation, Gini coefficient, high net worth, illegal immigration, inventory management, microcredit, Northern Rock, peer-to-peer lending, pirate software, Ponzi scheme, principal–agent problem, profit motive

This could quickly become a spiral—more dipping into savings would further reduce the likelihood of anyone wishing to invest in FCC, requiring further dipping into savings. Client savings, however obtained, and whether forced or voluntary, could be used to meet such a shortfall, but whether this was legal or not was a valid question. And even if legal, it was no free lunch: the cash may be accessible for use in other areas, but the obligation of the MFI to return these funds to clients did not vanish. In a sense such practices can be likened to Bernie Madoff’s recent Ponzi scheme. For as long as new investors keep pouring money in, there are funds available to return to early investors, and no one need know quite how the underlying portfolio is doing for as long as the dance maintains its momentum. The more recent investors are locked in for some period before they can extract their profits, by which point more investors have been found. This is remarkably similar to a microfinance loan—clients cannot withdraw their savings until they have fully repaid their loans, by which point new clients have provided new savings to be available for such withdrawals.

But when it became clear that Madoff’s underlying investments were not doing so well, or when an MFI has high operating costs and a declining, poor-quality portfolio, the problem rapidly becomes critical. The tide goes out, and those without bathing costumes are left standing in their full glory. Thus the need for tight regulation of any institution that takes money from the general public, regulation that is often absent in developing countries. Even the SEC in America missed Bernie Madoff for some years. How much easier for a bank in a forgotten African nation recovering from a bloody civil war and years of communism? The recent financial crisis has led to endless reams of new regulations in countries already tightly regulated—how much more is this true in countries such as Mozambique? It was strange that so many alarm bells were ringing so shortly after my arrival. I certainly should have done better due diligence on Mozambique before agreeing to help fix a bank there.

If there was ever a country that demonstrated that the funding bodies had entirely lost all track of reality, it was Nicaragua. Many microfinance funds lost millions of dollars as MFIs defaulted—not their dollars, of course, but those of their own investors, thanks to their failure to consider the simple fact that pyramid schemes require permanent new injections of capital and limited withdrawals. But, as Bernie Madoff so elegantly demonstrated, the music can continue for a long time. I worked in Nicaragua frequently, mainly with Triple Jump. I later spent months based in Panama shuttling back and forth to Nicaragua, and I knew many of the MFIs there. The profit potential was excellent. Every fund was desperate to invest there, and every MFI had offers from funds crawling over each other to lend them money.


pages: 200 words: 54,897

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading by Peter Kovac

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bank run, barriers to entry, bash_history, Bernie Madoff, computerized markets, computerized trading, Flash crash, housing crisis, index fund, locking in a profit, London Whale, market microstructure, merger arbitrage, prediction markets, price discovery process, Sergey Aleynikov, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, zero day

Lastly, Lewis doesn’t claim, nor would it make sense to claim, that high-frequency traders are front-running high-frequency traders. There goes another 50% of the market, at least. In sum, I don’t know how or why Lewis extrapolates from the questionable analysis of a single trade to the entire market, but it clearly isn’t sound. The extrapolation appears as flimsy as the premise itself. When I first heard Lewis say on his press tour that, “The market is rigged,” I thought he had found another Enron or Bernie Madoff, sending legions of unsuspecting investors to the poor house. I didn’t expect to find that, based on a single trade and a few hunches, some old-school big-bank traders speculated that 0.07% of their trades’ potential value was going to another subset of traders using questionable practices. If it turned out to be true, it’s still unethical and wrong. But it’s simply absurd to claim that this would apply to every share traded in the stock market.

A broker-dealer must abide by rules that, among other things, govern trading activities, risk management, accounting, and the amount of capital reserved to pay for any trading losses. Broker-dealers are subject to periodic audits, and the SEC can drop in at any time if they have the slightest suspicion about the broker-dealer’s activities (and they do drop in). It’s a good thing. Personally, I’d be more worried about the hedge funds that ultimately fund Katsuyama’s dark pool, who have virtually no regulator oversight. What do Scott Rothstein, Arthur Nadel, and Bernie Madoff have in common? Serving as hedge fund managers, and serving time in jail. Chapter 5: Sergey Aleynikov There’s not too much to add to this chapter, as (a) it mostly focuses on a single individual, and (b) it’s largely a reprint of Lewis’ September 2013 article, which benefitted from Vanity Fair’s fact-checking team. Goldman overreacted. They wanted to send a message to programmers everywhere, and they did: steal code, go to prison.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

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algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, computerized trading, corporate raider, creative destruction, credit crunch, Credit Default Swap, financial innovation, fixed income, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, Myron Scholes, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

The charges by Arnuk and Saluzzi were sensational and potentially explosive. The markets were being manipulated. No one else had noticed what they had noticed. Regulators had been asleep. They hadn’t blown any time-out whistles or thrown any penalty flags for spoofing or momentum ignition or pinging. This was outrageous, because the SEC and FINRA were supposed to be cleaning up their act after missing abuses like Bernie Madoff’s outrageous Ponzi scheme. But after the two traders disseminated the white paper, nothing happened—nothing at all. Investors in December 2008 had other things on their minds. They were consumed by bailouts, failures, bankruptcies, and the incoming Democratic administration of Barack Obama. The white paper was little more than background noise. “Outside of our clients, no one made a stink or even mentioned our findings,” recalled Arnuk.7 The two men may have been disappointed, but they were not quitters.

She was most afraid they might clip the agency’s wings and transfer some of its authority to the Federal Reserve. In the end, the SEC would maintain its turf, but the historic legislation would end up saddling the SEC a to-do list containing more than 80 new chores, including studies and the adoption of new regulations, and a deadline of two years for most of them. Simultaneously, Schapiro struggled to reinvigorate the agency, to make it more aggressive. The SEC had missed uncovering the Bernie Madoff Ponzi scheme because somnambulant bureaucrats had ignored direct complaints between 1992 and 2008. There had been a pair of half-hearted investigations and some cursory exams of Madoff’s firm but, according to a report by the SEC’s inspector general, “a thorough and competent investigation or examination was never performed.” The episode had been a demoralizing embarrassment. Schapiro was trying to bring back the zeal and spirit that the agency had had at its inception.


pages: 295 words: 89,280

The Narcissist Next Door by Jeffrey Kluger

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Albert Einstein, always be closing, Apple's 1984 Super Bowl advert, Bernie Madoff, Columbine, delayed gratification, Donald Trump, Elon Musk, impulse control, Jony Ive, meta analysis, meta-analysis, Plutocrats, plutocrats, Ponzi scheme, QWERTY keyboard, Ralph Nader, Ronald Reagan, Schrödinger's Cat, Stephen Hawking, Steve Jobs, the scientific method, theory of mind, Triangle Shirtwaist Factory, Walter Mischel, zero-sum game

Most people concluded her performance was an effort to demonstrate to her fans that she had, you know, grown up and was, you know, no longer a child—a rite of passage as inevitable for her as for anyone else, but somehow newsworthy because it was happening to Miley. This played out in the same summer that Lady Gaga—she of the meat dress, which may or may not have had much fashion merit, but undeniably drew eyeballs—released a song called “Applause,” in which she repeats over and over the lyric “I live for the applause, applause, applause,” as frank an admission and as powerful an anthem of the age of narcissism as you could imagine. There is Bernie Madoff as well, a man whose multi-decade Ponzi scheme made him exceedingly rich, but at the cost of $65 billion in other people’s wealth, stolen from a victim list that, in the government’s records, ran 165 pages long. Hedge funds and banks made up much of that inventory of the wronged—admittedly, nobody’s idea of sympathetic victims—but there were also pension funds and charities, as well as individuals like Jack Cutter of Longmont, Colorado, a seventy-nine-year-old oil industry worker who was living with his wife on $1 million in retirement savings, a nest egg that vanished in Madoff’s care, forcing Cutter to take a job stocking supermarket shelves.

Play must come second to work, gluttony must yield to restraint, and all manner of other pleasures must be passed up entirely if they violate marriage vows, the law or simple common sense. None of that is easy, and we often fail at it miserably. “The heart wants what it wants,” said Woody Allen in a supremely narcissistic moment, as he blithely explained away his decision to ditch his longtime partner, Mia Farrow, in favor of her twenty-one-year-old daughter, Soon-Yi Previn. “Well, that’s what I did,” is how Ponzi king Bernie Madoff shrugged it off to a fellow inmate who offered the hard-to-argue-with opinion that stealing money from old ladies was a “fucked-up thing to do.” Both Madoff and Allen wanted and they took. Full stop. The idea that desire equals license is something that comes factory-loaded in all of us, and is the reason babies are not just sad or disappointed when they’re denied something, but downright furious.


pages: 76 words: 20,238

The Great Stagnation by Tyler Cowen

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Asian financial crisis, Bernie Madoff, en.wikipedia.org, endogenous growth, financial innovation, Flynn Effect, income inequality, indoor plumbing, life extension, liquidity trap, Long Term Capital Management, Mark Zuckerberg, meta analysis, meta-analysis, Peter Thiel, RAND corporation, school choice, Tyler Cowen: Great Stagnation, urban renewal

As the world became more prosperous, it seemed that relying on the optimistic expectations of others was justified. For instance, the notion that the United States was seeing a real estate bubble was a staple observation among financial commentators at the time. But it was well known that a real estate bubble had popped before—in the late 1980s—and that the United States had survived that event with a mild recession but not much calamity. The investment frauds of Bernie Madoff reflect some factors behind the broader financial crisis. The point is not that all banking is a fraud, but rather the more subtle point that we rely on the judgments of others when we decide whom to trust. For years, Madoff had been a well-respected figure in the investment community. Madoff’s fraud was possible only because so many people trusted him. The more people trusted him, the easier it was for Madoff to gain the trust of yet others.


pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

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Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

Wall Street is not a bunch of greedy bastards shaking down Main Street for every last dime – although there are plenty of those types of ass wipes that do work on Wall Street. Wall Street provides a needed function in the economy. It is real. It provides real economic value. You will generate wealth, for yourself AND for society. Really. But believe me, it’s hard, if not outright impossible, for most others to see this value. Movies like Wall Street don’t help. Nor does Bernie Madoff or any of the other villains. And what the heck, Goldman Sachs Lloyd Blankfein and JP Morgan’s Jamie Dimon don’t help the cause with their massive compensation. I think they deserve their due, but they should take it all in stock and sell it when they retire. I’m proud of my 20+ years working on Wall Street. Maybe I’m just rationalizing its economic purpose to make myself feel good and so I have something to talk about at cocktail parties.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

As in the wake of the Great Crash of 1929, villains had to be found and punished. The collective delusion of the housing bubble and market forces would not suffice as an explanation for such a calamity. However, there was no single person or group of identifiable individuals to put in the dock, as Ken Lay and Jeff Skilling had been after the collapse of Enron. The discovery and prosecution of Bernie Madoff was a poor substitute, since his Ponzi scheme far predated the bubble and had nothing to do with it. No, finance and, more broadly, greed, were to blame. The general public were of course victims, and the political class would avenge them and see that never again would something like the meltdown be allowed to occur. The first order of business, though, was to get back to the world of growth and debt-driven prosperity that after a quarter century everyone took as normal, even as a birthright.

No important bankers have been sent to prison, and though several have lost considerable wealth and reputation, most remain very rich men even after losing their jobs. This is unfortunate, because the paranoid style of American politics demands that the whole thing was a plot—bizarre as it is to believe that a bunch of bankers thought they could get rich by blowing up the global economy— and plots need flesh-and-blood villains. The legal destruction of a few Bernie Madoff types might have slaked the public’s thirst for revenge. In the absence of a scapegoat to punish, the public wants to punish the banks as institutions. Of course, as in the insane practice of shareholders suing companies they invest in, punishing the banks means attacking the viability of the only institutions that actually hold and transmit deposit money for the rest of society. Few politicians understand any of this and fewer care, and the banks by their own practices and behavior have made themselves irresistible targets.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

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Affordable Care Act / Obamacare, bank run, banking crisis, Bernie Madoff, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve, zero-sum game

What it primarily does is make a massive number of rules designed to provide investors with “transparent” financial and operating information to ensure that they can make sound investments. Based on the performance of capital markets over the last 10 years, there is prima facie evidence that the SEC has failed miserably. Without even considering the fraud and abuse that the SEC failed to detect in cases like Enron, WorldCom, Fannie Mae, Freddie Mac, and Bernie Madoff, simply consider that the S&P 500 today (August 2011) is still 11 percent below where it traded in August 2000. Because the work of the SEC is somewhat eclectic, we will focus on its primary policy mistakes, a number of which have been previously discussed. One of the most significant errors by the SEC is the sanctioning of the rating agencies (Standard & Poor’s [S&P], Moody’s, and Fitch). Under an SEC rule, only debt instruments rated by S&P, Moody’s, or Fitch qualify for positive consideration under Employee Retirement Income Security Act (ERISA) rules designed to protect pension accounts.

The world would be a dramatically better place to live. Whim seeking, hedonism, shortsightedness, fraudulent manipulation, and narcissism, are not the acts of a person who is pursuing long-term happiness. These are the acts of a person with low self-esteem. I had a friend who drank 24 beers a day. He developed cirrhosis of the liver and continued to drink. He died. People say he was selfish. I think he was self-destructive. Bernie Madoff is often described as selfish, which is ridiculous. By his own admission, Madoff was miserable before he was caught. He was stealing from his best friends and from his family. He was self-destructive, not selfish. The most important lesson we can teach our children is that they should act in their long-term rational self-interest, properly understood. Acting in your rational self-interest requires a lot of thinking and a lot of work, but it has an extraordinarily high payback.


pages: 294 words: 81,292

Our Final Invention: Artificial Intelligence and the End of the Human Era by James Barrat

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3D printing, AI winter, Amazon Web Services, artificial general intelligence, Asilomar, Automated Insights, Bayesian statistics, Bernie Madoff, Bill Joy: nanobots, brain emulation, cellular automata, Chuck Templeton: OpenTable, cloud computing, cognitive bias, commoditize, computer vision, cuban missile crisis, Daniel Kahneman / Amos Tversky, Danny Hillis, data acquisition, don't be evil, drone strike, Extropian, finite state, Flash crash, friendly AI, friendly fire, Google Glasses, Google X / Alphabet X, Isaac Newton, Jaron Lanier, John Markoff, John von Neumann, Kevin Kelly, Law of Accelerating Returns, life extension, Loebner Prize, lone genius, mutually assured destruction, natural language processing, Nicholas Carr, optical character recognition, PageRank, pattern recognition, Peter Thiel, prisoner's dilemma, Ray Kurzweil, Rodney Brooks, Search for Extraterrestrial Intelligence, self-driving car, semantic web, Silicon Valley, Singularitarianism, Skype, smart grid, speech recognition, statistical model, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, strong AI, Stuxnet, superintelligent machines, technological singularity, The Coming Technological Singularity, Thomas Bayes, traveling salesman, Turing machine, Turing test, Vernor Vinge, Watson beat the top human players on Jeopardy!, zero day

Al Qaeda’s attacks of 9/11 cost the United States some $3.3 trillion, if you count the wars in Afghanistan and Iraq. If you don’t count those wars, the direct costs of physical damage, economic impact, and beefed up security is nearly $767 billion. The subprime mortgage scandal that caused the worst global downturn since the Great Depression cost about $10 trillion globally, but around $4 trillion at home. The Enron scandal comes in at about $71 billion, while the Bernie Madoff fraud cost almost as much, at $64.8 billion. These numbers show that in dollar cost per incident, financial fraud competes with the most expensive terrorist act in history, and the subprime mortgage crisis dwarfs it. When researchers put advanced AI into the hands of businessmen, as they imminently will, these people will suddenly possess the most powerful technology ever conceived of. Some will use it to perpetrate fraud.

The subprime mortgage scandal: International Monetary Fund, “IMF Loss Estimates: Executive Summary,” last modified 2010, http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/exesum.pdf (accessed October 13, 2011). The Enron Scandal comes in at about $71 billion: Laws.Com, “Easy Guide to Understanding ENRON,” last modified December 6, 2011, http://finance.laws.com/enron-scandal-summary (accessed January 14, 2012). while the Bernie Madoff fraud: Graybow, Martha, “Madoff mysteries remain as he nears guilty plea,” Reuters, March 11, 2009, http://www.reuters.com/article/2009/03/11/us-madoff-idUSTRE52A5JK20090311?pageNumber=2&virtualBrandChannel=0&sp=true (accessed February 14, 2012). Enron, the scandal-plagued Texas corporation: Roberts, Joel, “Enron Traders Caught on Tape,” CBSNEWS.COM, December 5, 2007, http://www.cbsnews.com/8301-18563_162-620626.html?


pages: 385 words: 118,901

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street by Sheelah Kolhatkar

Bernie Madoff, Donald Trump, family office, fear of failure, financial deregulation, hiring and firing, income inequality, light touch regulation, locking in a profit, margin call, medical residency, mortgage debt, p-value, pets.com, Ponzi scheme, rent control, Ronald Reagan, short selling, Silicon Valley, Skype, The Predators' Ball

It was less than a year into the worst financial crisis in eighty years. The previous fall, Lehman Brothers had gone bankrupt, banks were collapsing, and millions of people were watching the value of their retirement savings go down with the plunging stock market. House prices had plummeted, revealing the corrupt machinery inside investment banks that had packaged low-quality subprime mortgages and sold them to investors all over the world. Bernie Madoff’s $20 billion Ponzi scheme had been discovered, along with the fact that the SEC missed obvious warning signs for many years. Morale had never been lower. For decades after its founding in 1934, the SEC was a feared and respected force on Wall Street, its lawyers priding themselves on their discretion and political independence. Over the previous few years, however, the culture at the SEC had changed; incompetence had become ingrained.

