Friday, February 20, 2009

Scandals Multiply Like Cockroaches

Back in December we started learning about one of the biggest frauds ever perpetrated by one person. In my article, "Madoff Scandal a Microcosm of Social Mood," I stated:

These kinds of events feed off each other. From personal experience, I know that when you see a cockroach, you have cockroaches. There will be many more Bernie Madoffs. It was not his incredible arrogance or greed that allowed this to go on for so long. Rather it was the social atmosphere of neglect that led nobody to question it. Until now. Now people are starting to ask questions. Is my mutual fund invested in what they say it is? Are they invested in the real asset, or in a derivative of that asset? How else did they manage such great returns?

Like clockwork, we have learned of two additional scandals as social mood darkens, suspicions circle anything that smells bad and the lust for scapegoats to the financial crisis intensifies. Please consider:

Sir Allen Stanford served with legal papers

FBI agents tracked down billionaire R. Allen Stanford at the Virginia home of an acquaintance Thursday and served him with legal papers in a civil case accusing him of orchestrating an $8-billion investment scam.


The SEC announced its action against Stanford on Tuesday, alleging that the flamboyant billionaire and his two colleagues perpetrated "a fraud of shocking magnitude that has spread its tentacles throughout the world."

In Latin America and the Caribbean, where much of Stanford's operations are based, depositors have since besieged Stanford bank branches, demanding return of their money only to be turned away.

The Venezuelan government on Thursday seized a failed bank controlled by Stanford after a run on deposits.

Stanford's offshore financial services operations were subject to the regulatory authority of Antigua & Barbuda, the tiny two-island Caribbean nation that the 58-year-old Texan adopted as his second home and lavished with millions in sports promotions.

This latest scumbag was one of the many billionaires operating hedge funds out of the Caribbean tax havens. He attracted investors from all over the world, with significant contributions from Mexicans, Venezuelans, and Antiguans. Note that he was knighted. Antiguans didn't care if he was a fraudster years ago. All they knew was that he was rich. And thus, he was deserving of a title of nobility. Also note that he was a significant donor to the Obama presidential campaign.

Speaking of tax havens, another one has come under scrutiny. Switzerland.

UBS Agrees On Tax Fraud Settlement in US

Switzerland's largest bank, UBS, has agreed to pay $780 million (SFr915.8 million) and name some United States clients to resolve criminal fraud charges against it.

The deal is to settle the claim that UBS helped wealthy American clients evade taxes. It could expose some UBS customers to US Internal Revenue Service scrutiny and law enforcement action

Is this news to anyone? No. It has been widely understood for decades that the wealthy have used Switzerland as an offshore banking haven. Why the scrutiny now? We need look no further than the darkening social mood and general disdain toward the wealthy and the banking industry specifically.

People are angry. They are distrustful. That anger and distrust leads them to scrutinize aspects of society that they had previously ignored. This leads them to uncover frauds like the Madoff and Stanford schemes. This outrages people even further. It is a vicious cycle.

Anyone who became wealthy in the previous period of social nihilism will be persecuted. First it will be the big fish. Then the little guy who thought he could get away with some accounting shenanigans. Then anyone wealthy will be perceived as a criminal - guilty or not.

It will get to the point that people will go out of their way to appear worse off than they really are. No more yachts and garages full of toys to impress the neighbours. The neighbour lost his job. The culture of frugality will engulf all.

And so deflates our culture of consumerism. Good riddance.

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mike.montchalin said...

Maybe it is time for us to exercise a little individual responsibility?

Should we just accept the "Madoff system" without any questions?

Should we just accept Moody's, Fitch's, and Standard & Poors ratings without any judgment of our own?

Should we just acquiesce to SSI deductions from our paychecks to finance the Social Security scheme?

Should we place blind faith in the SEC to regulate the naked shorts fraud?

Should we have accepted curtailments of our Civil Rights by Congress and Homeland Security?

It seems to me that there has been a failure of individual responsibility.

mannfm11 said...

My father wasn't rich, but he wasn't about to starve to death when he died, which was pretty good for a guy who quit working at age 46 and had very conservative investments. Not many people in Highland Park would nail him, but he would tell me from time to time that the woman in the grocery store or the woman at the Federal reserve would make a comment he had a lot of money. He dressed like a plumber and drove an old auto. I think most millionaires are like that except the guys that get out and grab money out of schemes. 18 out of 20 guys that actually have a worth of $1 million or more when the dust settles will be people that you will never even know had more than a decent job or a good retirement. The richest guy I know still lives in a house he bought when he first started out. I would bet he has $100 million minimum. Never had a Benz or any German car and usually drove something like an explorer or an old Lincoln. He had to get rid of his wife because she wanted to look like she had money and he needed his money for his business. People don't get rich blowing money, not the ones that have a degree of honesty to them.

In any case, I am acquainted with a stock broker who I was informed through a third party had most of his familys money and much of his clients money with Stanford. For his sake, I hope this is nothing more than a reaction and there are assets, but the pattern of bankrolling dozens of politicians smells of a fraud. Guys like this buy their way into circles of influence, thus a few thousand gets them into a room with other people with money, people that can lead them to other people with money. There is another guy I know, a guy that has worked his ass off all his life selling stuff on the road very few people could make a living selling and he told me he had some money in a group that his son was involved in. I sure hope for his sake that Stanford didn't have his money. I had tried to get him to sell his mutual funds in 1999, but he didn't understand the difference between mutual funds and stock, which there isn't any. There is a big business built around selling stock and all this crap. If it was such a good idea to own all this stuff, why is the business built around selling it? Every person that shows up on CNBC has a vested interest in getting people interested in buying stocks, even the bears who need someone to buy their shorts. I know more about the markets than I know about the stocks, but I also have some first and second hand experience in owning some of this crap.

In closing, my sister knows this operator. When I first met him, he was hanging with a group that was up to their necks in what was the first big real estate scandal here in the 1980's. His business at the time was Primerica insurance. Recently he tried to interest my mother in some kind of venture capital financing instrument to buy an existing business here. Basically a group needed money to buy a company and the payment was to be 14%. I told her that they were trying to find someone to buy them a company and if it didn't work, whomever it was owned a company without a operating plan. There is a sucker born every minute. When I was able to put together the price of insurance products sold by Primerica (Sandy Weill was the big mover behind this mess at one time, which demonstrates what a piece of crap this outfit was)I realized they were stuffing customers premium and maybe company capital down their pants, as their primary product cost more than the one they were trying to sell against. My father taught me that there is a big business out there to get your money and that advice combined with my education in risk and return has made me quite skeptical of a lot that has gone on. My brother bought into an offshore scheme a few years back that was so absurd that in a few years he would have owned the world. I couldn't believe he, who was paint on the wall tight and had an education himself in finance actually bought into the idea. I guess I have looked at too many long term projections of high returns and realized the economies of the world weren't big enough to support those numbers for long.

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