Bernie Madoff : The American Dream

People have called Bernie Madoff the most hated person in America, a thief, a sociopath, and a host of other things I refuse to put into writing. This man has received death threats to the point that he was forced to wear a bulletproof vest to and from court. Even Eli Wiesel – who won the Nobel Prize for peace – joined the angry mob, recently saying that no punishment was harsh enough and that he could never forgive Madoff for what he did.

When a Nobel Peace Prize winner is calling for your head, you know you’re a hated man.

Here’s the brutally honest truth: Bernie Madoff (which should always be pronounced “made-off” as in “made off” with everyone’s money) is the embodiment of what, for too many, has become the American Dream. He may have technically broken some rules (hence the jail time) but his method, in spirit, was well in line with some of our most treasured cultural values -- and not very far from what our country says is perfectly legal.

Bernie Madoff is guilty of creating a Ponzi scheme. Essentially, Mr. Madoff took people’s money, promising to pay them high returns on their investment – but then paid these people with the money of other investors, rather than on gains from actual investments. So long as Mr. Madoff could find investors, the scheme worked. It was only when the economy tanked that Madoff couldn’t find enough new investors and was finally… apprehended (I was going to say “caught” but he really wasn’t – his two sons turned him in).

So Bernie Madoff made money without doing any work – and so long as the economy was good, he didn’t have to work. He made a bundle and everyone was happy getting a guaranteed ten percent plus return on their investments. Wealth without work, wealth without risk. The good life for everyone involved. The American Dream.

Is this much different than the way banks and Wall Street firms operate?

Many people have this image of banks as being large vaults filled with money. Banks, they imagine, lend this money to people and make money on the interest charged for this service.

In truth, banks don’t have anywhere near the amount of money on deposit that they lend out. The capitalization requirements for banks are quite small (thanks to deregulation). The job of banks, therefore, is not really to lend money. A bank’s job is to assess risk. So long as banks are properly assessing risk, in theory they can continue their business without much actual money because most people will be paying off their debts. In other words, debtors replace the money the bank has to pay out with new money. Sound kind of familiar?

Of course, assessing risk properly means you don’t make as much money because it means you can’t lend to a lot of people – namely people who can’t really afford it. So there is an incentive to figure out ways to make risky loans (without taking the risk yourself, of course).

One way to do this is to bundle these loans up and sell them to Wall Street -- who really doesn’t care if they are risky because they can give them a fancy name (mortgage backed securities) get a fancy rating agency to slap a AAA rating on them (another player in the scheme who gets paid to do nothing) and then sell them to the unsuspecting public.

And nothing can go wrong because AIG is insuring all of it.

Everyone is happy. The banks make money, Wall Street makes money, investors make money, and the guy making twenty five thousand a year gets to live in a six hundred thousand dollar home. Wealth without work, wealth without risk. The American Dream.

And this works just fine until the economy tanks and banks can’t find enough people who can actually pay back the debt they’ve issued and the whole house of cards collapses. A few people at the very top get very (unbelievably) rich from this scheme – and the rest of us suffer dearly.

Does this sound familiar?

The only real difference is that the executives in the second scenario probably won’t go to jail. Why? What they did was more confusing than what Mr. Madoff did – involving more people, complex financial instruments, and many different institutions. So there will be a lot of finger pointing and much unraveling to do – and in the end nobody gets blamed.

So what is Bernie Madoff’s real sin here? Perhaps it is that he didn’t make his scheme complicated enough. Or maybe he just got unlucky with the economy. If the economy had only waited fifteen years to fall off a cliff, Bernie Madoff might have been able to spend the rest of his days in Palm Beach instead of a jail cell.

But the real point of this article is that Bernie Madoff isn’t an evil man. He’s just a product of his environment. And I’m not just talking about Wall Street – I’m talking about America. When we look at the Bernie Madoffs of the world and call for their heads, we should be looking at our culture and, perhaps, taking a long hard look in the mirror.

I think one reason we all despise Madoff is that we secretly admire the man. As a culture, we have always admired great wealth. But our culture is increasingly putting less and less value on the work and the risk associated with obtaining that wealth. When we see Richard Fuld take 25 million out of Lehman Brothers days before it collapsed or executives at AIG receive bonuses for doing a bad job, we are appalled – but I think secretly jealous.

“This working for a living crap is for losers and suckers,” we secretly think as we slog to work every day making a fraction in a lifetime as Mr. Fuld “stole/earned” in a day on the “job” at Lehman. That’s the way we’d all like to live our lives – getting something for nothing. Wealth without risk, wealth without work. Darn those Wall Street executives!!

But… Come to think of it, many of us do live our lives the same way as Mr. Fuld, the AIG executives, and Mr. Madoff – we’re just not as successful at it.