Bringing a billionaire in for questioning wasn’t something the SEC did every day. It wasn’t long ago, in fact, that SEC attorneys were openly discouraged from pestering important people on Wall Street. The leadership of the SEC had often hinted to the staff that the wealthiest, most successful individuals in the financial world were not to be disturbed. It was part of the former SEC chairman’s “hands-off” approach to regulation. But in 2012, post–Bernie Madoff, the agency was in the midst of a transformation. This time, no one questioned the Elan team’s desire to bring Cohen in for a deposition. The new director of enforcement was trying to make it easier for SEC attorneys to do their jobs. On March 12, Riely sent a subpoena requesting that Cohen appear to testify. They all knew it was unlikely that Cohen would say anything that would be helpful to them—it was likely to be one of the most carefully rehearsed and lawyered interviews they had ever done.

Many of them, including university endowments and pension funds managing retirement accounts for public school teachers and police officers, were only too happy to overlook the questionable things hedge funds were doing—as long as they made money. Pension fund managers in particular had enormous, in some cases impossible, financial obligations to fulfill for their retirees, and very few ways of earning the returns they needed. Cohen had made his investors so much money over the years, it was going to take a lot to compel them to leave. And if there was one thing the Bernie Madoff case had shown, it was that even sophisticated investors could fall for the lure of easy money. Once the government’s investigation of SAC reached a certain feverish stage, however, circumstances began to change. Cohen was getting calls from anxious investors seeking an explanation as to why his name was in the newspaper every few days. Wasn’t this a distraction? What was he doing to put this behind him?


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

David Kotz, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, Report of Investigation Case No. OIG-509, United States Securities and Exchange Commission, Office of Inspector General (2011), pp. 61–77, accessed May 29, 2015, https://www.sec.gov/news/studies/ 2009/oig-509.pdf. 26. James B. Stewart, “How They Failed to Catch Madoff,” Fortune, May 10, 2011. Accessed May 2, 2015. http://fortune.com/2011/05/10/how-they -failed-to-catch-madoff/. 27. Kotz, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, p. 249. 28. Ibid., p. 247. 29. Ibid., p. 250. Markopolos gives a graphic account of the conversation from his perspective: No One Would Listen, Kindle location 2585 and following. See also Suh’s testimony on this subject: Kotz, Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, p. 251. 30.

But the deterrence effects of prosecuting whole corporations are far weaker: since penalties against organizations are spread across all their stakeholders; whereas penalties against individuals are targeted to those directly responsible. The Madoff case gives a second, much more detailed glimpse into the workings of the SEC, and as we will see, possibly, into the consequences of budgetary deficiency. It is now common knowledge how the great phisher-for-phools Bernard Madoff duped wealthy in­­vestors into a Ponzi scheme. Every month the investors would receive a statement showing how their Madoff-held assets had grown in value: with remarkable regularity. An investment quant from Whitman, Massachusetts, Harry Markopolos, followed up on this CONCLUSION Akerlof.indb 157 157 6/19/15 10:24 AM and presented his suspicions to the SEC Boston regional office. He claimed that Madoff’s high, and smooth, returns (between 1 and 2 percent per month) defied the laws of finance.22 Madoff said that he accomplished the smoothing by an investment strategy called a “collar.”

Accessed March 15, 2015. http://knowledge.wharton.upenn.edu/article/goldman-sachs-and-abacus -2007-ac1-a-look-beyond-the-numbers/. Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. New York: William Morrow, 1992. Kotler, Philip, and Gary Armstrong. Principles of Marketing. 14th ed. Upper Saddle River, NJ: Prentice Hall, 2010. Kotz, David. Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme. Report of Investigation Case No. OIG-509. US Securities and Exchange Commission, Office of Inspector General. 2011. Accessed May 29, 2015. https://www.sec.gov/news/studies/2009/oig-509.pdf. Krasnova, Hanna, Helena Wenninger, Thomas Widjaja, and Peter Buxmann. “Envy on Facebook: A Hidden Threat to Users’ Life Satisfaction?” 192 Akerlof.indb 192 BIB LIOGR APHY 6/19/15 10:24 AM Wirtschaftsinformatik Proceedings 2013.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, Gunnar Myrdal, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

Well, yes, they do invest, but not necessarily directly in production. Most of them prefer to invest in asset values. For example, they put money in the stock market and stock values go up, so they put even more money in the stock market, irrespective of how well the companies they invest in are actually doing. (remember those predictions in the late 1990s of the dow at 35,000?) The stock market has a Ponzi-like character even without the Bernie Madoffs of this world explicitly organising it so. The rich bid up all manner of asset values, including stocks, property, resources, oil and other commodity futures, as well as the art market. They also invest in cultural capital through sponsorship of museums and all manner of cultural activities (thus making the so-called ‘cultural industries’ a favoured strategy for urban economic development).

Disruptions of social networks and destruction of social solidarities can be every bit as serious. Loss of social relations is impossible to recompense with a money payment. Finally we need to note the role of crises. A crisis, after all, is nothing less than a massive phase of dispossession of assets (cultural as well as tangible). To be sure, the rich as well as the poor suffer, as the cases of housing foreclosures and losses from investing with Bernie Madoff’s crazy Ponzi scheme show. But this is how wealth and power get redistributed both within and between classes. Devalued capital assets left over from bankruptcies and collapses can be bought up at fire-sale prices by those blessed with liquidity and profitably recycled back into circulation. Surplus capital thus finds a new and fertile terrain for renewed accumulation. Crises may be, for this reason, orchestrated, managed and controlled to rationalise the irrational system that is capitalism.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Asset managers could charge commission to the account of their clients, while office expenses would have to be met from their own pockets. From the 1970s the structure of exchanges changed radically. The change had multiple strands, and causes. The monopoly of the New York Stock Exchange (NYSE) was challenged, first by NASDAQ, an electronic exchange established in 1971 by broker–dealers, led by Bernard Madoff. A broker is an agent; a dealer is a trader. The rise of the broker–dealer blurred the distinction between two types of transaction. The conflict of interest inherent in the broker–dealer concept, and the name of Bernard Madoff, will recur in this book. Some hot new companies, such as Intel and Microsoft, chose to list on NASDAQ rather than the NYSE. The technological shift was paralleled by regulatory changes that encouraged competition between exchanges. Today there are multiple exchanges on which shares can be traded – the London and New York stock exchanges both own electronic exchanges which compete with their main markets.

As ‘Fabulous Fab’ Tourre practised his ‘intellectual masturbation’, he had little interest in the long-term health of Goldman Sachs, much more in his own bonus. The cyber cafés of Lagos are home to the scammers who invite you to facilitate an illicit transaction in return for a large commission. The criminals call those who fall for their entreaties ‘mugus’ – people who believe they are the beneficiaries of impropriety when they are in fact the victims. There is always a supply of mugus. Some of Bernard Madoff’s clients suspected he was operating illegally, but supposed he was improperly using the information he gained from his other activities to secure exceptional returns. So clients of investment banks often believe that ‘the Edge’ – the inside information about markets obtained by undertaking a wide range of financial services activities – is used for their benefit. But even clients who are sceptical about the extent to which ‘the Edge’ benefits customers rather than insiders may find there is no practical alternative to dealing with these heavily conflicted firms.

The theft was not complicated – high returns to savers were achieved by paying any withdrawals from the funds subscribed by new investors. The new investors were attracted by the success of those who had been in the scheme from the beginning. Ponzi schemes break down when the supply of new investors is insufficient to meet the withdrawals of the old. The greatest of all Ponzi schemes in history was that perpetrated by Bernard Madoff, who claimed high returns with low volatility from an investment strategy using derivative securities. In fact, no investment activity took place.25 During the global financial crisis the demand for redemptions increased and incoming funds shrank. Unable to meet withdrawals, Madoff turned himself in to the FBI and was duly sentenced to 140 years in jail. Some of those who invested with Ponzi and Madoff made money.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

This is no surprise, and, historically, crashes of this sort almost always uncover frauds and malfeasances of a type which had escaped everyone’s notice while prices were rising. Downturns put pressure on earnings, and companies which are less than wholly honest begin to creak at the seams; at the same time, the voices which have been warning that there is something funny about Charles Ponzi (in 1920), Ivar Kreuger the match king (in 1932), Bernie Ebbers (in 2002), or Bernard Madoff (in 2008) begin to gain a hearing. The decline in share prices rolls over a rock, and an unsettling variety of financial beasties emerge. In the case of the millennial dot-com bust, the creature which came crawling out from underneath the rock was a fraud so spectacular and so systematic and so magnificently, reekingly wrong that it was in its way almost a thing of beauty: Enron. To fully understand the impact that Enron had, you have to appreciate just how admired the company was in its prime.

Now the country is in one of the worst recessions to hit a developed economy in modern times, one which is likely to get worse: if 25 percent of your gross national product and 13 percent of your employment come from house building, and house building stops, it’s time to switch metaphors: Celtic Dodo? Celtic Zeppelin? Celtic Zombie? Celtic Car Crash? The undrinkable Galway water was a classic funny smell. In fact, it’s noticeable how often people who speak of or report these things refer to things smelling off or funny. The exact phrase was used to me by a man who turned down an invitation from Bernard Madoff to participate in his hedge fund. This man worked for a big investment bank, which offered clients the chance to participate in a fund-of-funds service: in other words, it offered a fund which consisted of a investments in several different hedge funds. For the banker, this should have been a win-win, because he had clients who were clamoring to join in Madoff’s funds—which were famous for their consistency, returning a steady 10 to 12 percent in all years and all weather—and the inflow of money would in turn generate a steady income in fees.

That was the regime at the body which was supposed to be regulating the banks. Just as President Bush’s Environmental Protection Agency and Consumer Product Safety Commission seemed to have been captured by the very interests they were supposed to be regulating, so it was at the SEC. Much of this doctrinaire laissez-faire involved the nonenforcement of the rules which already existed. An activist SEC, for instance, would never have allowed Bernard Madoff to run his Ponzi scheme; the very consistency of his returns—the funny smell alluded to above—would have been enough to draw their close attention to his accounts. In 2005, a professional investor named Harry Markopolos, a mild-mannered Boston accountant, wrote a twenty-one-page letter to the SEC, pointing out the high probability that Madoff’s fund was a Ponzi scheme. The only alternative explanation Markopolos could come up with wasn’t that Madoff was legit; it was that he was doing something called “front running,” using private information gleaned from his stockbroking operation to make profits for his other funds.


pages: 319 words: 103,707

Against Everything: Essays by Mark Greif

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1960s counterculture, back-to-the-land, Bernie Madoff, citizen journalism, collateralized debt obligation, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Desert Island Discs, Donald Trump, income inequality, informal economy, Norman Mailer, Ponzi scheme, postindustrial economy, Ronald Reagan, technoutopianism, telemarketer, trickle-down economics, upwardly mobile, white flight

On the 26th of January, eight babies were born by cesarean section. They ranged in size from one pound, twelve ounces, to two pounds, nine ounces. Only seven had been noted on ultrasound. The eighth, emerging as a minuscule hand clinging to the ob-gyn’s latex glove, amazed the delivery room. I think Octomom deserves another glance, in the midst of our compulsive forgetfulness, as the central actor in perhaps the only non–Bernard Madoff, ostensibly nonfinancial story to stir the boiling pitch of the nation’s passions in those historic months of September 2008 to March 2009, when American news outlets were trying to cope with the greatest financial collapse since the Great Depression. (Also enacting their own greatest moral collapse since their collusion in the 2003 Iraq War, at a rare moment when different messengers might really have led American society on a different path into history.)

If you remember Edward Liddy—the closest we ever came to seeing a visible individual in a position of responsibility on TV for more than one night’s broadcast—testifying to Congress as head of AIG in March 2009, you’ll remember that it was compulsory for the press to identify him as not the chief of the company in its bad old days. He was someone who must not be blamed, even as he argued for the $173 billion in tax revenues sucked out of government to prop up his new employer. The press didn’t follow up this sentence with the logical next one, naming the chief of AIG in the period for which someone should be blamed. Who was the old chief?*1 But Octomom, Octomom! And Bernard Madoff. Is it in very bad taste to point out that the two villains we gained by name in the months of deepening recession, in early 2009, were a woman and a Jew? Suleman and Madoff. That is to say, at the moment when American capitalism tottered under the mistakes, bad bets, lies, overconfidence, cupidity, and evil of its financial firms, the press groped at traditional scapegoats—and it left one blinking, dumbfounded.

Admittedly the anchors and editors had first stumbled around in a mode of semi-investigation for some months, September to December, seemingly unsure of whom to feature on the broadcasts, whom to wait for outside Wall Street offices (if anyone—I don’t remember this happening much), so near to their own television headquarters, or which bankers to sic TV investigative teams on (none, as I recall). Then they followed the lineups of congressional hearings from Barney Frank’s House Financial Services Committee, relying on the same live C-Span the rest of us were watching (but without the level of analysis mustered on any week’s Monday Night Football), increasingly uncomfortable, it seemed, with anything that might be fomenting “class war.” Luckily, Bernard Madoff took over the headlines in December 2008, and this fixation on one Jewish banker could not be anti-Semitism, because his prominent Jewish victims also wanted his head. Indeed, we had the sorry spectacle of Elie Wiesel, conscience of humanity, investor with Madoff, becoming the spokesman for vengefulness. “I would like him to be in a solitary cell,” Wiesel said, “with only a screen, and on that screen for at least five years of his life, every day and every night, there should be pictures of his victims, one after the other after the other, all the time a voice saying, ‘Look what you have done to this old lady, look what you have done to that child, look what you have done,’ nothing else.”


pages: 486 words: 148,485

Being Wrong: Adventures in the Margin of Error by Kathryn Schulz

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affirmative action, anti-communist, banking crisis, Bernie Madoff, car-free, Cass Sunstein, cognitive dissonance, colonial rule, conceptual framework, cosmological constant, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, desegregation, Johann Wolfgang von Goethe, lake wobegon effect, mandatory minimum, Pierre-Simon Laplace, Ronald Reagan, six sigma, stem cell, Steven Pinker, Tenerife airport disaster, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, trade route

We get stuck there when we are really wrong about really big things—beliefs so important and far-reaching that we can neither easily replace them nor easily live without them. If our trivial beliefs sometimes burst as lightly as bubbles—just a quick pop of surprise and they’re gone—these gigantic beliefs collapse like stars, leaving only us and a black hole behind. If you mortgaged your family’s future on your faith in Bernie Madoff; if you hitched your whole wagon to a doctrine or a deity you no longer believe in; if you were wrong about someone you loved and the kind of life you thought the two of you would live together; if you have betrayed your own principles in any of the countless dark ways we can surprise ourselves over the course of a lifetime: if any of this or anything like this has happened to you, then you have suffered in the space of pure wrongness.

(In fact, they could not have been, since profound faith is, in the end, a necessarily private commitment.) Nor could they fairly claim to have been kept in the dark, either. Millerism wasn’t one of those religious sects based on secret arcana known only unto high priests; broad dissemination of its tenets and the calculations used to justify them was both the means and the message of the movement. Nor, finally, had the Millerites been defrauded. William Miller was no Bernie Madoff, and his followers, unlike Madoff’s clients, hadn’t been intentionally deceived. They had simply placed their faith in an expert who turned out to be wrong. In that respect, they deserve our sympathy, at least up to a point. As we’ve seen, all societies function on the basis of distributed expertise, and all of us rely on others in areas where our own knowledge falls short. Still, those of us in free countries choose our leaders, and we have the obligation to do so with care.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Towards the end of his investing career he mellowed and put less faith in speculative investments, writing: ‘As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about.’21 Perhaps the enormous losses banks incurred in the crisis, and the fines levied by regulators around the world, will bring a similar change of heart in banking. Banks and other financial intermediaries create wealth by providing valuable services to their customers. But there is always the risk that they create the illusion of wealth – in the extreme case of the fraudster Bernie Madoff and his funds there was quite a long period when the perception of wealth was substantially higher than the reality.22 More generally, many of the substantial bonuses that were paid as a result of trading in derivatives reflected not profits earned in the past year but the capitalised value of a stream of profits projected years into the future. Such accounting proved more destructive than creative.

