Madoff is a retread of free lunch theory

For the past month we have been inundated with news about the Madoff scandal and the implications of its reach.   It is amazing to me that so many people act like this is something new and unprecedented.   From the news reports it would seem that folks merely repeated the mistakes from the past.  They allowed themselves through their own personal greed to believe in the Easter Bunny and the free lunch theory.  Anyone with only a semblance of awareness must have known that the returns he was promising were not realistic or attainable.   No one can produce 10 to 12% returns year after year with the ups and downs of the market.  Yet many apparently sophisticated people chose to believe such nonsense.  They let their greed get in the way of their judgment.   Remember the movie “The Sting”?  No grifter or con artist can succeed unless he has a willing participant who thinks he is getting a better deal than anyone else.  Greed is what allows the con artist to thrive.   I am not in the least defending anything that Madoff may have done.  I am however observing that he did have “partners” in crime.   From all reports you didn’t need an MBA to realize that his so called monthly statements were balderdash.  Everyone who has looked at them has said that they didn’t make any sense at even a cursory glance.  Why would you trust your money to someone who gives out information that is nonsensical?  I will tell you why–because you wanted that return that was promised even if you didn’t believe it was based on understandable facts.    Never trust someone who is selling you something that is based on “secret” information or methods that can’t be explained.   That is investing 101.   It is also common sense.   Those folks thought they could get the free lunch.   You can get lucky sometimes and make an unexpectedly high return on the market on one stock that does extraordinarily well.  But that never last more than a year or two at most.   Gravity always takes over sooner or later, in the physics lab and the market.   His genius was in letting people believe what the wanted to believe and that they were getting a deal that no one else could get.   He played to and massaged their greed and those folks let their worst traits dominate their decisions.  

This is not a story about betrayed trust to me so much as it is a morality tale.   Like the drowning man who won’t let go of the bag of gold.   It wasn’t the gold that drowned him it was the greed.   The Hedge Funds that advanced money to him should be vilified for their lack of due diligence.   In their case it was a greed also because they were making money without earning it.  A minimum of due diligence would have raised a number of red flags but they earned a fee without having to do their work.   They sure can’t claim that they did their homework on this one.   Over the years I have seen so many examples of this type of fraud where people suspend their common sense to get in on the “deal of a lifetime” because the returns and profits just look too good to pass up.

I recall years ago a situation where a promoter conned hundreds of folks in an oil and gas deal.   He was Mormon and the vast majority of his investors were from that same faith.   There was some initial trust established and he was promising good returns on their investments in his oil and gas wells in west Texas.   Like all good promoters he was very bold.   He got by with his scheme for several years before the truth caught him out.   He did have a few decent wells but that was mostly be accident.  His real business, if you could call it that, was raising money for wells.  The fees and expenses he charged allowed him to live very well.  Finding oil or gas was secondary. 

He got to a rough patch where he needed new investors to pay for some earlier ones and for his own high flying style of living and he went a con too far and that brought him down.  He would fly in the potential new investors and then take them out to the prodcing well.  His pitch was that he was going to drill an offset well right beside the good well and the odds were great that more oil would be found.  He would wine and dine guysand then the high point of his promotion was taking them out in the field and letting them visit the well.  It would be an abandoned well that hadn’t been plugged yet.  He would literally go to the well site and turn on the spigot and let the investors see the oil pouring out.  That always impressed them and they wuld get our their checkbooks.  Problem was that he had hired crews to go get crude from tank batteries in the area and pump it into the abandoned well the night before.   There was no oil except what had been pumped in.  It was a classic case of “salting” the well, just like the mining scams in the old West.   A too talkative roughneck was his undoing.   A minimal amount of checking would have revealed the scam but again greed overcame prudence.  The Texas Railroad Commission keeps records on every well and they could have been checked easily enough but no one ever did.  They were looking for that sure shot gusher right beside that producing well where they saw the oil with their own eyes!   When you allow your greed to overcome your common sense and you don’t do the work to check facts for yourself then you are reaping the reward of that one of the seven deadly sins.

As we are embarking up a gigantic expansion of the State with the new administration and the bailout and stimulus plans, perhaps we should take heed of a well known 20th century statesman.   “Against individualism, the Fascist conception is for the State; and it is for the individual in so far as he coincides with the State, which is the conscience and universal will of man in his historical existence”.  That was from Benito Mussolini.   Take heed of those who say the Government is the answer to everything.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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