We routinely spend money we don’t have (and in many cases will never earn) on houses and cars and other luxuries we can’t afford. We are happy to take the ridiculous lines of credit banks routinely offer us on little plastic cards (another Ponzi scheme that’s going to come back to bite us quite soon) because we know we can’t live the way we want if we live within our means.

Indeed, living within one’s means seems very un-American -- especially given the fact that our economy is based on spending and not saving. Be patriotic! Go buy something expensive (with money you don’t have).

Yes -- most of us very willingly participate in the great American Ponzi scheme and then we’re surprised when we find ourselves in foreclosure. We’ll be more surprised when we want to retire – but that’s another article.

So to all the victims of Mr. Madoff, guess what – many of you are just as much to blame as he is. I know I’ll get a lot of hate mail for saying so – but it’s the brutally honest truth.

I won’t blame people who didn’t know they were invested with Madoff or the charities that were hurt. I do feel badly for them. But the rest of you knew.

You knew that investing with Bernie Madoff was a rigged game. You were financially sophisticated, business savvy people who knew that it is impossible to legitimately guarantee ten percent plus returns every year, year after year.

You were among the social elite – a small privileged group who could access Mr. Madoff – a former NASDAQ chairman who had some sort of insider information, you thought, that made his investments risk free.

With a wink and a nod, you all put your money into an investment referred to by many as a “Jewish bond” – a ten percent plus return with no risk. Wink, wink. Nod, nod. You knew deep down this arrangement had to be a fix – but chose to look the other way because you wanted in on the great American Ponzi scheme too. Wealth without risk, wealth without work.

And you got burned (by Bernie – even his first name is ironic) who was doing exactly what you thought he was doing – gaming the system. You just didn’t think you were the part of the system he was gaming.

If we want to fix the economy we have to fix our culture. Rich or poor, we have to accept that nothing is free, bailouts don’t work forever, and there is such a thing as a budget.

The American Dream can’t be based on the lie of easy credit -- or the sentiment of too many at the top that only suckers and losers work for a living and pay taxes.

If we really want the American Dream, we have to be willing to pay for it.

As we are beginning to see, an American Dream based on a Bernie Madoff style Ponzi scheme will render that dream a mere fantasy and our reality a nightmare.

Legalization of Marijuana

I was disappointed but not surprised to read that President Obama – a man who prides himself on his rational decision making -- dismissed an online question in his recent town hall meeting advocating the legalization of marijuana. Unfortunately, Mr. Obama has taken a completely irrational position on this issue in the name of political correctness.

Don’t get me wrong – President Obama has no choice in this matter. Endorsement of marijuana legalization would give his Republican enemies enough red meat to last the next seven years and beyond, although ironically some of our Nation’s most prominent conservative voices have advocated such a change in our drug policies for years.

Let’s look at the facts.

We are a nation of hypocrites when it comes to drugs. We are the largest consumer of drugs (legal and illegal), yet we rage against a few of the least harmful ones as if they were sent to us by the Devil himself. We drink like fish, smoke like chimneys, and get our doctors to prescribe us all sorts of potent, addictive, and deadly goodies – except for pot. That’s evil – even if medically necessary.

In the context of what is legal and illegal in America, marijuana is relatively harmless. It isn’t physically addictive in the way that tobacco and alcohol are and it is virtually impossible to overdose on. The smoke – even unfiltered – doesn’t correlate with lung cancer. In fact, there was a 2007 study that showed the active ingredient in pot (THC) actually inhibits the growth of common lung cancer tumors.

I’m not arguing that pot is good for you (although it does have valid medical uses), but when compared to alcohol, tobacco, many proscription drugs, and even a few over-the-counter drugs -- it is pretty innocuous.

And it is readily available. Your kids can pick some up at the local mall – I don’t care where you live. Let’s not kid ourselves.

We spend billions on the war against drugs while tent cities spring up in California. Very honestly, this is money that is being thrown down a black hole bigger than the one the TARP money went down on Wall Street.

It’s a simple matter of economics. When there is large demand for something, it will be available in the market. When governments try for unreasonable reasons to prohibit what the market has a high demand for, they create an underground market which is uncontrollable – and which inevitably leads to more harm than good.

We had prohibition against alcohol in the United States for the exact same reasons we now have prohibition against marijuana. We considered drinking to be immoral, therefore we banned it.

What happened? Everybody continued to drink – they just did it at underground clubs owned by the mob – a mob which became very powerful as a result of vastly increased revenues. Al Capone and others got rich, the alcohol went untaxed, lots of cops and politicians were paid bribes to look the other way, and lots of people got killed in the turf wars that sprang up.