Data are for end 2014. 7 Worldwide bank assets are the total assets of the largest 1000 banks in the world, as listed in the Banker Database. 8 The Banker Database, www.thebankerdatabase.com 9 The description ‘socially useless’ was used by Adair Turner, chairman of the Financial Services Authority in the UK from 2008 to 2013, in his Turner Report on the financial crisis in United Kingdom; The phrase ‘doing God’s work’ was used by the CEO of Goldman Sachs, Lloyd Blankfein, in an interview published in the Sunday Times, 8 November 2009. 10 Figures from the Banker Database, www.thebankerdatabase.com, as of end 2014. 11 Because for any bank total assets must equal total liabilities, leverage can be measured by the ratio of either assets or liabilities to equity capital. 12 Brennan, Haldane and Madouros (2010). 13 I prefer ‘too important to fail’ (TITF) to ‘too big to fail’ (TBTF) as a description of the problem, because a small bank can be significant if it is highly interconnected with other banks or if its failure would be a signal leading to contagion to other banks. 14 Wolf (2010). 15 Bank of England (2009). 16 Bank for International Settlements (BIS), Derivative Statistics 2015. 17 Abbey National demutualised in 1989 and has survived as part of Santander UK. 18 That attitude was brilliantly captured in the book Liar’s Poker by Michael Lewis (1989). 19 CCP Research Foundation estimates of conduct costs 2010–14, http://conductcosts.ccpresearchfoundation.com/conduct-costs-results. The estimate includes provisions made by banks of around $70 billion for future settlements of conduct cases relating to past behaviour. 20 Moggridge (1992), p. 95. 21 Keynes in a 1934 letter quoted by Chambers et al. (2014). 22 Bernie Madoff, former chairman of the NASDAQ stock exchange, for many years managed funds for private investors in which the money paid out was financed by new money coming in – what is known as a Ponzi scheme. He is estimated to have defrauded his investors of around $18 billion and in 2009 was sentenced to the maximum term in prison of 150 years. 23 Quoted in Alan Harrington, ‘The Tyranny of Forms’, Life in the Crystal Palace (Knopf, 1959). 24 This is not to say that accounting standards guarantee a fair and accurate description of the health of a bank (Dowd, 2015, Kerr, 2011). 25 The success of an investment in Berkshire Hathaway is in part the judgement of Warren Buffett and in part the fact that he does not operate his company as a hedge fund, which would typically charge an annual fee of 2 per cent of capital and 20 per cent of profits.


pages: 275 words: 77,017

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society by David Wolman

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Bay Area Rapid Transit, Berlin Wall, Bernie Madoff, bitcoin, Bretton Woods, carbon footprint, cashless society, central bank independence, collateralized debt obligation, corporate social responsibility, credit crunch, cross-subsidies, Diane Coyle, fiat currency, financial innovation, floating exchange rates, German hyperinflation, greed is good, Isaac Newton, M-Pesa, Mahatma Gandhi, mental accounting, mobile money, money: store of value / unit of account / medium of exchange, offshore financial centre, Peter Thiel, place-making, placebo effect, Ponzi scheme, Ronald Reagan, seigniorage, Silicon Valley, special drawing rights, Steven Levy, the payments system, transaction costs

Plus, don’t you deserve some trifling office supplies, after all those years of loyalty to the firm? It’s not like you’re walking off with a company car. With the stolen Cokes, the rationale is even easier: if there are any what’s-mine-is-yours communities left on Earth, they are college dormitories. These findings help us to understand the thinking—or lack thereof—that goes on in the minds of villains like Bernie Madoff, the architects of the Enron scam, and even bankers who sell legal but toxic assets. Ariely ventures that these people, and millions like them, wouldn’t mug an old lady on the street, and he’s probably right. Fuzzy up the transaction, though, and it brings out the worst in us. “We need to recognize that once cash is a step away,” writes Ariely, “we will cheat by a factor bigger than we could ever imagine.”

The Psychopath Inside: A Neuroscientist's Personal Journey Into the Dark Side of the Brain by James Fallon

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Bernie Madoff, epigenetics, Everything should be made as simple as possible, meta analysis, meta-analysis, personalized medicine, phenotype, Rubik’s Cube, selective serotonin reuptake inhibitor (SSRI), stem cell, theory of mind

We also need individuals with narcissism, because to have the energy to be a leader you’ve got to be full of yourself. Who the hell else would want to be a president or CEO if they really knew what it involved? You need heavy egotism and a lot of glibness and a bit of bullshit to aspire to that kind of work and to do it well. Robert Hare, the man behind the psychopath checklist, sees psychopathy at work in the finance and banking and investment community, perhaps in some people like Bernie Madoff. (A strong study showing greater psychopathy in business hasn’t been done, but the hypothesis is reasonable.) It could be argued that the only reason these money-managing swindlers exist is that the general public wants to make that quick and easy buck and, while lacking their own combination of high risk and knowledge, use hired guns like Madoff and other investment mavens to do their dirty work for them.


pages: 274 words: 66,721

Double Entry: How the Merchants of Venice Shaped the Modern World - and How Their Invention Could Make or Break the Planet by Jane Gleeson-White

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Affordable Care Act / Obamacare, Bernie Madoff, Black Swan, British Empire, carbon footprint, corporate governance, credit crunch, double entry bookkeeping, full employment, Gordon Gekko, income inequality, invention of movable type, invention of writing, Islamic Golden Age, Johann Wolfgang von Goethe, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, means of production, Naomi Klein, Ponzi scheme, shareholder value, Silicon Valley, Simon Kuznets, source of truth, spice trade, spinning jenny, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, traveling salesman, upwardly mobile

Economist Basil Yamey argues that this was accounting’s formative moment: ‘Indeed, it might be claimed that the joint stock company was responsible for the transformation of book-keeping into accounting and for the profession of accountancy.’ When railway companies faltered in the late 1840s, struggling to return 10 per cent on investments, many began to fiddle their books. For example, they treated costs as capital investments rather than as expenses, thereby inflating their profits; and used fresh investments instead of profits to pay out dividends (a strategy now known as a Ponzi scheme, made infamous most recently by Bernie Madoff in 2009). The most notorious perpetrator of deceptive railway accounting was the ‘Railway King’, George Hudson (1800–71), who by 1844 controlled over 1600 kilometres of railway in Britain. Hudson overstated his profits and used shareholder investments to pay dividends. When he was eventually exposed by a group of outraged investors, he fled England to escape lawsuits against him for outstanding sums amounting to almost £600,000, a fortune at the time.


pages: 219 words: 61,720

American Made: Why Making Things Will Return Us to Greatness by Dan Dimicco

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Affordable Care Act / Obamacare, American energy revolution, American Society of Civil Engineers: Report Card, Bakken shale, barriers to entry, Bernie Madoff, carbon footprint, clean water, crony capitalism, currency manipulation / currency intervention, David Ricardo: comparative advantage, decarbonisation, fear of failure, full employment, Google Glasses, hydraulic fracturing, invisible hand, job automation, knowledge economy, laissez-faire capitalism, Loma Prieta earthquake, manufacturing employment, oil shale / tar sands, Ponzi scheme, profit motive, Report Card for America’s Infrastructure, Ronald Reagan, Silicon Valley, smart grid, smart meter, sovereign wealth fund, The Wealth of Nations by Adam Smith, too big to fail, uranium enrichment, Washington Consensus, Works Progress Administration

We’ve always had economic ups and downs, of course. But when you look at the expansions and recessions since 1970, you find deep and lasting damage to the economy. You find a pattern of well-paying jobs disappearing, to never return, and millions of manufacturing jobs being replaced with service industry jobs or financial industry jobs. You find greed, you find cheating and fraud and a wholesale abandonment of ethics. You find Bernie Madoff and Ken Lay and Dennis Kozlowski. You find bubbles that burst with disastrous consequences. The housing bubble, like every other debt-driven bubble before it, was a giant Ponzi scheme. In reality, for every year that housing prices ballooned, and people found more elaborate ways of packaging financial service “products” that nobody really understood, we lost more ground. You can manage wealth, certainly.


pages: 283 words: 77,272

With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald

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Ayatollah Khomeini, banking crisis, Bernie Madoff, Clive Stafford Smith, collateralized debt obligation, Corrections Corporation of America, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, deskilling, financial deregulation, full employment, high net worth, income inequality, Julian Assange, mandatory minimum, nuremberg principles, Ponzi scheme, Project for a New American Century, rolodex, Ronald Reagan, too big to fail, Washington Consensus, WikiLeaks

Over the past several decades, we have witnessed numerous examples of serious lawbreaking on the part of our most powerful political and financial leaders with no consequences of any kind. It is no exaggeration to state that the current consensus among journalists and politicians is that except in the most blatant and sensationalistic cases (typically ones in which other powerful factions are aggrieved—a Bernie Madoff here, a Rod Blagojevich there), criminal prosecutions are simply not appropriate for the country’s elites. Courtrooms, indictments, and prisons are there for ordinary Americans, not for the ruling classes, and virtually never for our highest political leaders. The central promise of the American founding—that all would stand equal before the rule of law no matter what other political and economic inequality was allowed—has been abandoned.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

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Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, intangible asset, invisible hand, Kenneth Rogoff, market bubble, money market fund, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, selection bias, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

In slightly worse scenarios we would probably want to own fixed assets such as a house or property, and there would still be value somewhere in the broadly diversified rational portfolio as the whole world probably did not go bust all at once. In an even worse scenario than this where property rights are out the window we would probably want to own high-value, yet easy to hide and transfer, goods like gold or jewellery. And in complete mayhem we want to own shelter, security, food and water. And indeed guns and ammo. Avoiding fraud While different from the broader kind of calamity discussed above, for some people Bernie Madoff and other fraudsters like him have become their personal equivalent. Whole books have been written about how to avoid investing with the next Madoff, and rightly so. Madoff is the epitome of the worst the world of finance has to offer. He was stealing from people whose confidence he had gained, and left many people bankrupt while he was living the high life. A couple of former investors of mine were hurt by the Madoff debacle.


pages: 416 words: 118,592

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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3Com Palm IPO, accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, beat the dealer, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Edward Thorp, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, money market fund, mortgage tax deduction, new economy, Own Your Own Home, passive investing, Paul Samuelson, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, survivorship bias, The Myth of the Rational Market, the rule of 72, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

Trading generates commissions, and commissions are the lifeblood of many brokerage houses. The technicians do not help produce yachts for the customers, but they do help generate the trading that provides yachts for the brokers. APPRAISING THE COUNTERATTACK As you might imagine, the random-walk theory’s dismissal of charting is not altogether popular among technicians. Academic proponents of the theory are greeted in some Wall Street quarters with as much enthusiasm as Bernie Madoff addressing the Better Business Bureau from his jail cell. Technical analysts consider the theory “just plain academic drivel.” Let us pause, then, and appraise the counterattack by beleaguered technicians. Perhaps the most common complaint about the weakness of the random-walk theory is based on a distrust of mathematics and a misconception of what the theory means. “The market isn’t random,” the complaint goes, “and no mathematician is going to convince me it is.”

In the long run, though, I agree with Bernard Baruch, a legendary investor of the early twentieth century, who said, “Market timing can only be accomplished by liars.” And Jack Bogle, a legend of the late twentieth century, has remarked, “I do not know of anybody who has done it [market timing] successfully and consistently.” Investors should also never forget the age-old maxim “If something is too good to be true, it is too good to be true.” Heeding this maxim could have saved investors from falling prey to the largest Ponzi scheme ever: the Bernard L. Madoff fraud uncovered in 2008, in which $50 billion was said to have been lost. The real con in the Madoff affair is that people fell for the myth that Madoff could consistently earn between 10 and 12 percent a year for investors in his fund. The “genius” of the fraud was that Madoff offered what seemed to be a modest and safe return. Had he offered a 50 percent return, people might well have been skeptical of such pie-in-the-sky promises.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

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Albert Einstein, asset allocation, Atul Gawande, backtesting, beat the dealer, Bernie Madoff, Black Swan, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, volatility arbitrage, William of Occam, zero-sum game

But understand that in trying to protect every penny of your profit, you actually prevent yourself from making the big profits. Loss I began to realize that the big money must necessarily be in the big swing. Jesse Livermore You are going to have ups and downs in your trading account. Losses are a part of the trading game. You say you want no losses? You want positive returns every month? Well, you could have had your money with the Ponzi-scheme of Bernard Madoff, but we all know how that turned out! Life equals having losses and you’re going to have losses with trend following. “You can’t make money if you are not willing to lose. It’s like breathing in, but not being willing to breathe out.”36 If you don’t have losses, you are not taking risks. If you don’t risk, you won’t ever win big. Losses aren’t the problem. It’s how you deal with them. Ignore losses with no plan and they will come back to haunt you and your account size.

On Saturday, February 25, 1995, Mike Killian, who almost singlehandedly built Barings Far East customer brokerage business over the past seven years, was awakened at 4:30 a.m. in his Portland, Ore., home. It was Fred Hochenberger from the Barings Hong Kong office. “Are you sitting down?” Hochenberger asked a sleepy Killian. “No, I’m lying down.” It is not unusual to see people frame market wins and losses as a morality tale. These types of questions are designed to absolve the guilt of the market losers for their bad strategies (i.e. Amaranth, Bear Stearns, Bernard Madoff, etc.). The market is no place for political excuses or social engineering. No law changes human nature. If you don’t like losing, examine the strategy of the winners. The performance histories of trend followers during the 2008 market crash, 2000–2002 stock market bubble, the 1998 LongTerm Capital Management (LTCM) crisis, the Asian contagion, the Barings Bank bust in 1995, and the German firm Metallgesellschaft’s collapse in 1993, answer that all important question: “Who won?”

Daniel Goleman8 There are a number of behaviors that almost guarantee losses in the markets. These behaviors, the antithesis of the way trend followers operate, include: • Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others than take the time to learn for themselves. People are lazy when it comes to the education needed for trading. Think about Bernard Madoff. People just wanted to believe. • Impatience: People have an insatiable need for action. It might be the adrenaline rush they’re after—their “gambler’s high.” Trading is about patience and objective decision making, not action addiction. • No objectivity: We are unable to disengage emotionally from the market. We “marry” our positions. • Greed: Traders try to pick tops or bottoms in the hope they’ll be able to “time” their trades to maximize profits.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

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asset-backed security, backtesting, banking crisis, barriers to entry, beat the dealer, Bernie Madoff, Black-Scholes formula, British Empire, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, Edward Thorp, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

Thorp had actually used an equivalent form of the formula to very profitably trade warrants and options for years before the publication of the Black-Scholes model. He was the founder of the first market neutral fund. He established the first successful quant hedge fund. He was the first to implement convertible arbitrage. He was the first to implement statistical arbitrage. He was likely the first person to uncover that Bernie Madoff was a fraud—he developed conclusive evidence of the fraud many years before Harry Markopolos did.4 Thorp, a PhD mathematician, and near PhD physicist, came to the markets via gambling, but not gambling in the conventional sense. Normally, casino games of chance have a negative edge for the player, and the longer one plays, the greater the chance of financial ruin. This type of gambling is the antithesis of what Thorp was interested in.

He had lots of energy, as if he had so much to say and had just been waiting for the right person to talk to. The conversation ranged from the paradoxes presented by quantum physics experiments to John’s particular disgust for one fund manager, who he insisted was a fraud. I wouldn’t hear that manager’s name again for nine years, when the financial crisis exposed what John had known all along: Bernie Madoff was a fraud. College was quickly approaching. I went down to my dad’s office to seek his advice on a major. It’s quite embarrassing to say, but at this point, I had still not read Market Wizards. I had no involvement with the markets, and my father was never one to push anyone toward his own desires. I told him I wanted to be a doctor. I remember his response very clearly: “I don’t think that’s a very good fit.”


pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, Alvin Roth, assortative mating, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, end world poverty, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, Kenneth Arrow, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

Everyone nodded and laughed, appreciating his enthusiastic, non-buttoned-down approach. “Is anybody here rich?” he asked. “I know I am, but you college students aren’t. No, you are all poor. But that’s going to change through the power of CHEATING! Let’s do it!” He then recited the names of some infamous cheaters, from Genghis Khan through the present, including a dozen CEOs, Alex Rodriguez, Bernie Madoff, Martha Stewart, and more. “You all want to be like them,” he exhorted. “You want to have power and money! And all that can be yours through cheating. Pay attention, and I will give you the secret!” With that inspiring introduction, it was now time for a group exercise. He asked the students to close their eyes and take three deep, cleansing breaths. “Imagine you have cheated and gotten your first ten million dollars,” he said.

This first study showed that creativity and dishonesty are correlated, but that doesn’t necessarily mean that creativity is directly linked to dishonesty. For example, what if a third factor such as intelligence was the factor linked to both creativity and dishonesty? The link among intelligence, creativity, and dishonesty seems especially plausible when one considers how clever people such as the Ponzi schemer Bernie Madoff or the famous check forger Frank Abagnale (the author of Catch Me If You Can) must have been to fool so many people. And so our next step was to carry out an experiment in which we checked to see whether creativity or intelligence was a better predictor of dishonesty. Again, picture yourself as one of our participants. This time, the testing starts before you even set foot in the lab. A week earlier, you sit down at your home computer and complete an online survey, which includes questions to assess your creativity and also measure your intelligence.

Maybe it was his sickness, my fear of catching something in general, sleep deprivation, or just the random and amusing nature of free associations that made me wonder about the similarity between the germs my seatmate and I were passing back and forth and the recent spread of corporate dishonesty. As I’ve mentioned, the collapse of Enron spiked my interest in the phenomenon of corporate cheating —and my interest continued to grow following the wave of scandals at Kmart, WorldCom, Tyco, Halliburton, Bristol-Myers Squibb, Freddie Mac, Fannie Mae, the financial crisis of 2008, and, of course, Bernard L. Madoff Investment Securities. From the sidelines, it seemed that the frequency of financial scandals was increasing. Was this due to improvements in the detection of dishonest and illegal behavior? Was it due to a deteriorating moral compass and an actual increase in dishonesty? Or was there also an infectious element to dishonesty that was getting a stronger hold on the corporate world? Meanwhile, as my sniffling neighbor’s pile of used tissues grew, I began wondering whether someone could become infected with an “immorality bug.”

