When The Rich Get Poorer

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

Surely by now, everyone has heard about Bernard Madoff, the former chairman of NASDAQ who has been arrested on charges of essentially running history’s greatest Amway scam, bilking many wealthy investors out of, possibly, as much as $50 billion.  It’s quite the story, and the list of affected people and institutions, who allowed their greed and the promise of unrealistically consistently high returns to overwhelm their good judgment, is quite sizeable.

Personally, as an Eagles fan, I couldn’t be happier to see the name Norman Braman on the list.  Braman was the Birds’ previous owner, and his selfish greed was, in large part, responsible for the atmosphere which led to the judicial system giving NFL players the right to free agency.  Eagle all-time great Reggie White was the first big-name free agent, leaving for Green Bay where he finally, happily, got the ring he so well deserved.

Anyhow.  It seems to me that there are many good stories to tell about l’affaire Madoff. The first, and simplest, is that, sometimes, people are bad.  Bad people will lie, often to their own benefit.  And so, if the so-called ‘free market’ is going to be populated by actual people, rather than computer representations thereof, we need some form of centralized governmental regulation to make sure that everyone is playing fair.  Obviously, the regulations here were not being adequately enforced, someone fell asleep on the job, whatever.  This story is most pithily summed up by the news that none other than the Donald Trump called Madoff a ‘sleazebag’.  And when Donald Trump calls you a sleazebag…well, suffice to say, you are definitely a grade-A sleazebag.

The second story generalizes from the individual to the market as a whole.  The general argument is that, while Madoff’s case is a unique example of fraud and abuse, it’s not actually so different from the story of the real estate bubble and today’s economic woes.  Not surprisingly, Paul Krugman tells this story the best.

Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

O.K., maybe my example wasn’t hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

And this story is definitely true.  While there is a definite need for a financial services industry – after all, if we agree that there is any benefit to be gained from making the right decisions with our finances, it makes sense to contract the services of someone who knows more about making those right decisions – the way that the industry has evolved is not the least bit healthy.  The eternal quest for increased quarterly returns, the me-tooism that leads to bubble after bubble after bubble, and the absurdly high incomes that one can earn (or, as Krugman would put it, “earn”) from essentially shuffling money from one place to another, without producing anything of notable value, is not the sort of activity that makes up a significant portion of a vibrant, growing economy.

However, I think there’s an even bigger, more general story to be told here, one which goes to the heart of many of the woes besetting our economy right now.  I am really looking forward to sitting down with a copy of Malcolm Gladwell’s new book Outliers, which tells the story, as I understand it, of titans in various fields, and makes the argument that there’s a lot more to the question of how they became so successful than just native brilliance.  There is plenty of hard work, but there’s also a sizeable dollop of old-fashioned good luck.  In a pre-digital age, would Bill Gates have been anything like the most successful man in the world, even if Windows Vista still sucks?  Probably not.  He had the extreme good fortune to be born in a place and time when his unique skills worked in his favor.

In a similar way, far too much credit is given to people who are in positions of leadership.  Yes, they are often quite smart, and work quite hard.  But when news breaks, like this morning, that banks which are receiving taxpayer bailout funds paid out 1.6 billion dollars to their top executives this holiday season, I can’t help but think that there’s absolutely no appreciation for the fact that the people who are in charge are not, really, that much smarter off than the rest of their employees.  And, while their work is hard, and important, and they deserve to be well-paid for it, that there’s no realistic justification for the concept that they are simply entitled to these kinds of payouts, regardless of things like, you know, job performance and such.

My understanding is that part of the reason we have to pay the executives so handsomely is so that they don’t leave for other companies.  To which my response is – good riddance!  If some other financial firm is so foolish as to want to hire all the executives away from already-failing banks, who are we to say otherwise?

I hope that the incoming Obama administration puts some leashes on the firms which continue coming with their hands out, hoping for a little more suckling from the public teat.  I am totally sympathetic to the arguments that allowing these companies to fail would do more damage to the economy than it does to send a few hundred billion more in public funds down the rabbit hole.  I get that.  But someone whose life is on the line doesn’t still hold out for a taxpayer-funded country club membership.  Any firm that can pay for that, clearly doesn’t need any of my money…

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