Sound familiar? Look what’s happening on our boarder with Mexico. The Mexican government is powerless to stop the carnage -- and the violence is beginning to spill over into our country in the form of murders and kidnappings.

And look what's happening in our own inner cities. I taught at at a New York City public high school before I taught college, and I had several of my thirteen year old eighth graders describe how they had seen people gunned down in the streets or had friends or family gunned down in this unwinnable war.

I remember very vividly one of my high school freshman, a friendly young man -- just thirteen years old -- showing me the scars from where he had been shot -- the innocent victim of a drive-by shooting. He described being shot as a burning feeling. He said he was surprised -- that he didn't think being shot would feel like that.

I cannot imagine the harm such experiences do to children, nor can I imagine the harm they do to the communities they live in. What I do know is that leaving things the way they are is no answer.

Legalizing marijuana – and possibly some other drugs such as cocaine – would go a long way toward emasculating the drug cartels that have done so much harm to so many. The health costs of such a policy change are manageable – and arguably may not even exist -- considering these drugs are readily available no matter what we do.

Legalization of marijuana would also go a long way toward getting this nation back on track economically. We would no longer be spending large sums of money – both on the federal and on the state levels – investigating and imprisoning people -- many who have done society little (if any) harm. Legalization would also create jobs and generate significant tax revenue which could be applied to deficit reduction instead of financing the activities of drug lords both here and across the boarder.

CONGRESSIONAL RESPONSE TO THE AIG BONUS SITUATION

Just a quick post on this – it doesn’t deserve more.

Our Congress has proven once again that it is a national disgrace. The proposed tax of 90% on AIG bonuses is certainly popular, but will never and should never become law. Here are a few reasons why:

Congress itself approved of the bonuses. Restrictions on executive pay should have been a part of the original TARP legislation and not some retroactive and hastily conceived measure designed to absolve Congress -- rather than to fix the real problem of executive pay for poor performance -- which is all too common in Corporate America.

Congress has highlighted one of its major problems that doesn’t get much publicity – it doesn’t read. Yes, members of Congress read poll numbers – but apparently they don’t read their own legislation. We have learned over the past few days that Senator Chris Dodd apparently forgot he inserted the bonus provision himself. Although Mr. Dodd could have just been telling an outright lie on national television when he denied knowledge of the amendment, the more disturbing possibility is that he really didn’t know. My impression is that members of Congress not only don’t read the legislation they vote on – they may not do the actual writing of it either. In any case, all of Congress is to blame for this, not just Mr. Dodd.

The legislation is likely unconstitutional. The U.S. Constitution prohibits bills of attainder and ex post facto laws. This bill, at the very least, comes uncomfortably close to being both. If passed, the U.S. Government can expect to spend a lot of money defending itself in court for years to come.

The real problem here is the TARP program itself. This was a giveaway of your money to a few large corporations. Anybody who expected Wall Street executives to feel badly about taking some of it for themselves doesn’t understand the mentality of these people. They work on Wall Street because they want to make money – as much money as they can. When there is money for them to take – they take it.

Congress and the previous several administrations can share the real blame for not only the bonus situation, but for the financial mess in general. Yes, Wall Street behaved appallingly – but they played, for the most part, within the rules that were (or in this case weren’t) given to them BY OUR GOVERNMENT. The deregulation and lack of enforcement of existing regulation allowed companies like AIG and Citigroup to become so large that their failures affected the world economy. The lack of enforcement led to massive fraud in the form of mortgage-backed securities, Bernie Madoff, and others. The “hands-off private enterprise” attitude our government (more associated with Republicans, but Democrats are guilty as well) is really to blame more than anything else. For those who still cling to the idea that getting government off the backs of private industry will create wealth for all, consider a sports analogy. Think of private industry as a basketball game. Think of government as not only the refs, but as the league that ultimately decides the rules of the game. If you have too many rules and the refs call everything, the game grinds to a halt. But if you have no rules and no refs, you get Rollerball – not basketball (for those unfamiliar with the movie Rollerball, the two teams at the end play each other in an ultra-violent sport without rules and essentially kill each other until only one man is left standing). Either extreme and there's no more March Madness.

More on reasonable regulation later. Thoughts on Bernie Madoff and Dick Chaney shortly.

I hope to have my weekly video segment up shortly as well.

THE AIG BONUS FIASCO

(But is this really the issue?)

IN THE NEWS:

AIG has received nearly two hundred billion dollars of taxpayer money, yet decided recently to pay around one hundred and sixty five million dollars to corporate executives as per their employment contracts. Keep these two numbers in mind as you continue reading this article.

The way the majority of the press is covering this issue is to look at all the ways in which the taxpayer can get the one hundred and sixty five million dollars back. Most reporters and politicians have focused on how disgracefully AIG has behaved. True, they have behaved disgracefully -- but this misses the point.