Poking a Dead Frog: Conversations With Today's Top Comedy Writers by Mike Sacks

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Bernie Madoff, Columbine, hive mind, index card, iterative process, Norman Mailer, period drama, Ponzi scheme, pre–internet, Saturday Night Live, Upton Sinclair

We thought it was really obvious, but when people saw that movie, they didn’t really pick up on what we were doing. What do you think they missed? I remember people were blindsided by what we were saying. I was like, “Did you see the movie? The villain is from The Center for American Capitalism. The whole movie is about how chasing small-time drug crimes is meaningless. The real crimes, like the Bernie Madoff situation, are always taking place behind the scenes.” That was the whole premise for the movie. And I was amazed when no one picked up on it. To me it was glaring. Will Ferrell’s character in The Other Guys is interesting. As opposed to the rest of the characters in the film, he did, in fact, have the guts to take on those in power. He was a bit strange, a bit of a nerd, and yet he was in no way meek.

He would chase little movements around on the lawn, digging bizarre little holes. His hearing was incredible. He’d hear things that no other dogs, or people, could hear. The Ferrell character in The Other Guys is like that. He almost had an Asperger’s quality to him. I remember learning about this financial analyst [Harry Markopolos] who uncovered, years before anyone else—way back in 2000—the Bernie Madoff crimes. He knew what Madoff was doing was a Ponzi scheme. He went to the SEC and even The Wall Street Journal. Neither did a thing. Meanwhile, Madoff was making comments about this guy, really dismissive comments: “This guy is a joke. Everyone on Wall Street laughs at that guy.” Well, guess what? The guy was right, and he had the guts to stand before everyone and say as much. When you put that type of heroism on the right rail, it’s unstoppable.


pages: 177 words: 54,421

Ego Is the Enemy by Ryan Holiday

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activist fund / activist shareholder / activist investor, Airbnb, Berlin Wall, Bernie Madoff, Burning Man, delayed gratification, Google Glasses, Jeff Bezos, Lao Tzu, Paul Graham, Ponzi scheme, Ralph Waldo Emerson, Richard Feynman, Richard Feynman, side project, South Sea Bubble, Steve Jobs, Upton Sinclair

A genuinely good and loyal individual, he was not cut out for the dirty world of Washington, and it made quick work of him. He left office a maligned and controversial figure after two exhausting terms, almost surprised by how poorly it had gone. After the presidency, Grant invested almost every penny he had to create a financial brokerage house with a controversial investor named Ferdinand Ward. Ward, a Bernie Madoff of his day, turned it into a Ponzi scheme, and publicly bankrupted Grant. As Sherman wrote with sympathy and understanding of his friend, Grant had “aimed to rival the millionaires, who would have given their all to have won any of his battles.” Grant had accomplished so much, but to him, it wasn’t enough. He couldn’t decide what was important—what actually mattered—to him. That’s how it seems to go: we’re never happy with what we have, we want what others have too.


pages: 181 words: 50,196

The Rich and the Rest of Us by Tavis Smiley

affirmative action, Affordable Care Act / Obamacare, back-to-the-land, Bernie Madoff, Bernie Sanders, Buckminster Fuller, Corrections Corporation of America, Credit Default Swap, death of newspapers, deindustrialization, ending welfare as we know it, F. W. de Klerk, fixed income, full employment, housing crisis, Howard Zinn, income inequality, job automation, liberation theology, Mahatma Gandhi, mass incarceration, mega-rich, new economy, obamacare, Occupy movement, Plutocrats, plutocrats, profit motive, Ralph Waldo Emerson, Ronald Reagan, shareholder value, Silicon Valley, Steve Jobs, traffic fines, trickle-down economics, War on Poverty, We are the 99%, white flight, women in the workforce, working poor

Keller’s and Mandela’s stories prove that, yes, one unbound imagination, one individual, can become the inspiration for millions, as Orman said. But Ehrenreich’s point, that the movement to end poverty will more than likely be a “leaderless” movement, is a powerful reflection of the times that we live in. Revolution in the information age demands a new model. There are no exemptions in the body politic; everybody has been hit by various forms of financial distress—from retirees fleeced by Bernie Madoff, to auto workers in Detroit, retirees in Florida, and municipal workers in Wisconsin. Poverty in the 21st century has taught us many lessons—but first and foremost, we have discovered that poverty is an equal opportunity employer and that we are all vulnerable to unpredictable economic maelstroms. Like all powerful social movements, this effort won’t be led by a single person, but it will be advanced by a single message.


pages: 171 words: 57,379

Navel Gazing: True Tales of Bodies, Mostly Mine (But Also My Mom's, Which I Know Sounds Weird) by Michael Ian Black

Bernie Madoff, double helix, Minecraft, pre–internet

Nobody’s uncles are ever “lost.” They are either at home building model railroad sets or in jail for touching their nieces. Besides, the idea that a relative of mine would leave behind any kind of worthwhile estate was ridiculous. Other than my gangland namesake, my family has never had much money. If they had, it either would have been squandered on dubious business opportunities or invested with Bernie Madoff or something. To die with more assets than liabilities is as exotic a concept to my family as crunking. When I called the man on the phone a liar, he sighed. “That’s what everybody says when I call, but it’s true. You have a great-uncle on your father’s side who recently died.” He then detailed a fair amount of information to me about myself and my family, and told me he would be sending me a form so I could claim my inheritance.

J.K. Lasser's New Tax Law Simplified: Tax Relief From the HIRE Act, Health Care Reform, and More by Barbara Weltman

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Affordable Care Act / Obamacare, Bernie Madoff, employer provided health coverage, estate planning, Home mortgage interest deduction, mortgage debt, Ponzi scheme

Thus, the election cannot be made on an amended return (which, by definition, is filed after the due date of the return for the year in question). Investment Losses in Ponzi Schemes The Bernard Madoff Ponzi scheme and other similar financial frauds in 2008 left thousands of investors without their money and with uncertainty about how to handle their losses for tax purposes. Unfortunately for investors, more financial schemes are being uncovered every day. The IRS has created a safe harbor for affected investors under which they can treat losses as a theft loss and claim a deduction. The safe harbor avoids problems of proof of how much income reported in prior years was fictitious or a return of capital. Who qualifies? The safe harbor can be used only by an investor in a taxable account if the lead figure, such as Bernard Madoff, has been charged federally or under state law with fraud, embezzlement, or a similar crime and the investor invested solely with such lead figure (and not through a fund or other entity).


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

When the ratio of borrowed to equity capital reaches 35 to 1 —Bear Stearns' ratio when it collapsed (and UBS's reached 50 to 1) —a mere 3 percent fall in the value of the firm's assets will plunge the firm into insolvency. The government was doing nothing to prick the bubble and too little to keep leverage within safe bounds. The longer the world economy went without a depression, the worse the collapse would be when it finally, inevitably, came. Warren Buffett is reported to have said that you don't know who's swimming naked until the tide goes out. The receding stock market tide exposed Bernard Madoff, who is said to have confessed to having pulled off the biggest Ponzi scheme in history. The scheme would have lasted longer and the losses to investors would have been greater had the stock market crash been postponed. The crash reduced the value of Madoff's hedge fund, but more important (because the fund probably had little in the way of assets), the general economic collapse caused requests for redemptions of investments in hedge funds and other investment funds to soar, and Madoff could not honor his investors' requests for redemption and as a result his scheme collapsed.

A plausible though probably erroneous case was made that consolidation would close gaps in the protection of the nation against terrorist attacks and other calamities. A similar but more compelling case can be made for consolidation of the multiplicity of federal agencies that regulate the financial system; and it is beginning to seem likely that there will be such a reorganization. If in the course of it the Securities and Exchange Commission is abolished as punishment for its inaction, Bernard Madoff and Christopher Cox can share the credit. But to reorganize in the midst of crisis, and likewise to regulate or reregulate in the midst of crisis, is a formula for chaos. The argument for doing either is that the ability to change the institutional structure of financial regulation will fade with time; the President's power is at its maximum now, and should be used, and doubtless will be.


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

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algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

But if we think about future decades, we should instead harvest only a portion of the forest now, and we should periodically replant where we have cut. We should do this not because we love trees necessarily but because we care about the next generation’s needs. Sustainability is a hard-nosed approach to thinking about the future, like the difference between a steady investment and a get-rich-quick scheme. Warren Buffett is sustainable; Bernie Madoff is not. Sustainability is also related to GDP measurement. GDP tells us how well we did last year and may give us a limited sense of the short-term future. But it doesn’t say anything about the long term. It doesn’t tell us whether a country’s citizens are consuming too much of their current wealth, or whether there are enough natural resources and human capital for future decades. It doesn’t predict how long a country’s transportation and technology infrastructure will last, or whether its next generation of workers will be sufficiently educated and trained.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Those who woke up to reality early enough might have managed to sell their tickets to the even more gullible without incurring any significant financial loss (although, with eBay not properly established until 1995, finding the even more gullible might not have been particularly easy). Someone, however, would eventually have to take a loss: the tickets, after all, were claims on something destined never to materialize. Selling tickets to Mars would have been a fraudulent act. We have plenty of laws to prevent that sort of thing happening. Bernie Madoff, the disgraced investor, sits behind bars for his own version of fraud. Fraudulent acts are acts of deliberate deception, where one 35 4099.indd 35 29/03/13 2:23 PM When the Money Runs Out party sets out to rip off others. What happens, however, if all parties share a roughly similar view of the future, which then turns out to be hopelessly wrong, a collective delusion perhaps based on an inappropriate extrapolation of past trends?


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

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Affordable Care Act / Obamacare, Airbus A320, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, creative destruction, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, information asymmetry, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, Pareto efficiency, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs, US Airways Flight 1549

A 2007 Slate article explains that of the missing children in one recent year, “203,900 were family abductions, 58,200 were nonfamily abductions, and only 115 were ‘stereotypical kidnappings,’ defined in one study as ‘a nonfamily abduction perpetrated by a slight acquaintance or stranger in which a child is detained overnight, transported at least 50 miles, held for ransom, or abducted with the intent to keep the child permanently, or killed.’” So the next time your brain insists on fearing strangers, try to tell it to cool out a bit. It’s not that you necessarily need to insist that it fear your friends and family instead—unless, of course, you are friends with someone like Bernie Madoff. Let’s not forget that the greatest financial fraud in history was committed primarily among friends. And with friends like that, who needs strangers? CHAPTER 6 If You’re Not Cheating, You’re Not Trying ©iStock.com/mstay “Cheating may or may not be human nature,” we wrote in the first chapter of Freakonomics, “but it is certainly a prominent feature in just about every human endeavor.


Starstruck: The Business of Celebrity by Currid

barriers to entry, Bernie Madoff, Donald Trump, income inequality, index card, industrial cluster, labour mobility, Mark Zuckerberg, Metcalfe’s law, natural language processing, place-making, Ponzi scheme, post-industrial society, prediction markets, Renaissance Technologies, Richard Florida, Robert Metcalfe, rolodex, shareholder value, Silicon Valley, slashdot, transaction costs, upwardly mobile, urban decay, Vilfredo Pareto, winner-take-all economy

Contrast this with sports, and to a greater extent with Hollywood, where an audience and visual persona is part of a star’s dossier of success.21 Financial celebrity emerges at times, but it is usually predicated on two conditions: when someone has done something really bad or when someone has actively created a persona that transcends his or her talent. Financial celebrities tend to be cultivated through notoriety. The 1991 Salomon Brothers’ outrage when trader Paul Mozer was found to be submitting false bids to buy U.S. Treasury Department bonds or the $50 billion Ponzi scheme that Bernie Madoff was busted for in 2009 were some of the most speculated about and discussed scandals of their time. Madoff’s private life was endlessly dissected in Vanity Fair and even Tatler, including a tell-all by his secretary and an examination of his privileged (and now broke) social circle. But again, the collective public interest was directly linked to extraordinary circumstances. Consider the other type of famous financier.


pages: 442 words: 135,006

ZeroZeroZero by Roberto Saviano

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Berlin Wall, Bernie Madoff, call centre, credit crunch, double entry bookkeeping, Fall of the Berlin Wall, illegal immigration, Julian Assange, London Interbank Offered Rate, Mikhail Gorbachev, new economy, open borders, planetary scale, Ponzi scheme, Ronald Reagan, Skype, Steve Jobs, uranium enrichment, WikiLeaks

Martin stirred up troubled waters, he dirtied his hands with numbers in order to reactivate the American banking system’s protections. A single lightning bolt in a cloudless sky. But there are thunder and lightning on the horizon. Controls grew very rigid after September 11, but with the financial crisis that exploded in the midst of Martin’s investigation, the climate changed. Hence the verdicts that send the megaswindler Bernie Madoff to prison for 150 years, and the French trader Jérôme Kerviel for 5, along with repaying Société Générale nearly €5 billion, the amount he’d burned through. These men, who often describe themselves as sacrificial lambs of the system, nevertheless caused enormous harm to individuals, companies, and society as a whole. But the narco-dollars that flow into coffers don’t seem to cause any damage; in fact, they provide that life-giving oxygen known as liquidity.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

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Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

The most straightforward are slips, when through clumsiness or lack of attention you do something you simply didn’t mean to do. In 2005, a young Japanese trader tried to sell one share at a price of ¥600,000 and instead sold 600,000 shares at the bargain price of ¥1. Traders call these slips ‘fat finger errors’ and this one cost £200 million. Then there are violations, which involve someone deliberately doing the wrong thing. Bewildering accounting tricks like those employed at Enron, or the cruder fraud of Bernard Madoff, are violations, and the incentives for them are much greater in finance than in industry. Most insidious are mistakes. Mistakes are things you do on purpose, but with unintended consequences, because your mental model of the world is wrong. When the supervisors at Piper Alpha switched on a dismantled pump, they made a mistake in this sense. Switching on the pump was what they intended, and they followed all the correct procedures.

Shortly after the Equity Funding Corporation collapsed, Ray Dirks was rewarded for his efforts: the SEC prosecuted him for insider trading, a charge that would at the very least have ended his career. Dirks fought his case for ten years before eventually being cleared by the US Supreme Court. The SEC seems to have learned few lessons: when a former fund manager, Harry Markopolos, handed them a dossier of evidence that Bernard Madoff was running a gigantic fraud, he was ignored. (At least he was not prosecuted.) It is true that some whistleblowers have an axe to grind. Some are disgruntled former employees looking to make trouble. Mr Markopolos was Mr Madoff’s rival; Paul Moore had plenty of reasons to complain about HBOS, whether or not his complaints had merit. It is hard to know who to take seriously. But when billions are at stake, it is unwise to dismiss whistleblowers too casually.


pages: 282 words: 26,931

The Five-Year Party: How Colleges Have Given Up on Educating Your Child and What You Can Do About It by Craig Brandon

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Bernie Madoff, call centre, corporate raider, Donald Trump, en.wikipedia.org, Gordon Gekko, helicopter parent, impulse control, new economy, Ponzi scheme, Ralph Nader

The regional accreditation organizations that are supposed to evaluate the quality of education at our colleges and universities seem to have been soundly sleeping as the colleges dumbed down their programs, inflated grades, and turned themselves into entertainment centers. They are like Securities and Exchange Commission watchdogs, fiddling with forms while corporate raiders fleeced millions of Americans and Bernie Madoff set up his Ponzi schemes. There are six regional accreditation groups in the United States, but they all work pretty much the same way. Colleges apply for membership and then become a part of the organization. The college and individual departments submit regular self-study reports about changes they have made and problems they are experiencing. The accrediting groups develop a book-length statement of standards that they use as a guide when suggesting changes in college policies, courses, and programs.


pages: 300 words: 78,475

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream by Arianna Huffington

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American Society of Civil Engineers: Report Card, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, extreme commuting, Exxon Valdez, full employment, greed is good, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, new economy, New Journalism, offshore financial centre, Ponzi scheme, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, single-payer health, smart grid, The Wealth of Nations by Adam Smith, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration

In fact, he can’t even understand his own home mortgage: “I know I can’t and I’ve tried,” Raines told a House committee. “To this day, I don’t know what it said.… It’s impossible for the average person to understand.” In other words, who could have known? But isn’t it interesting that the complexity and opacity of these things somehow always redounds to the benefit of those in charge? We saw a familiar insistence on ignoring all warnings in the Bernie Madoff scandal.147 “We have worked with Madoff for nearly twenty years,” said Jeffrey Tucker, a former federal regulator and the head of an investment firm that lost billions to Madoff. “We had no indication that we … were the victims of such a highly sophisticated, massive fraudulent scheme.” Who could have known? Well, financial fraud investigator Harry Markopolos, for one. Not only did he know, he did everything he could to make sure everybody else knew as well.148 In 1999, after researching Madoff’s methods, Markopolos wrote a letter to the SEC saying, “Madoff Securities is the world’s largest Ponzi Scheme.”


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

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affirmative action, asset allocation, backtesting, barriers to entry, Bernie Madoff, Bretton Woods, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fiat currency, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, High speed trading, housing crisis, index fund, joint-stock company, money market fund, moral hazard, Myron Scholes, passive investing, Ponzi scheme, price discovery process, random walk, risk tolerance, risk-adjusted returns, risk/return, too big to fail, trade route, Vanguard fund, walking around money

Today there is little understanding of this distinction to the average consumer looking for advice. While there is much hype inside the industry, including champions of the fee-only model like the National Association of Personal Financial Advisors, it has never gained the attention it deserves. My take is that people ultimately don’t care about ethics as long as the job gets done. However, isn’t that what investors thought when Bernie Madoff offered a steady 10 percent return per year? In 1999, the SEC started to look at proposals from brokerage firms to end fee-based brokerage programs. What was at stake was if broker-dealers—otherwise known as brokerage firms that hire stockbrokers—would be able to claim exemption under the Advisers Act of 1940. Specifically, brokers wanted to be exempt from the fiduciary standards that RIAs had to abide by, including always placing the client’s interests ahead of his or her own.


pages: 202 words: 66,742

The Payoff by Jeff Connaughton

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algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, Robert Bork, short selling, Silicon Valley, too big to fail, two-sided market, young professional

I’m very worried that this is a prescription for another disaster. Schapiro took it all in. She responded by reiterating her pledge, which she’d made publicly in response to Ted’s letter, that the SEC would conduct a comprehensive review of market-structure issues and HFT. She added that she had many other issues on her plate. And indeed she had. America had just been through the biggest financial disaster in sixty years; Bernie Madoff’s Ponzi scheme had gone undetected by the SEC for years despite repeated warnings from whistleblowers; investors were rattled and worried that the SEC was toothless. Nevertheless, it was obvious to me that she only had one choice if history was to judge her well: she had to do something. Ted must have been thinking the same thing. Near the end of the meeting he told Schapiro, “I don’t believe you’re going to do anything about high-frequency trading.”

One More Thing: Stories and Other Stories by B. J. Novak

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Bernie Madoff, carbon-based life, citation needed, dark matter, F. W. de Klerk, Saturday Night Live

Finally, she told me that I was no longer the type of person she could trust with her ATM password, but that if it was this important to me, I could wait in the museum with the kids while she went across the street herself to withdraw two hundred dollars from her card, but that she needed me to know she would “never, ever forget what happened today.” I said yes, thank you, it was indeed this important to me. Fortunately, as I said, this story has a happy ending. Inside the secret room was a mind-blowingly elaborate, incredibly well-executed interactive holographic exhibit on the Bernie Madoff hedge fund scam of 2009. It was beyond amazing—just jaw-droppingly intricate and detailed and smart and interesting and well designed. The holograms actually interacted with you, putting you in the mindset of the people who got ripped off, and very compellingly conveyed the scope of the scam he pulled—did you know the numbers involved? Staggering. Anyway, all of us were absolutely fascinated.


pages: 244 words: 79,044

Money Mavericks: Confessions of a Hedge Fund Manager by Lars Kroijer

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activist fund / activist shareholder / activist investor, Bernie Madoff, capital asset pricing model, corporate raider, diversification, diversified portfolio, family office, fixed income, forensic accounting, Gordon Gekko, hiring and firing, implied volatility, index fund, intangible asset, Jeff Bezos, Just-in-time delivery, Long Term Capital Management, merger arbitrage, new economy, Ponzi scheme, risk-adjusted returns, risk/return, shareholder value, Silicon Valley, six sigma, statistical arbitrage, Vanguard fund, zero-coupon bond

In this book I want to explain what it was like to run a hedge fund during a period when the industry went from relative obscurity to something everyone’s aunt or uncle would discuss. When I set out to write this book it was mainly because I felt the inner workings of the hedge funds were poorly understood by outsiders. Having grown from a small and mainly US investment activity to become a global trillion-dollar circus, the industry is often unfairly portrayed as a fee-charging gambling den populated by dart-throwing chancers and Bernie Madoff’s evil twin. This was nothing like the industry I had been a part of for a decade, and I recognised little of my time at Holte Capital in many of the accounts. The industry I had known largely involved highly intelligent people who were passionate about the world of investing. They would spend endless hours engaging in complex financial analysis to find angles from which their investors might profit.


pages: 202 words: 72,857

The Wealth Dragon Way: The Why, the When and the How to Become Infinitely Wealthy by John Lee

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8-hour work day, Albert Einstein, barriers to entry, Bernie Madoff, butterfly effect, buy low sell high, California gold rush, Donald Trump, financial independence, high net worth, intangible asset, Mark Zuckerberg, negative equity, passive income, payday loans, self-driving car, Snapchat, Stephen Hawking, Steve Jobs, Tony Hsieh, Y2K

The great father of modern economics, Adam Smith, said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” Do you really believe that people who offer to invest your money for you are concerned for your interests ahead of their own? Obviously their first priority is to make money for themselves. Did you feel sorry for Bernie Madoff's clients, or did you secretly think they were a little naive to trust him so implicitly with their money without asking too many questions about how he was allegedly getting such high profits from their investments? The Truth about Your Investments We've been told: Let a (so-called) financial expert invest your money for you. The undesirable truth is: When you hand your money over to other people they are going to make sure they make a profit before you do.


pages: 261 words: 81,802

The Trouble With Billionaires by Linda McQuaig

battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, British Empire, Build a better mousetrap, carried interest, collateralized debt obligation, computer age, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Douglas Engelbart, Douglas Engelbart, employer provided health coverage, financial deregulation, fixed income, full employment, George Akerlof, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invention of the wheel, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, Joseph-Marie Jacquard, laissez-faire capitalism, land tenure, Mark Zuckerberg, market bubble, Martin Wolf, mega-rich, minimum wage unemployment, Mont Pelerin Society, Naomi Klein, neoliberal agenda, Northern Rock, offshore financial centre, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, pre–internet, price mechanism, purchasing power parity, RAND corporation, rent-seeking, rising living standards, road to serfdom, Ronald Reagan, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, trickle-down economics, Vanguard fund, very high income, wealth creators, women in the workforce

Weill, former head of Citigroup, whose extensive lobbying efforts helped kill the Glass–Steagall Act, thereby undermining regulatory supervision of financial markets and allowing Wall Street to turn itself into a giant casino. Indeed, much of Wall Street would fit in one way or another into this non-poster-boy category of billionaires. (And we haven’t even mentioned the likes of out-and-out billionaire crooks such as Bernie Madoff, who, in crossing the line into obvious criminality, have lost any claims to deserving their fortunes.) Of course, if contribution to society were the criterion for determining an individual’s compensation, the income parade would look very different. By most people’s standards, the giants reaching up into the clouds would be people such as nurses, doctors, teachers and social workers, while the bankers and hedge fund managers would find themselves among the dwarves.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

In this neoliberal perspective, there is also a natural stratification in what classes of law are applicable to different scofflaws: “the criminal law is designed primarily for the nonaffluent; the affluent are kept in line, for the most part, by tort law.”110 In other words, economic competition imposes natural order on the rich, because they have so much to lose. The poor need to be kept in line by a strong state, because they have so little to lose. Hence, the spectacle of (as yet) no major financial figure outside of Bernie Madoff and Raj Rajnarathan going to jail because of the crisis, while thousands of families behind on their mortgages are turfed out into the street by the constabulary, is a direct consequence of this neoliberal precept. [13] The neoliberals have struggled from the outset to have their political/economic theories do dual service as a moral code. First and foremost, it would appear that the thought collective worshipped at the altar of a deity without restraints: “individual freedom, which it is most appropriate to regard as a moral principle of political action.

General-interest magazines, from Business Week to The Economist to the New York Times, which had hitherto volunteered as cheerleaders for the economics profession without encouragement, turned openly hostile in 2008, hectoring whole schools of thought for their failures, grasping randomly for “new paradigms,” rooting around for sixth-round draft picks and telegenic wicked rebels to replace their prior stable of catallactic pundits. Lusting for scapegoats, journalists initially scoured the landscape for miscreants like Bernie Madoff, Dick Fuld, and Joseph Cassano; and then instinctively turned to find their counterparts inside the economics profession. There was even an online ballot for receipt of the Ignoble (or “Dynamite”) Prize, to be awarded to three economists deemed to have contributed the most to the global financial collapse. (The winners were Alan Greenspan, Milton Friedman, and Larry Summers.) Of course, there existed no equivalent of the Justice Department or the Securities and Exchange Commission to actually police the economists, just as there was no phalanx of gumshoes and DAs to do the hard investigative work; and thus it dawned upon some that (unlike medicine, and even sociology) there was not even a professional code of ethics to which bona fide economists were enjoined to subscribe.


pages: 827 words: 239,762

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Albert Einstein, barriers to entry, Bayesian statistics, Bernie Madoff, Bob Noyce, Bonfire of the Vanities, business process, butterfly effect, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, Clayton Christensen, cloud computing, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate raider, corporate social responsibility, creative destruction, deskilling, discounted cash flows, disintermediation, Donald Trump, family office, financial innovation, Frederick Winslow Taylor, full employment, George Gilder, glass ceiling, Gordon Gekko, hiring and firing, income inequality, invisible hand, Jeff Bezos, job-hopping, John von Neumann, Joseph Schumpeter, Kenneth Arrow, London Whale, Long Term Capital Management, market fundamentalism, Menlo Park, new economy, obamacare, oil shock, pattern recognition, performance metric, Peter Thiel, Plutocrats, plutocrats, profit maximization, profit motive, pushing on a string, Ralph Nader, Ralph Waldo Emerson, RAND corporation, random walk, rent-seeking, Ronald Coase, Ronald Reagan, Sand Hill Road, Saturday Night Live, shareholder value, Silicon Valley, Skype, Steve Jobs, survivorship bias, The Nature of the Firm, the scientific method, Thorstein Veblen, union organizing, urban renewal, Vilfredo Pareto, War on Poverty, William Shockley: the traitorous eight, women in the workforce, Y Combinator

Skilling was anomaly personified, a bad apple and nothing more. And HBS has never claimed to have eliminated all bad apples from the world, only to be the best at teaching good apples how to stay that way. But to isolate the fraud like that misses the point entirely. Few people actually set out to commit fraud, and that includes Jeff Skilling. Except in the case of a truly talented con artist such as Bernie Madoff, the fraud almost always comes just before the very end, at the point when you’re flat out of new ideas but notice a couple of bad ones lying around. What’s more, the speed with which you can move from day one on the job to running out of new ideas has nothing to do with your ethical compass but rather everything else you bring to the job. It gets a little complicated in the details, but the following is a short summary of those things that Skilling brought to the company, which combined to then bring Enron to the point where he felt he had no choice but to commit fraud. 1.He deemphasized the distinctive capabilities of the company—knowing how to build power stations and the like—and promoted those that most anyone can do, such as negotiating, financing, lobbying, and trading.

Chairman of the Securities and Exchange Commission from 2005 through 2009, Cox later claimed that his agency had no power to keep the financial giants that became leveraged to the point of collapse from doing so, but that’s simply not true. At the very least, he could have demanded more disclosure out of the likes of Merrill Lynch and Lehman Brothers. Instead, he oversaw a dwindling SEC staff. He also missed Bernie Madoff’s towering fraud. Stan O’Neal (’78). The CEO of Merrill Lynch from 2003 to 2007, O’Neal is the perfect example of the big-bank CEO who threw caution to the wind in pursuit of profit. By mid-2006, just before the subprime dam broke, Merrill had $41 billion in subprime CDOs and mortgage bonds on its books.5 John Thain (’79). Thain followed O’Neal as CEO of Merrill, serving from 2007 to 2009.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

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asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game

We signed every memo ‘Hank, John and John.’ ” But increasingly over time, the other executives at Goldman grew resentful and referred to them as the “owner’s sons.” Resentment continued to build not only after the Internet IPO scandals but also after Goldman’s dot-com initiatives—such as investments in Wit Capital and a number of electronic trading platforms, including Primex Trading, a joint venture among several Wall Street firms and Bernie Madoff’s securities firm—soured and as it became clear that the Spear, Leeds acquisition was basically a bust. “In doing things like that they were hopeful when we were executing,” said one Paulson loyalist about Thornton and Thain, “but when we were dealing with a mess they weren’t around.” As it became clear that Paulson was sticking around, he encouraged both men to use one of Goldman’s supply of “management coaches,” who could help them think through how to adapt to the new situation, and to begin to take on more and more operating responsibilities, to help relieve some of the burden on Paulson.

But then the SEC stopped responding to S&C and to Goldman, which tried again to contact the SEC during the first quarter of 2010 to see if a settlement could be reached. The next communication from the SEC came with the filing of the complaint on April 16, which happened to be the same day the SEC inspector general issued a critical report about the SEC’s bungling of its investigation into the Ponzi scheme perpetrated by Bernard Madoff. The news media—understandably—focused on the fraud charges against Goldman, rather than the SEC’s poor handling of the Madoff case, a fact Goldman noted in its communications with journalists. When Goldman eventually responded to the SEC’s complaint, it denied all allegations. “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman said initially.

Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

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Albert Einstein, Bernie Madoff, Black Swan, commodity trading advisor, correlation coefficient, delayed gratification, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, Lao Tzu, Long Term Capital Management, market bubble, market microstructure, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Sharpe ratio, systematic trading, the scientific method, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

If you are able to apply such an unsound principle, you can keep on averaging down by buying 200 at 44, then 400 at 41, 800 at 38, 1600 at 35, 3200 at 32, 6400 at 29, and so on.1 “Don’t frown, double down!” Not smart strategy. Losses are a part of the game. You want no losses? You want positive returns every month? It does not work that way, that is, not unless you were lucky enough to be invested in the Bernard Madoff Ponzi-scheme—which has resulted in assorted criminal convictions and a few suicides. Losses are not your problem. It’s how you react to them. Ignore losses with no plan, or try to double down on your losses to recoup, and those losses will come back like a Mack truck to run over your account. You can’t win if you are not willing to lose. It’s like breathing in, but not breathing out.2 Slow everything down.


pages: 374 words: 114,600

The Quants by Scott Patterson

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Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

But only 20 P&G options in total had changed hands that day (this was well before the explosion in options trading that occurred over the following decade). Similar discrepancies appeared for trades on IBM, Disney, and Merck options, among others, Thorp’s research revealed. He told the firm that had made the investment to pull its money out of the fund, which was called Bernard L. Madoff Investment Securities. In late 2008, the fund, run by New York financier Bernard Madoff, was revealed as the greatest Ponzi scheme of all time, a massive fraud that had bilked investors out of tens of billions. Regulators had been repeatedly warned about the fund, but they never could determine whether its trading strategies were legitimate. While Thorp was taking a break from the investing game, the stage for the amazing rise of the quants had been set.

Gated mansions hunched in the Connecticut cold behind their rows of exotic shrubbery, bereft of their traditional lacings of Christmas glitz. Few of the high-powered occupants of those mansions felt much like celebrating. It was a glum holiday season in Greenwich, hedge fund capital of the world. Making matters worse, a multibillion-dollar money management firm run by a reclusive financier named Bernard Madoff had proved to be a massive Ponzi scheme, one that Ed Thorp had already unearthed in the early 1990s. The losses rippled throughout the industry like shock waves. A cloud of suspicion fell upon an industry already infamous for its paranoia and obsessive secrecy. Ground zero of Greenwich’s hedge fund scene was Two Greenwich Plaza, a nondescript four-story building beside the town’s train station that once had housed a hodgepodge of shippers, manufacturers, and stuffy family law firms.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

The belief in future value is just as much an asset as a bar of gold is. John Kenneth Galbraith even pointed out that embezzlement creates capital, since both the embezzler (correctly) and the embezzlee (incorrectly) think they have the “bezzle,” and act and spend accordingly. One of the exacerbating factors in financial crises is the disappearance of this bezzle, as falling asset prices cause frauds to be revealed. Bernie Madoff is just the biggest in a long line. Whether capital is created honestly or dishonestly is important legally, but what matters to an economist is how the capital is allocated. If it is put to good use there is a net increase in wealth. That brings us to the second major function of financial markets, capital allocation. One of the silly things people who don’t understand finance like to say is Wall Street should stick to raising new capital for businesses and get rid of all that casino trading that just transfers money from one speculator to another without accomplishing any economic good.


pages: 459 words: 118,959

Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine S. Richard

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activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, banking crisis, Bernie Madoff, cognitive dissonance, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Long Term Capital Management, market bubble, money market fund, moral hazard, old-boy network, Ponzi scheme, profit motive, short selling, statistical model, white flight, zero-sum game

Rafael Mayer, an early investor in Pershing Square, says that Ackman’s drive to bring people around to his way of thinking can backfire. His impatience can make people feel a bit used, and his thoroughness can be seen as obsession, Mayer says. “Look at Markopolos,” Mayer says, referring to Harry Markopolos, the fund manager who tried for 10 years to warn the Securities and Exchange Commission in detailed letters and e-mails about Bernie Madoff’s Ponzi scheme. “Unfortunately, if you write long letters, people think you are crazy,” Mayer says. Even Ackman’s friends poked fun at his relentless pursuit of MBIA. For his 40th birthday, Ackman’s wife Karen threw him a party, inviting more than 100 family members and friends to the Blue Hill at Stone Barns restaurant in upstate New York. Former Gotham colleagues David Berkowitz and David Klafter composed a song in Ackman’s honor set to the tune of the 1936 hit “The Way You Look Tonight.”