A few reporters are now focusing on how Wall Street, in collusion with Congress, had language inserted into the TARP legislation specifically requiring payments of bonuses in contracts entered into before or on February 11, 2009. Yes, this is appalling – but did anybody really expect Wall Street lobbyists to stay at home (or for Congress to ignore them) just because it might have done the nation some good?

THE BRUTAL TRUTH:

One of the limitations of the human brain is that it has trouble comprehending large numbers. To most people, “millions” and “billions” and “trillions” are somewhat interchangeable (I have observed several television reporters using these words interchangeably – one on a major financial network -- in connection with this story).

Here’s a trick: whenever the word “millions” is used (correctly) in connection with TARP (or other government bailout program), just think of the amount as a dollar. That way, you won’t be so outraged by the fact that people who work on Wall Street make more money than they deserve -- and you will be able to focus on the real issues concerning TARP and companies such as AIG.

On the other hand, when the word “billions” is being used, you should be concerned – and when the word “trillions” is being used, you should be alarmed. The real dollar amount that our government has given or loaned to these few large businesses is in the many trillions. Be alarmed by that.

What is really going on is that the AIG bonus story is being used as a distraction. The political theatre of dragging the CEO of AIG in front of Congress and declaring, among other things, that AIG executives should apologize and then kill themselves – is all designed to shift the public’s attention away from the real issue.

The real issue is that very large companies including AIG are successfully extorting a lot of money from us – and that our government is all too happy to fork it over, even if it means long-term economic disaster.

And there seems to be no plan to remedy this situation.

Here’s what happened. AIG and some other very large companies such as Citigroup failed. It isn’t uncommon for businesses to fail – that’s part of a successful capitalist system – good companies succeed and bad companies go out of business.

AIG distinguished itself in two ways, however. First, it failed worse than any American company has ever failed. Second, they became so large that they were able to argue that they were “too big to fail.”

The solution: former Secretary of the Treasury Henry Paulson gave AIG close to two hundred billion (not million) dollars. We gave AIG – a company that failed worse than any American company has ever failed – more money than most companies ever see.

There was no transparency and we still don’t know where it all went – although we do know that a lot of it went to Mr. Paulson’s former firm, Goldman Sachs. He also gave Goldman Sachs a large amount of free cash directly (in the billions, so you should care) while letting Goldman’s competition (Lehman and Bear Stearns) fail. Was there a conflict of interest? Probably yes… but we have a new administration now so everything’s going to be OK… right??

Current Secretary of the Treasury Timothy Geithner’s solution to the AIG bonus problem is to recover the bonus money for the taxpayer -- by taking it out of the next thirty billion dollars AIG will (I am tempted to use the word “steal”) from us through the TARP program. So Tim Geithner’s solution is to hand AIG a lot more money, minus a small fraction for political purposes. And the executives still keep their bonuses.

Are you beginning to see how this isn’t going to solve the real problem?

We keep giving more and more money to failed companies – to do what? To make themselves even bigger so that the next time they fail, we will have to give them even more money? Will they use this money to lobby our representatives with, so that they can get even more money from the American taxpayer? What is the exit strategy here?

The answer: there is none.

I don’t know whether TARP was the result of government corruption or whether it was the result of government stupidity or whether it was the result of fear of the unknown – or a mix of all of these – and I don’t care. That is another distraction.

What I care about is that this policy is dangerously wrong and doesn’t solve the gigantic economic mess that threatens this nation.

Think about the economic incentives TARP gives to companies and the individuals running them: make your company so big it can call itself “too big to fail,” and then you can do anything you want – including going hundreds of billions of dollars beneath “broke” because Congress will always be there to give you more money – because you’re “too big to fail.”

This is circular reasoning that has this nation circling the drain.

We need a change in policy that eliminates the argument that any company is “too big too fail.” Going forward, no company should be allowed to get so big that it can make this argument. For the companies that are broke but really large – take them over and dismantle them as gently as possible.

But if you really think about it, this argument about being too big to fail is pretty bogus anyway. Yes, if AIG goes under there will be a lot of pain. But there will also be opportunity for better businesses to move into the vacuum that AIG creates. These new businesses will be more energized and innovative and will move the economy forward – until they eventually fail and are replaced by more innovative and energized companies. That’s how our economy moves forward – that is how it evolves. The dinosaurs were really big – but they failed – and the world didn’t end – it evolved.

*Time Magazine has a good article entitled “The Case for Letting AIG Fail” at:

http://www.time.com/time/business/article/0,8599,1885578,00.html (Copy this link into the address bar of your browser).

Test post. An article concerning Dick Chaney's recent interview and some thoughts on AIG and the TARP bailout program coming soon.