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

Their rewards are so beyond those of ordinary people that they risk being seen as aliens from another galaxy.3 None of this is now credible, even though many of the practices over pay and business strategy continue as if nothing has happened. The quest to generate fabulous personal wealth led not just to unsustainable levels of credit, bad business decisions, increasingly stupid deals, gross misdirection of economic activity and, of course, the crash but malfeasance and fraud. The cast of characters ranged from hedge-fund operator Bernie Madoff, who in effect stole $18 billion from his clients, to RBS CEO Sir Fred Goodwin, who haggled for a £600,000 pension as his bank fought for its very survival. They were the exposed tip of a whole rotten iceberg. Bankers had created a gambling culture in which the moral borders between legitimate trading activity, recklessness and criminal activity became ever more fuzzy – and the disproportionate personal rewards disconnected from any economic and social reality.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

In keeping interest rates too low for too long, Greenspan and Bernanke distorted the price signals that the market sends and created the conditions for an unprecedented housing bubble. Greed is another oft-mentioned factor; stupidity, a third. (How could those boneheads on Wall Street not have known that lending money to folks with no income, no jobs, and no assets—the infamous “NINJA” mortgage loans—was a bad idea?) In the wake of the revelations about Bernie Madoff and his multibillion-dollar Ponzi scheme, criminality is yet another thing to consider. At the risk of outraging some readers, I downplay character issues. Greed is ever present: it is what economists call a “primitive” of the capitalist model. Stupidity is equally ubiquitous, but I don’t think it played a big role here, and neither, with some obvious exceptions, did outright larceny. My perhaps controversial suggestion is that Chuck Prince, Stan O’Neal, John Thain, and the rest of the Wall Street executives whose financial blundering and multimillion-dollar pay packages have featured on the front pages during the past two years are neither sociopaths nor idiots nor felons.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

In defense, the advocates of capitalism contend that these bizarre inequalities are justified by the larger results. Capitalism doesn’t make sense, morally or rationally, but it does make wealth, and wealth is essential for the very survival of a planet with an ever-growing population. So, they say, don’t knock it. This usual case for capitalism concedes that greed may drive Angelo Mozilla of Country Wide Financial or the egregious Bernie Madoff to criminal behavior. But, runs the argument, greed also makes the system go. Because greed is less trammeled in the United States than in Ethiopia, Harry on the grate eats better than the middle class of Addis Ababa. This was essentially the argument of Adam Smith, the first and still most quoted apologist of capitalism. He declared that it is only from the entrepreneur’s “luxury and caprice,” his desire for “all the different baubles and trinkets in the economy of greatness,” that the poor “derive that share of the necessaries of life, which they would in vain have expected from his humanity or his justice.”


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Albert Einstein, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

Nor was it different from past entrepreneurship because it could raise capital to fund new enterprises. Merchants, explorers, and voyagers had done that for centuries, but the fortunes of the trade they created never spread widely in the economy. The premodern economic system was full of speculative capital and asset bubbles, such as the Dutch tulip mania in the 1600s or the French Mississippi finance bubble in the 1700s. All past ages have had their own financial sharks and Bernie Madoff-type hustlers. A defining characteristic of modern capitalist entrepreneurship, to follow economic historian Alexander Gerschenkron, was rather one of time: investments in big innovation needed far longer to generate expected economic gains. One of the factors separating past entrepreneurs from the new generation emerging after the modernization of entrepreneurship was the latter’s understanding of uncertainty as a necessary ingredient to build private and societal profits.42 The twentieth century witnessed ideological experiments with other economic systems, but capitalism, for all its faults, has stood the test of time.


pages: 363 words: 101,082

Earth Wars: The Battle for Global Resources by Geoff Hiscock

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Admiral Zheng, Asian financial crisis, Bakken shale, Bernie Madoff, BRICs, butterfly effect, clean water, cleantech, corporate governance, demographic dividend, Deng Xiaoping, Edward Lorenz: Chaos theory, energy security, energy transition, eurozone crisis, Exxon Valdez, flex fuel, global rebalancing, global supply chain, hydraulic fracturing, Long Term Capital Management, Malacca Straits, Masdar, mass immigration, megacity, Menlo Park, Mohammed Bouazizi, new economy, oil shale / tar sands, oil shock, Panamax, Pearl River Delta, purchasing power parity, Ralph Waldo Emerson, RAND corporation, Shenzhen was a fishing village, Silicon Valley, smart grid, South China Sea, sovereign wealth fund, special economic zone, spice trade, trade route, uranium enrichment, urban decay, working-age population, Yom Kippur War

Among the big resource-rich economies, Russia (ranked a lowly 143 out of 182 countries on Transparency International’s 2011 corruption perceptions index), Brazil (ranked 73), Mexico, and Indonesia (both ranked 100) continue to see their share of crony capitalists, government ministers, and officials with snouts in the public trough. In the United States (ranked 24, well behind Australia, Canada, Germany, Japan, and the United Kingdom), corruption in government and big business is almost an art form—think Enron, lobbyist Jack Abramoff, financier Bernie Madoff, hedge funds Long-Term Capital Management and Galleon, and former Illinois Governor Rod Blagojevich, to name just a few. But the United States has a number of redeeming features, including its ability to renew itself in the face of adversity or threats to its position, and its willingness to shine a light on corporate and political skulduggery. It has technology, innovation, infrastructure, deep capital pools, well-defined markets, a business environment that encourages investment and rewards risk-taking, and an abundance of enthusiasm and confidence.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, women in the workforce

Then there is crisis triggered by the failure of the counteracting tendencies listed above, leading to a tangible collapse in the profit rate, an investment freeze, layoffs and falling GDP. Finally, in volume III of Capital, Marx describes how financial crisis happens: credit becomes massively overextended, and then speculation and crime drive it to unsustainable limits where the bust inevitably overcorrects the boom – pushing the economy into a multi-year depression. In one evocative sentence Marx anticipated the world of Enron, Bernie Madoff and the wealthy 1 per cent. The main function of credit, he wrote, is to develop exploitation ‘to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth’.2 In 2008 it was the parallels between the collapse of finance and the famous passage quoted above that provoked the articles claiming Marx was right. Today, as the financial crisis recedes but real incomes stagnate across the Western world, people are once more saying ‘Marx was right’ – this time on the problem of overproduction, where profits and growth rebound but the workers’ wages do not.


pages: 484 words: 104,873

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

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3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, debt deflation, deskilling, diversified portfolio, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Fractional reserve banking, Freestyle chess, full employment, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, knowledge worker, labor-force participation, labour mobility, liquidity trap, low skilled workers, low-wage service sector, Lyft, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, Plutocrats, plutocrats, post scarcity, precision agriculture, price mechanism, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Richard Feynman, Rodney Brooks, secular stagnation, self-driving car, Silicon Valley, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, Thomas L Friedman, too big to fail, Tyler Cowen: Great Stagnation, union organizing, Vernor Vinge, very high income, Watson beat the top human players on Jeopardy!, women in the workforce

A rash decision to “cash out, and party” would be “prevented with some fairly light paternalism, like temporary ‘lock-up’ provisions.”18 The problem with this is that “light paternalism” might not be enough. Imagine a future in which your ability to survive economically is determined almost exclusively by what you own; your labor is worth little or nothing. In that world, there would be no more stories about the person who lost it all and then worked his or her way back to the top. If you make a bad investment or get ripped off by a Bernie Madoff type, then the error might well be unrecoverable. If individuals are ultimately given control over their capital, then it’s inevitable that this scenario would play out for some unlucky people. What would we do for individuals and families who found themselves in this kind of situation? Would they be “too big to fail”? If so, there would be a clear moral hazard problem: people might see little downside in taking excessive risks.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

Two days later the old system of annuity finance was relaunched. By October the notes of the Bank had been abolished. By December, Law had fled France in fear of his life. So unlikely was the rise, and so precipitous the fall, of the System that it has always been easy to dismiss the whole affair as a typical tale of unscrupulous financial chicanery, with Law in the role of an eighteenth-century Bernie Madoff. The English writer Daniel Defoe painted Law’s career sarcastically as an excellent model for a young man seeking his fortune. “The Case is plain,” he advised, “you must put on a Sword, Kill a Beau or two, get into Newgate, be condemned to be hanged, break Prison, IF YOU CAN,—remember that by the Way,—get over to some Strange Country, turn Stock-Jobber, set up a Mississippi Stock, bubble a Nation, and you may soon be a great Man.”16 Such assessments are too superficial.


pages: 250 words: 87,722

Flash Boys: A Wall Street Revolt by Michael Lewis

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automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, latency arbitrage, pattern recognition, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund

He places bets in the casino on every game and waits for other gamblers to take the other side of those bets. There’s no guarantee that anyone will do so; but if they do, he’s certain to win. In his investigation of the people who managed Credit Suisse’s dark pool, one of the first things Schwall noticed was the guy in charge of electronic trading: Josh Stampfli, who had joined Credit Suisse after seven years spent working for Bernie Madoff. (Madoff had pioneered the idea of paying brokers for the right to execute the brokers’ customers’ orders, which should have told people something but apparently did not.) This, of course, only heightened Schwall’s suspicions, and sent him digging around in old articles in trade journals about Credit Suisse’s dark pool.†† There he found references and allusions that made sense only if Credit Suisse had planned, right from the start, to be deeply involved with high-frequency trading firms.


pages: 284 words: 92,688

Disrupted: My Misadventure in the Start-Up Bubble by Dan Lyons

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activist fund / activist shareholder / activist investor, Airbnb, Bernie Madoff, bitcoin, call centre, cleantech, cloud computing, corporate governance, dumpster diving, fear of failure, Filter Bubble, Golden Gate Park, Google Glasses, Googley, Gordon Gekko, hiring and firing, Jeff Bezos, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, Menlo Park, minimum viable product, new economy, Paul Graham, pre–internet, quantitative easing, ride hailing / ride sharing, Rosa Parks, Sand Hill Road, sharing economy, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, Snapchat, software as a service, South of Market, San Francisco, Steve Ballmer, Steve Jobs, Steve Wozniak, telemarketer, tulip mania, Y Combinator, éminence grise

(The investor later walked back that comment, saying it was a “poor choice of words.”) Start-ups seem to believe it is okay for them to bend rules. Some, like Uber and Airbnb, have built their businesses by defying regulations. Then again, if laws are stupid, why follow them? In the World According to Start-ups, when tech companies cut corners it is for the greater good. These start-up founders are not like Gordon Gekko or Bernie Madoff, driven by greed and avarice; they are Rosa Parks and Martin Luther King Jr., engaging in civil disobedience. There’s also a sense among start-ups that it’s okay for them to break the rules because they’re underdogs competing against huge opponents; they’re David, firing his slingshot at Goliath. Another argument is that the big guys break just as many rules as the little guys. Everybody cheats, and only suckers drive inside the lines.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

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3Com Palm IPO, asset allocation, Bernie Madoff, Brownian motion, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, survivorship bias, transaction costs, two-sided market, value at risk, yield curve

Inherent psychological biases lead investors to make distorted risk assessments and ultimately irrational investment decisions when comparing hedge funds with traditional investments. 1 We use the fund of funds index rather than the composite index of individual funds to represent hedge fund performance because, as will be explained in Chapter 14, hedge fund indexes based on individual funds are significantly biased. 2 Bernie Madoff may have been even more prominent, but his was a Ponzi scheme rather than a hedge fund. Madoff simply made up performance results and never did any trading. Also, Madoff lacked all the normal structural checks of a hedge fund, such as an independent broker and administrator. 3 New York: Random House, 2000. This book was the source for the LTCM discussion in this section. 4 In 2003, President Levy Mwanawasa of Zambia banned the distribution of donated genetically modified food to his starving population.


pages: 345 words: 92,849

Equal Is Unfair: America's Misguided Fight Against Income Inequality by Don Watkins, Yaron Brook

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3D printing, Affordable Care Act / Obamacare, Apple II, barriers to entry, Berlin Wall, Bernie Madoff, blue-collar work, business process, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, collective bargaining, colonial exploitation, corporate governance, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, David Brooks, deskilling, Edward Glaeser, Elon Musk, en.wikipedia.org, financial deregulation, immigration reform, income inequality, indoor plumbing, inventory management, invisible hand, Isaac Newton, Jeff Bezos, Jony Ive, laissez-faire capitalism, Louis Pasteur, low skilled workers, means of production, minimum wage unemployment, Naomi Klein, new economy, obamacare, Peter Singer: altruism, Peter Thiel, profit motive, rent control, Ronald Reagan, Silicon Valley, Skype, statistical model, Steve Jobs, Steve Wozniak, The Spirit Level, too big to fail, trickle-down economics, Uber for X, urban renewal, War on Poverty, wealth creators, women in the workforce, working poor, zero-sum game

Terms such as “the rich” and “the 1 percent” are not neutral descriptions of an individual’s income or wealth. They assume that there are such things as economic classes, which are made up of essentially similar people with a coherent set of interests—interests that clash with those of other economic classes. But what did a visionary CEO like Steve Jobs have in common with a con man like Bernie Madoff besides the fact that both had a lot of money? What do the right-leaning Koch brothers have in common with the left-leaning George Soros? What does an innovator like Amazon’s Jeff Bezos have in common with the political favor-seeking CEO of GE, Jeffrey Immelt? How do the interests of a young, ambitious, and poor Sam Walton clash with the interests of an older, ambitious, and successful Sam Walton?


pages: 364 words: 99,897

The Industries of the Future by Alec Ross

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23andMe, 3D printing, Airbnb, algorithmic trading, AltaVista, Anne Wojcicki, autonomous vehicles, banking crisis, barriers to entry, Bernie Madoff, bioinformatics, bitcoin, blockchain, Brian Krebs, British Empire, business intelligence, call centre, carbon footprint, cloud computing, collaborative consumption, connected car, corporate governance, Credit Default Swap, cryptocurrency, David Brooks, disintermediation, Dissolution of the Soviet Union, distributed ledger, Edward Glaeser, Edward Snowden, en.wikipedia.org, Erik Brynjolfsson, fiat currency, future of work, global supply chain, Google X / Alphabet X, industrial robot, Internet of things, invention of the printing press, Jaron Lanier, Jeff Bezos, job automation, John Markoff, knowledge economy, knowledge worker, lifelogging, litecoin, M-Pesa, Marc Andreessen, Mark Zuckerberg, Mikhail Gorbachev, mobile money, money: store of value / unit of account / medium of exchange, new economy, offshore financial centre, open economy, Parag Khanna, peer-to-peer, peer-to-peer lending, personalized medicine, Peter Thiel, precision agriculture, pre–internet, RAND corporation, Ray Kurzweil, recommendation engine, ride hailing / ride sharing, Rubik’s Cube, Satoshi Nakamoto, selective serotonin reuptake inhibitor (SSRI), self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart cities, social graph, software as a service, special economic zone, supply-chain management, supply-chain management software, technoutopianism, The Future of Employment, underbanked, Vernor Vinge, Watson beat the top human players on Jeopardy!, women in the workforce, Y Combinator, young professional

The work of big data is to chew through that spreadsheet, summarize the information, and display the findings in a map, a graph, or some other picture that the Marine will grasp immediately. Finding patterns that we would otherwise overlook and displaying them in ways that we can’t miss is Palantir’s goal. An investor prospectus for Palantir revealed that its software was used to scour 40 years’ worth of records to help convict Bernie Madoff of securities fraud. While it is not forced to disclose its revenues, the private sector now reportedly represents a majority of the firm’s revenue. Alex Karp regards the work of Palantir as sanctified. When recruiting, he says, “We tell people you can help save the world.” To some extent, that’s probably true, but I don’t believe that these kinds of capabilities will stay bottled up and only be put to work in the common interest.


pages: 237 words: 82,266

You Say Tomato, I Say Shut Up by Annabelle Gurwitch

Atul Gawande, Bernie Madoff, big-box store, Donald Trump, Donner party, Exxon Valdez, Mahatma Gandhi, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Yogi Berra

“In the running of schools, businesses, in planning war, in caring for the sick and injured, negative thinking may be exactly what we need.” It isn’t a stretch to see that these same skills are exactly what are needed to run a family.* In fact, numerous credible sources see a direct correlation between a reliance on positive thinking, which lulls people into optimistic complacency and overconfidence, and lack of oversight, fueling everything from the housing downturn, the stock market debacle, and the Bernie Madoff scandal. If anything puts me in an early grave, I predict it will be the stress of dealing with the health-insurance industry, whose own mission statement appears to be: “Band together to make it as difficult as possible for people to receive the health care benefits they pay for.” By 1:30 a.m., we’d come as close to a marital mission statement as we’ve ever come: “Our shared vision is to realize our dream of divergent futures.”


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

When a plan is controlled by a plan-sponsor executive, usually the chief financial officer or head of the human resources department, he or she may do the best they can to advance the interests of beneficiaries. But the potential for a conflict of interest is obvious. What is not as obvious is that a corporate official may simply not be as vigilant in overseeing the pension plan if he or she is not overseen by the people with a stake in its performance. In one disheartening case, a corporate pension plan included infamous Ponzi scheme mastermind Bernard Madoff’s fraudulent investment program even though the custodian of the plan refused to take custody of Madoff’s “assets.”16 The challenge is to ensure that those with the power to control funds act in the interests of those who are supposed to benefit from them. When those in charge of the plan are not accountable to members, it is difficult to be sure if, when, how frequently, how energetically, and how skillfully this oversight is carried out.


pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

The Swiss economist Peter Bernholz tells us that "a study of about 30 currencies shows that there has not been a single case of a currency freely manipulated by its government or central bank since 1700 that enjoyed price stability for at least 30 years running."" If we chop down the jungle of government support, protection, and requirements, investors and savers will be left to their own devices. That is tough. But thinking for yourself should be tough, because the intellectual exercise it provides will train skills that have lain dormant. And they are necessary. Just think about the hedgefund fraudster Bernard Madoff, who may have cheated his established and well-heeled clients out of an unbelievable $50 billion. Despite the phenomenal returns reported by his fund, the big institutional investors stayed away. One of them explained that the fund made a nonserious impression "because when you get to page two of your 30-page due diligence questionnaire, you've already tripped eight alarms and said `I'm out of here."'20 Madoff's fraud was hardly rocket science.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

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Airbnb, bank run, banks create money, Bernie Madoff, bitcoin, Bretton Woods, Carmen Reinhart, corporate raider, correlation does not imply causation, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Uber for X, War on Poverty, yield curve

Even if she gave everything away, she would still have her Promethean work ethic, her much-admired talent as a songwriter, and her ability to entertain filled-to-capacity stadiums with her performing ability. Swift is the personification of “easy credit” any time, any day, and anywhere. Reversing scenarios, imagine, if by some quirk in the federal sentencing system, that disgraced financier Bernard Madoff was released from prison. If so, no matter the Fed’s loose stance, no matter the fed funds rate, and no matter the central bank’s naive attempts to create credit with quantitative easing, Madoff would be shown the door by any respectable (or not-so-respectable) lender, no matter his willingness to pay usurious rates of interest for credit. At this point, it’s worth quoting Hazlitt in longer form.


pages: 166 words: 49,639

Start It Up: Why Running Your Own Business Is Easier Than You Think by Luke Johnson

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Albert Einstein, barriers to entry, Bernie Madoff, collapse of Lehman Brothers, corporate governance, corporate social responsibility, creative destruction, credit crunch, Grace Hopper, happiness index / gross national happiness, high net worth, James Dyson, Jarndyce and Jarndyce, Jarndyce and Jarndyce, mass immigration, mittelstand, Network effects, North Sea oil, Northern Rock, patent troll, Plutocrats, plutocrats, Ponzi scheme, profit motive, Ralph Waldo Emerson, Silicon Valley, software patent, stealth mode startup, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, traveling salesman, tulip mania, Vilfredo Pareto, wealth creators

Only risk-positive entrepreneurs have the guts to risk making fresh investments in this environment, a time when investment is exactly what society needs to pick itself up again. Watch out for an epidemic of petty fraud The economist J. K. Galbraith asserted that fraud rose in a bull market and shrank in a slump. As he put it, the ‘bezzle’ rises in a boom because of lax controls, and fades in a bust. Colossal frauds like Bernard Madoff’s Ponzi scheme suggests Galbraith may be right about large-scale embezzlement, but my experience is the opposite when it comes to petty larceny. One of our restaurant companies suffered a disturbing rise in insurance claims. It wasn’t down to carelessness. Several claims related to apparent falls by suppliers’ workers. The curious thing is that in more than one case the victim appears to have waited more than fifteen months before notifying us of the injury.


pages: 164 words: 57,068

The Second Curve: Thoughts on Reinventing Society by Charles Handy

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Airbnb, basic income, Bernie Madoff, bitcoin, bonus culture, British Empire, call centre, Clayton Christensen, corporate governance, delayed gratification, Diane Coyle, Edward Snowden, falling living standards, future of work, G4S, greed is good, informal economy, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kickstarter, Kodak vs Instagram, late capitalism, mass immigration, megacity, mittelstand, Occupy movement, payday loans, peer-to-peer lending, Plutocrats, plutocrats, Ponzi scheme, Ronald Coase, shareholder value, sharing economy, Skype, Steve Jobs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Veblen good, Walter Mischel

The Anglo-Bengalee Loan and Life Assurance Company paid out the claims of the early policyholders from the premiums coming in from later entrants. It is not known whether Charles Ponzi in the United States read Dickens but his own scheme, based on the arbitrage of international reply coupons, followed the same principle, diverting any new income to the early investors and to himself. When the scam collapsed in 1920 the sums involved were so large that Ponzi has given his name to all subsequent schemes. More recently Bernard Madoff ran something very similar, an investment fund that promised, and delivered, unusually high returns to investors for almost 50 years. When he was finally exposed, by his two sons, his liabilities were, he admitted, around $50 billion, although his early clients lost no money. He is currently serving a sentence of 150 years. How odd then that what was called the fraud of the century should be the common practice in much of society today.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

The currency’s architects deliberately limited the amount of bitcoins in order ostensibly to prevent inflation. In reality, the purpose is to ratchet up the value of bitcoins, most of which are owned by originators of the scheme. In this sense, bitcoin miners are no different from goldbugs talking up the value of of a finite quantity of gold, from tulip growers talking up the price of rare tulips in the seventeenth century, or from Bernard Madoff talking up his fraudulent Ponzi scheme. However, some have hyped up the technology used by bitcoin – blockchain, a distributed database or ledger – and argued that it could revolutionise the distribution of wealth and provide transparent accounts of transactions. We should treat these claims cautiously. In a recent blog, Financial Times journalist Izabella Kaminska argued that financial technology fads follow a pattern similar to new music designated first as ‘hip’ and ‘cool’ but which then fades and becomes ‘so last year’.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

Instead, investors will reward a manager handsomely only if the manager consistently generates excess returns, that is, returns exceeding those of the risk-appropriate benchmark. In the jargon, such excess returns are known as “alpha.” Why should a manager care about generating alpha? If she wants to attract substantial new inflows of money, which is the key to being paid large amounts, she has to give the appearance of superior performance. The most direct way is to fudge returns. In recent times, some fund managers, like Bernard Madoff, simply made up their numbers, while others who held complex, rarely traded securities attributed excessively high prices to them based on models that had only a nodding acquaintance with reality. But it is easy to track and audit the returns most financial managers generate, so fudging is usually not an option, even for those with consciences untroubled by committing fraud. What, then is a financial manager to do if she is an ordinary mortal—neither an extraordinary investor nor a great financial entrepreneur—and has no bright ideas on new securities or schemes to sell?


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

Frankfurt’s big problem is that London is a much more attractive and interesting place to live, especially for the demographic who work in finance: as a former mayor of London, Ken Livingstone, put it, “Young men want to go out on the pull and do a lot of cocaine, and they can’t really do that easily in Frankfurt.” fraud A perennial fact in the world of finance and money. As finance has got more virtual and computerized, and as the sums involved have got bigger and can be moved more easily, frauds have got bigger too: it’s noticeable that the biggest fraud trials in the history of the both the United States and the UK, those of Bernard Madoff and Kweku Abodoli, have happened in the last five years. In all the talk about the need to punish bankers, it seems to have gone largely unremarked that the Fraud Act of 2006 has a section dealing with “fraud by failing to reveal information.” That seems to me to cover the PPI scandal, in which banks sold policies that they knew would be of no use to their customers—but nothing has happened about that.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

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air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

But, when our ability to perform at a satisfactory level is low or nonexistent, and when our failures can hurt ourselves and others (think about driving)—this is when regulations are very handy boundaries to apply. (2) What caused bankers to lose sight of the economy? The financial crisis of 2008 left a lot of people feeling that the investment bankers involved were fundamentally evil human beings, and that the economic crisis resulted from their deceitfulness and greed. Certainly, people like Bernard Madoff were out to cheat their investors for personal gain. But personally, I think calculated cheating was the exception rather than the rule in this financial fiasco. I’m not suggesting in any way that the bankers were innocent bystanders, but I do think that the story of their actions is more complicated than simply accusing them of being bad apples. As in the aftermath of the Enron case and other market failures, it is important to understand what caused the bankers to behave as they did, since this is the only way to ensure that we don’t repeat these same mistakes.


pages: 252 words: 72,473

Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy by Cathy O'Neil

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Affordable Care Act / Obamacare, Bernie Madoff, big data - Walmart - Pop Tarts, call centre, carried interest, cloud computing, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Emanuel Derman, housing crisis, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, illegal immigration, Internet of things, late fees, mass incarceration, medical bankruptcy, Moneyball by Michael Lewis explains big data, new economy, obamacare, Occupy movement, offshore financial centre, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price discrimination, quantitative hedge fund, Ralph Nader, RAND corporation, recommendation engine, Rubik’s Cube, Sharpe ratio, statistical model, Tim Cook: Apple, too big to fail, Unsafe at Any Speed, Upton Sinclair, Watson beat the top human players on Jeopardy!, working poor

The small and underfunded teams who handle that work, from the FBI to investigators at the Securities and Exchange Commission, have learned through the decades that bankers are virtually invulnerable. They spend heavily on our politicians, which always helps, and are also viewed as crucial to our economy. That protects them. If their banks go south, our economy could go with them. (The poor have no such argument.) So except for a couple of criminal outliers, such as Ponzi-scheme master Bernard Madoff, financiers don’t get arrested. As a group, they made it through the 2008 market crash practically unscathed. What could ever burn them now? My point is that police make choices about where they direct their attention. Today they focus almost exclusively on the poor. That’s their heritage, and their mission, as they understand it. And now data scientists are stitching this status quo of the social order into models, like PredPol, that hold ever-greater sway over our lives.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Redefining the concept of expertise, these firms seemed to specialize in matching insiders with traders hungry for privileged information, routinely allowing access to non-public sensitive inside information on sales forecasts and earnings. The investigations recalled the investigations and convictions of Ivan Boesky and Michael Milken for corruption on Wall Street in the late 1980s. Regulators suggested that the practice was so widespread as to verge on a “corrupt business model.”16 Some fund managers dispense with pretence and fabricate returns. In 2008, Bernard Madoff confessed to an investment fraud totaling more than $60 billion, involving nearly 5,000 clients. Madoff’s hedge funds, operating from three floors of the Lipstick Building, generated solid returns, trading stocks, and options. In reality, since the mid-1990s, Madoff had operated a Ponzi scheme. Lucky Man Jones charged 20 percent of performance, but no management fee, and paid expenses from his performance fee.

They learned the truth of an old Wall Street saying: “Never tell anyone on Wall Street your problems. Some don’t care. Most are glad you have them.” The environment creates a culture where narrow, short-term self-interest dominates. It drives creation and sales of products of no intrinsic value. Fear of liquidation eliminates misgivings about profitable transactions that might result in enormous pain for others. Bernard Madoff perfected affinity fraud, preying upon unwitting members of his religious and ethnic communities, enlisting leading figures to promote fraudulent investments through the country clubs of Long Island and Palm Beach. Former Salomon Brothers economist and Lehman Brothers board member Henry Kaufman, along with stars such as Steven Spielberg, Jeffrey Katzenberg, Kevin Bacon, John Malkovich, Zsa Zsa Gabor, and Larry King lost money.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Realism—which seeks to capture value’s truth, as it were—plays an important part in such a critique. Paul Krugman described the system that made the crisis possible as “a world gone Madoff,” in which fraud is rife and bankers’ salaries are based merely on the illusion of profit. According to Krugman, “the vast riches being earned … in our bloated financial industry undermined our sense of reality.”25 In a similar vein, Slavoj Žižek called the Bernard Madoff case “an extreme but therefore pure example of what caused the financial breakdown itself” (Žižek 2009: 36). Madoff’s crime (his wealth management business operated as a Ponzi scheme for many years before its collapse in 2008, costing investors around $18 billion) was merely a manifestation of a form of reasoning that is inscribed into the very system of capitalist relations, namely, that the sphere of circulation must be expanded—using “fraudulent” monetary instruments, if necessary—to keep the machinery running: “the temptation to ‘morph’ legitimate business into a pyramid scheme is part of the very nature of the capitalist circulation process” (Žižek 2009: 36).

This is where we are today: undecidability, the era of floating theories, as much as floating money” (Baudrillard 1993: 44 n. 3; see also Baudrillard 2001: 53). 23 The terrorist model brings about “an excess of reality” (Baudrillard 2003: 18). 24 In his later analysis, Baudrillard makes the additional point that the towers were an “architectural graphism” embodying capitalism in its digital phase, “a system that is no longer competitive, but digital and countable, and from which competition has disappeared in favour of networks and monopoly” (Baudrillard 2003: 38–39). 25 “The Bernard Madoff story tells us a lot about the nation’s financial mess,” Seattle Times, December 19, 2008. 26 Michael Rowbotham takes a similar line, but in much narrower terms, describing fractional reserve banking per se as a form of legalized counterfeiting (Rowbotham 1998). 27 “Stucco is the triumphant democracy of all artificial signs,” he writes (Baudrillard 1993: 51). 28 As we see in Chapter 8, the idea behind Bitcoin is that no such copies are possible: each Bitcoin is unique. 29 Circulating at speed, speculative currencies are the epitome of an uncontrollable drifting of signs: “a simple play of flotation can ruin any national economy” (Baudrillard 1993: 23).


pages: 487 words: 151,810

The Social Animal: The Hidden Sources of Love, Character, and Achievement by David Brooks

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Albert Einstein, asset allocation, assortative mating, Atul Gawande, Bernie Madoff, business process, Cass Sunstein, choice architecture, clean water, creative destruction, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, deliberate practice, disintermediation, Donald Trump, Douglas Hofstadter, Emanuel Derman, en.wikipedia.org, fear of failure, financial deregulation, financial independence, Flynn Effect, George Akerlof, Henri Poincaré, hiring and firing, impulse control, invisible hand, Joseph Schumpeter, labor-force participation, loss aversion, medical residency, meta analysis, meta-analysis, Monroe Doctrine, Paul Samuelson, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, school vouchers, six sigma, Steve Jobs, Steven Pinker, the scientific method, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Walter Mischel, young professional

Their worldviews rested upon an assumption of pristine equilibrium. As long as everybody was civil and genial, the way they were, then their way of thinking made sense. As long as everything was neat and orderly, they could retreat and live inside the formulas they’d learned in school. But, much of the time, because the world is not neat and gentle, they were the babes of the universe. They fell for Bernie Madoff schemes, subprime mortgages, and derivatives they didn’t understand. They were suckers for every moronic management fad, every bubble mania. They wandered about in the mist, blown about by deeper forces they could not understand. Fortunately, God, in his infinite and redeeming mercy, had also sent down a tight-abbed, small-boned Chinese-Chicana woman to rescue the innocents. This hard-assed, chip-on-her-shoulder, hyper-organized human Filofax would liberate the overprotected masses from the six-delta PowerPoint bullet points and introduce them to the underworld of reality.


pages: 520 words: 129,887

Power Hungry: The Myths of "Green" Energy and the Real Fuels of the Future by Robert Bryce

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Bernie Madoff, carbon footprint, Cesare Marchetti: Marchetti’s constant, cleantech, collateralized debt obligation, corporate raider, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, decarbonisation, Deng Xiaoping, en.wikipedia.org, energy security, energy transition, flex fuel, greed is good, Hernando de Soto, hydraulic fracturing, hydrogen economy, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, James Watt: steam engine, Menlo Park, new economy, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, purchasing power parity, RAND corporation, Ronald Reagan, Silicon Valley, smart grid, Stewart Brand, Thomas L Friedman, uranium enrichment, Whole Earth Catalog

Bush and his cronies used trumped-up intelligence to justify the Second Iraq War, a ruinously expensive campaign that will haunt the United States for decades to come. We had the fraud perpetrated by Dennis Kozlowski of Tyco International, who felt entitled to a $6,000 shower curtain.7 There were the two Bernies: Bernie Ebbers of WorldCom, who’s now serving a twenty-five-year sentence for fraud and conspiracy, and, of course, Bernie Madoff, the gold-digging mastermind of a multibillion-dollar Ponzi scheme who’s now serving 150 years in prison. The sports pages were full of news about cheaters, from Major League Baseball players such as Mark Mc-Gwire and Barry Bonds to the ongoing doping scandals at the Tour de France. And we saw the carnage created by the pirates on Wall Street who engineered a multitrillion-dollar mess of toxic derivatives—from collateralized debt obligations to credit default swaps—that would have made even a privateer such as Enron’s Jeffrey Skilling blush in embarrassment.8 We cannot, must not, be Enroned when it comes to energy and energy policy.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

In the ’00s, mortgage bankers and investment bankers believed that there would always be another lender, another loan, to relieve them of the bad coin. One would have imagined that, at the very least, banks would not have needed coercion from regulators to take measures to safeguard their own precious capital. 26 Such was the central tenet of Greenspanism: people are rational; markets reflect the sum of many participants’ rational decisions. In fact, lenders, like the victims of a Bernie Madoff, engage in a willful self-delusion. By 2004, the number of Americans who “owned” their homes had climbed to an unprecedented 69 percent. By then, more than $2 trillion subprime and Alt-A no-doc loans were outstanding, and fully a third of new financings were for risky mortgages of one type or another—loans that, a short while ago, had been either unavailable or highly restricted. Among subprime loans, two-thirds were adjustable; thus, the borrowers would be vulnerable to a rise in interest rates, to a change in their own, already modest fortunes, and to a drop in home values.


pages: 481 words: 120,693

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, stem cell, Steve Jobs, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Crown Business, 1999. Hacker, Jacob S., and Paul Pierson. Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class. Simon & Schuster, 2010. Hayek, Friedrich A. Law, Legislation, and Liberty, Volume 2: The Mirage of Social Justice. University of Chicago Press, 1978. Henriques, Diana B. The Wizard of Lies: Bernie Madoff and the Death of Trust. Times Books, 2011. Hoffman, David E. The Oligarchs: Wealth and Power in the New Russia. Public Affairs, 2002. Hoffman, Reid. The Start-Up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career. Crown Business, 2012. Hsieh, Tony. Delivering Happiness: A Path to Profits, Passion, and Purpose. Business Plus, 2010. Jensen, Michael C., and Kevin J.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

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airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, mass incarceration, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, zero-sum game

seeing someone Harold Grasmick, Robert Bursik, and Karyl Kinsey (1991), “Shame and Embarrassment as Deterrents to Noncompliance with the Law: The Case of an Antilittering Campaign,” Environment & Behavior, 23:233–51. Carl A. Kallgren, Raymond R. Reno, and Robert B. Cialdini (2000), “A Focus Theory of Normative Conduct: When Norms Do and Do Not Affect Behavior,” Personality & Social Psychology Bulletin, 26:1002–12. general breakdown James B. Stewart (2011), Tangled Webs: How False Statements Are Undermining America: From Martha Stewart to Bernie Madoff, Penguin Press. unpunished free rider Robert O. Kurzban and Daniel Houser (2001), “Individual Differences in Cooperation in a Circular Public Goods Game,” European Journal of Personality, 15:S37–S52. David P. Myatt and Chris Wallace (2008), “When Does One Bad Apple Spoil the Barrel? An Evolutionary Analysis of Collective Action,” Review of Economic Studies, 75:499–527. In Islam Sahih Muslim, Book 037, Hadith Number 6658.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, financial thriller, fixed income, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information asymmetry, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Marc Andreessen, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks, zero-sum game

Adrian Vermeule, “Our Schmittian Administrative Law,” Harvard Law Review 122 (2009): 1095–1150. 128. Matt Taibbi, “Is the SEC Covering Up Wall Street Crimes?,” Rolling Stone, August 17, 2011, http://www.rollingstone.com /politics/news/is-the-sec -covering-up-wall-street-crimes-20110817?print=true. 129. For example, agency critics like Harry Markopolos have berated it for years for failing to catch Bernie Madoff earlier; the (now-deleted) MUI file about him might have led to some accountability for the individuals who failed to follow up on complaints about Madoff. Harry Markopolos, No One Would Listen: A True Financial Thriller (Hoboken, NJ: John Wiley & Sons, Inc., 2010). Past bad behavior can contextualize current accusations. But such a process would also prove embarrassing to the agency itself.


pages: 432 words: 124,635

Happy City: Transforming Our Lives Through Urban Design by Charles Montgomery

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, agricultural Revolution, American Society of Civil Engineers: Report Card, Bernie Madoff, British Empire, Buckminster Fuller, car-free, carbon footprint, centre right, City Beautiful movement, clean water, congestion charging, correlation does not imply causation, East Village, edge city, energy security, Enrique Peñalosa, experimental subject, Frank Gehry, Google Earth, happiness index / gross national happiness, Home mortgage interest deduction, housing crisis, income inequality, income per capita, Induced demand, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, license plate recognition, McMansion, means of production, megacity, Menlo Park, meta analysis, meta-analysis, mortgage tax deduction, New Urbanism, peak oil, Ponzi scheme, rent control, ride hailing / ride sharing, risk tolerance, science of happiness, Seaside, Florida, Silicon Valley, the built environment, The Death and Life of Great American Cities, the High Line, The Spirit Level, The Wealth of Nations by Adam Smith, trade route, transit-oriented development, upwardly mobile, urban planning, urban sprawl, wage slave, white flight, World Values Survey, zero-sum game, Zipcar

Smyrna’s council members had risked their political necks, raising property taxes in order to help bankroll the project, but after the village opened, land values within a mile radius went through the roof, inflating the city’s tax revenue twentyfold. The city started raking in so much money that the city council cut the tax rate by 30 percent, making it near the lowest in the state. “It sounds like a Bernie Madoff scheme, but it’s true!” one councilor gushed. The success made Mayor Bacon, who spearheaded the scheme, something of a hero in Smyrna. On the day of our walk through the Market Village, passersby kept slapping him on the back and thanking him. Village Sushi, a restaurant on the strip, even named a dish after him: the Max Bacon Sushi Roll. Yet the aesthetic appeal of the Market Village obscures a deep flaw in the Smyrna redesign.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

The next time an investment adviser comes to you promising a 20 or 40 percent return, you know that one of three things must be true: (1) This must be a very risky investment in order to justify such a high expected return—think Harvard endowment; (2) your investment adviser has stumbled upon an opportunity still undiscovered by all the world’s sophisticated investors, and he has been kind enough to share it with you—please call me; or (3) your investment adviser is incompetent and/or dishonest—think Bernie Madoff. All too often the answer is (3). The fascinating thing about economics is that the fundamental ideas don’t change. Monarchs in the Middle Ages needed to raise capital (usually to fight wars), just as biotech startups do today. I have no idea what the planet will look like in one hundred years. Perhaps we will be settling Mars or converting salt water into a clean, renewable source of energy.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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3Com Palm IPO, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, Paul Samuelson, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

He was in the toughest setup, in which the bigger prize, three delicious Oreo cookies, was sitting right in front of him. After a brief wait, he could not stand it anymore. But rather than ring the bell, he carefully opened each cookie, licked out the yummy white filling, and then put the cookie back together, arranging the three cookies as best he could to avoid detection. In my imagination, this kid grows up to be Bernie Madoff. The other behavioral scientist whose work captured my attention was a practicing psychiatrist named George Ainslie who was doing research in his spare time, while holding a job treating patients in a veterans’ hospital. In a paper published in 1975, which I had studied carefully during my year at Stanford, Ainslie summarized everything academics knew about self-control at the time. I learned from Ainslie that there existed a large literature studying delay of gratification in nonhuman animals such as rats and pigeons.


pages: 493 words: 132,290

Vultures' Picnic: In Pursuit of Petroleum Pigs, Power Pirates, and High-Finance Carnivores by Greg Palast

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anti-communist, back-to-the-land, bank run, Berlin Wall, Bernie Madoff, British Empire, capital asset pricing model, capital controls, centre right, Chelsea Manning, clean water, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, energy security, Exxon Valdez, invisible hand, means of production, Myron Scholes, offshore financial centre, random walk, Ronald Reagan, sensible shoes, transfer pricing, uranium enrichment, Washington Consensus, Yogi Berra

Then, under international law, these contracts could be voided. Contracts that are the fruit of crime cannot be enforced. BP, France’s Total, ConocoPhillips, Texaco, Italy’s ENI, and the rest of the gang, if indicted, would be out of the Caspian on their keisters. China, giggling on the sidelines, would end up with the whole caboodle. A huge scrum of reporters is down the hall, covering a blonde in the Bernie Madoff trial. I am the only reporter covering the Bribery Case of the Century. Lucky me. Now, Schwartz stands. Giffen’s mouthpiece is about to earn his $600 an hour. At a dark-wood lectern, tall and dramatic, the attorney says that his client had merely “failed to tick a box on a tax form”—that was his only crime, to which he now confessed. He’d given up an $84 million bank account. Giffen had, in fact, already suffered as if under sentence for years, a virtual prisoner in his own home!


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

The children come out the first few days with the watering can, but after three days they forget about it. How important is China in your thinking about the world right now? I was very fortunate to receive an invitation recently to present to a Chinese bank. Yet I had the misfortune of them asking me my view of the world, which is not very bullish on China. My view on China is one of irony and paradox. I jokingly suggest that it is as though we put Bernie Madoff in charge of America’s GDP accounting. Of course he would overstate it. In a similar manner I believe that all the credit card and home-equity spending of the last decade served to overstate the true size of the American economy. And the surplus nations bought into the dream that American GDP was $15 trillion. Furthermore, in 10 years time they thought it might be $25 trillion and that the growth would continue uninterrupted.


The Art of Scalability: Scalable Web Architecture, Processes, and Organizations for the Modern Enterprise by Martin L. Abbott, Michael T. Fisher

always be closing, anti-pattern, barriers to entry, Bernie Madoff, business climate, business continuity plan, business intelligence, business process, call centre, cloud computing, combinatorial explosion, commoditize, Computer Numeric Control, conceptual framework, database schema, discounted cash flows, en.wikipedia.org, fault tolerance, finite state, friendly fire, hiring and firing, Infrastructure as a Service, inventory management, new economy, packet switching, performance metric, platform as a service, Ponzi scheme, RFC: Request For Comment, risk tolerance, Rubik’s Cube, Search for Extraterrestrial Intelligence, SETI@home, shareholder value, Silicon Valley, six sigma, software as a service, the scientific method, transaction costs, Vilfredo Pareto, web application, Y2K

We also hope that it doesn’t include allowing others within your team to do the same. One of our favorite quotes goes something like “What you allow you teach and what you teach becomes your standard.” Here, allowance means either yourself or others. Nowhere does that ring more true than with ethical violations large and small. We’re not sure how issues like Tyco or Enron ultimately start. Nor are we certain how a Ponzi scheme as large as Bernie Madoff’s, which destroyed billions of dollars of wealth, can possibly exist for so many years. We do know, however, that they could have been stopped long before the problems grew to legendary sizes and that each of these events destroyed the size and scale of the companies in question along with a great deal of shareholder value We don’t believe that people start out plotting billion dollar Ponzi schemes and we don’t believe that people start off by misstating tens or hundreds of millions of dollars of revenue or embezzling tens of millions of dollars of money from a company.


pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

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23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, Cesare Marchetti: Marchetti’s constant, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, Plutocrats, plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, Vilfredo Pareto, wage slave, working poor, working-age population, Y2K, Yogi Berra, zero-sum game

The precautionary principle – better safe than sorry – condemns itself: in a sorry world there is no safety to be found in standing still. More immediately, the financial crash of 2008 has caused a deep and painful recession that will generate mass unemployment and real hardship in many parts of the world. The reality of rising living standards feels to many today to be a trick, a pyramid scheme achieved by borrowing from the future. Until he was rumbled in 2008, Bernard Madoff offered his investors high and steady returns of more than 1 per cent a month on their money for thirty years. He did so by paying new investors’ capital out to old investors as revenue, a chain-letter con trick that could not last. When the music stopped, $65 billion of investors’ funds had been looted. It was roughly what John Law did in Paris with the Mississippi Company in 1719, what John Blunt did in London with the South Sea company in 1720, what Charles Ponzi did in Boston in 1920 with reply coupons for postage stamps, what Ken Lay did with Enron’s stock in 2001.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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Alvin Roth, bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, income inequality, information asymmetry, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

In his 2010 book No One Would Listen, stock market analyst Harry Markopolos argued that government regulators can be deaf to evidence of nancial excess, even fraud, if the culprit appears to have legitimacy and prestige. The regulators quickly go after small-time crooks, Markopolos argued, but when it comes to large companies, they are “captive to the companies they are supposed to regulate.” Markopolos uncovered substantial evidence that the massive hedge fund run by the respected Wall Street gure Bernard Madoff was nothing more than a Ponzi scheme, a fraudulent investment scheme built on a plan for social contagion of enthusiasm among investors. The fund was eventually exposed in 2008. But Markopolos had complained about Mado ’s scheme to the SEC as early as 2000. In 2005, three years before the ultimate collapse of the scheme, Markopolos presented a twenty-one-page document to SEC New York Branch Chief Meaghan Cheung and explained his ndings.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, Plutocrats, plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

The new treasury secretary, as president of the New York Federal Reserve Bank, had been part of the troika running the rescue programs. The incoming Roosevelt administration of 1933 had no similar link. Gallup’s November poll had found 60 percent of those sampled calling it critical or very important for Obama to impose stricter regulation on financial institutions. Then December’s revelation of the $50 billion Ponzi scheme run by financier Bernard Madoff further soured the public. In December’s CNN/opinion research poll, 74 percent of those sampled said they believed Madoff’s behavior was common among financial advisers and institutions, and 59 percent said that government regulated the stock market and financial institutions too loosely, up from 50 percent in September. Surveytakers may continue to record such answers. The financial crisis became an intense national experience, imprinting psychologies that voters will not easily forget.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

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activist fund / activist shareholder / activist investor, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bernie Madoff, Bretton Woods, business process, call centre, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, fixed income, high net worth, interest rate derivative, Isaac Newton, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Myron Scholes, NetJets, oil shock, pattern recognition, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, systematic trading, zero-sum game

Those talks were abandoned amid the turbulence of the financial crisis, and were resumed with a new urgency in the aftermath. AHL was up in 2008 but was down 17 percent in 2009, and in 2010 was still 3.7 percent below its high-water mark. Man’s fees suffered accordingly; in March 2010, fees amounted to $97 million, down from $358 million the year before. In addition, RMF, Man’s fund-of-funds business, lost $360 million in the collapse of Bernard Madoff’s Ponzi scheme, and others strategies suffered significant losses as well. In the face of these losses, Man’s CEO Peter Clarke began the search for new assets. GLG was the first place he turned, and he found receptive listeners. Between the market turmoil of 2008 and Coffey’s departure, GLG’s stock price tanked, and the amount of assets under management fell to $17.3 billion, reportedly threatening to put GLG in breach of a covenant on a $570 million loan from Citigroup.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

Too many investors in developed markets were happy to chase higher yields on riskier assets, disregarding the associated dangers. As they did so, they allowed banks to raise funds well beyond their deposits through the creation of securitized products. Many of these funds were lent to US households with questionable credit histories in the form of sub-prime mortgages. Some of the funds raised, though, were lent back to the emerging economies. This wasn’t quite a Ponzi scheme (although Ponzi schemes, most obviously Bernard L. Madoff Investment Securities LLC, nevertheless developed), but it had much the same effect. The combination of rapidly growing emerging economies, 1990s Asian failures and a hunt for yield left investors with the belief that capital gains had to be plucked from the tree without any real regard for risk. Even sensible investors were forced to take part. I recall talking to one particularly cautious bond investor in 2007 who was lamenting his company’s determination to deliver to its investors a particularly high rate of return.

(i) Alaska (i), (ii) Albert, Prince (i) allocation of resources (i), (ii), (iii), (iv), (v), (vi) American International Group (i) Anglo-Russian Entente (i) Annan, Daniel (i) Argentina (i), (ii), (iii) Asia economic growth (i) inflation (i) Russian energy supply (i) trade (i) the West’s diminished status (i), (ii), (iii), (iv), (v), (vi) Asian economic crisis anarchy in capital markets (i), (ii), (iii) migration (i) price stability (i), (ii), (iii) state capitalism (i) Asiatic Barred Zone Act (i) asset-backed securities (i), (ii), (iii), (iv) assets China’s reserve currency (i) population demographics (i), (ii), (iii) price stability (i), (ii), (iii), (iv) savings (i) state capitalism (i), (ii), (iii), (iv), (v) Audi (i), (ii), (iii) Austria (i), (ii) baby-boomer generation (i), (ii), (iii), (iv), (v) balance of payments (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix) Balassa, Bela (i) Balassa–Samuelson condition (i), (ii) Bank of England (i), (ii), (iii), (iv), (v) banks anarchy in capital markets (i), (ii), (iii), (iv), (v) capital controls (i) price stability (i) printing money (i), (ii) protectionism (i) state capitalism (i), (ii), (iii) trade (i) Barbone, L. (i) Beattie, Alan (i) Beijing (i), (ii), (iii), (iv), (v), (vi), (vii) Belarus (i), (ii) Bernanke, Ben (i), (ii) Bernard L. Madoff Investment Securities LLC (i) Besley, Timothy (i) Big Mac index (i) bilateral deals (i), (ii), (iii), (iv), (v) billionaires (i) bio-fuels (i) Blair, Tony (i) Bloomberg (i) Bloom, David E. (i) Boeing (i) Bolshevik Revolution (i), (ii) bonds (i), (ii), (iii), (iv), (v), (vi), (vii) Bontch-Osmolovsky, M. (i) booms and busts (i), (ii), (iii), (iv), (v), (vi) border controls (i), (ii), (iii), (iv), (v), (vi) Boston Tea Party (i) BP (i) Brannan, Sam (i) Brazil anarchy in capital markets (i) inequalities (i), (ii), (iii), (iv) Olympic Games (i) population demographics (i), (ii) price stability (i), (ii) state capitalism (i), (ii) trade (i), (ii), (iii), (iv) the West’s diminished status (i), (ii), (iii) Bretton Woods exchange-rate system (i), (ii), (iii), (iv), (v), (vi) British East India Company (i), (ii), (iii), (iv) British Empire (i), (ii), (iii), (iv), (v) British Energy plc (i) British Nationality and Status Aliens Act (i) British National Party (i) Brown, Gordon (i), (ii), (iii), (iv), (v) bubonic plague (i), (ii) Buddhism (i) Bulgaria (i), (ii), (iii) Bundesbank (i) Bush, George W.


pages: 207 words: 86,639

The New Economics: A Bigger Picture by David Boyle, Andrew Simms

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Asian financial crisis, back-to-the-land, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, carbon footprint, clean water, collateralized debt obligation, colonial rule, Community Supported Agriculture, congestion charging, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, deskilling, en.wikipedia.org, energy transition, financial deregulation, financial exclusion, financial innovation, full employment, garden city movement, happiness index / gross national happiness, if you build it, they will come, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, land reform, light touch regulation, loss aversion, mega-rich, microcredit, Mikhail Gorbachev, mortgage debt, neoliberal agenda, new economy, North Sea oil, Northern Rock, offshore financial centre, oil shock, peak oil, pensions crisis, profit motive, purchasing power parity, quantitative easing, Ronald Reagan, seigniorage, Simon Kuznets, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trickle-down economics, Vilfredo Pareto, Washington Consensus, wealth creators, working-age population

That was the role of the junk bonds, which offered high yields because of the high risk involved. The junk bond revolution was led by a California company called Drexel Burnham Lambert, whose senior executive vice president, Michael Milkin, was the so-called ‘junk bond king’. Evidence obtained from the insider trader Ivan Boesky led to Wall Street’s biggest criminal prosecution ever (at least until the Bernard Madoff affair in 2008), after which 98 indictments of fraud and racketeering were brought against Milkin. He was sentenced to ten years in jail and agreed to pay $600 million in fines. Without his leadership, the junk bonds faltered. It is widely believed that the temporary decline of the junk bond market led to a credit crunch that contributed to the 1990 recession. Milken was released from prison early because he had been given only 18 months to live, and now runs his own economic think tank.


pages: 440 words: 108,137