Tag Archives: TARP

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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Stimulus and bailout shell game

As they said in Alice In Wonderland, this gets curiosier and curiosier.   The explosion of bailouts and stimulus proposals and actual implementation is growing so fast that I doubt anyone is able to keep up with them all.  Can you?   What really worries me is that all these “smartest guys in the room” types in the administration and the ones to come don’t know the full gamut of programs going on across the breadth of our gargantuan government.    I am not comfortable letting our economy be a classs exercise for some MBA or Phd. economics program.   Regrettably that is the impression I am getting.   People are dusting off old school papers and articles in supposed learned journals and now getting to try out those theories in real life.  But this is real life for most of us and this experimentation is reaching competitive levels.    The danger is that these aren’t harmless experiments in a class room but affect us all in the here and now.   It has become apparent to me if not to you that even though they may be the smartest guys in the room their ideas aren’t any better than  some of ours.   They may make wonderful charts and graphs and talk of the velocity of money and M1 and the treasury bill spread but that doesn’t mean they know how to pour water out of a pail.

First, let’s talk about all this money the Fed is printing.   My heavens, have you paid any attention to that?   Just yesterday they announced the possibility of  buying Treasury notes to affect the long term rates on those.   Talk about from one pocket to the other.   So the Treasury will owe money to the Fed when those notes come due.  Wow, like that is going to help us.   That is as sick as the way they allow one branch of the government to simply issue IOUs to the social security or medicare when the actual cash flow is insufficient to meet payments.    The huge concern is that the Fed is literallly printing up money to buy these items and make these investments.   Don’t you wish you could merely go to the garage and print up some money the next time you wanted to buy a new car?   All that money that has nothing behind it, including sanity,  will cause inflation.   Y0u did notice didn’t you that the dollar has dropped about 10% in value against the Euro this week alone.   It is a fact of life we underachievers can understand that if you print more money it becomes worth less each passing day.   I heard one of the leading advocates of this stimulus and printing madness last night say it was nothing to worry about “for the short term”.   He had no answer for how to deal with the overhang when the piper wants to be paid.   People around the world will not want their business deals denominated in dollars and will soon prefer other currencies because we keep printing and printing money that diminishes in value with each new round.  We are talking trillions here, not chump change.   If it was modest amounts we could weather the storm but these totals are staggering and the  ineluctable laws of supply and demand  will work as they have since man first organized a street market.    Of course the government can’t fool us all; that inflation is one way for it to pay off all its debts with much much cheaper dollars down the road.   It would not be the first time that has happened.  Check some history, it has occurred many times, but usually in some banana republic or a country devastated by war or turmoil.   They are feeding us a poison pill with a delayed time release.   All action has consequences and this will too.

Another small point is that the government has given all these billions to the banks and then has raised the fees it charges for FDIC insurance.   Likewise know that the government has an equity stake in some of these outfits and they are  creditor, owner and the regulator.   Talk about a conflict of interest.   If you or I tried to pull that off we would lose our license or go to jail.   And if by chance these banks in up making some money then the government will collect taxes out the wazoo on them.   Simillarly the SIPC is increasing its fees to the brokerage houses, many of whom are now debtors to the very same government.  Maybe the worst danger is that Congress will ramp up its “oversight” and start telling the banks exactly who to make loans to.   Hmm, of yes, that is what got us into the subprime mortgage mess in the first place.  We can’t afford for our banks or brokerage houses to lose their independence.   If Congress runs the banks they will operate with the same efficiency as the IRS or Social Security.  If you haven’t had any dealings with either of those government agencies ask some friend or relatives who have. 

We are assured the new stimulus package will create millions of jobs but how many jobs will be lost due to the focus on “green energy” and green this and that?  There will be lost jobs. There is always a trade off.  You do your own thinking about it.  For every job created to make a building green what about the job that is lost because of that change.   Like the glazier or the heating and air conditioning contractor who worked on the “old” equipment.  For every solar job made there will be one lost in the oil patch.   That roughneck will just as unemployed as anyone else.   All I am asking  is that the debate be based on real facts not campaign sound bites and nice sounding promises.   We can handle the truth better than they think.

I trust the market.  If only we would let it work now.   Yes, there will be some pain, don’t think for one minute these government programs won’t have their pain also.   I hate the centralization of power in so few people.  The market is made by all of us with our individual choices and options, some good, some bad and yes we get the consequences whether good or bad.  I hate bad consequences imposed on me from far away for arrogant demigods.

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Too Many Hogs at the Trough

Gee whiz, the companies and special interests groups that are demanding part of the “rescue” package continues to grow each day and seems to be expanding exponentially.   The auto Big Three, American Express, some counties and cities are now joining in and of course there is the continuing chorus of clammers from those underwater homeowners who are not current on their mortgages.  They are literally elbowing each other now trying to get to the head of the line and grab what they can.  What next, Airlines, hi tech,  agriculture?   It really reminds me of that scene in Steve Mcqueen’s movie about Nevada Smith when he joins up with the outlaws just so he can kill the leader.  That leader had murdered his family several years before.  He pretended to be one of them.  While planniing their robbery of the stage coach he asked the leader how the loot would be shared after the robbery.  The leader, played by Karl Malden, told him that there weren’t any “shares” just everyone would grab everything they could and then head for the hills each man for himself.    That is pretty much what seems to be occuring in Washington now.

I feel especially angry because I have already been hurt really badly in my retirement savings due to the flim flam of others on wall street and yes on main street.   Those idiots who bought those houses they couldn’t afford are now hurting everyone with their extragance.    You no doubt have been hurt too.  We have already incurred a very significant loss.  Now to add insult to injury the pols in Washington are expecting us to get hit again.  This bailout isn’t free anymore than a lunch.   We are going to pay for it with our taxes.  It is our money the Feds are spending.   Even if the Feds borrow the money in the market place it is still hurting us.  The credit of the US is OUR credit.   The US has credit to borrow from around the world only because of our individual work, effort, assets, labor and creativity.    That money is our money and that credit is there only because of us, not the Government.   Those borrowed funds have to be repaid and guess who will be asked to foot the bill.  The income tax payers.  Not those who only pay social security or medicare taxes, but those who pay income taxes.   Under the new administration that is only going to be about half of the workers and income earners in the country.    Do the math and you can make your own estimate what that means for you.  I wont’ presume to do it for you.  Maybe it seems like chicken feed to you but I wager it won’t to most of you.

When did we decide no one and no entity could fail?   I can understand somewhat the need to keep banks functioning.  After all we do want to be able to write checks and use our credit cards, but all these others.  Exactly what good is it doing me and you?   Try to be specific as you can and think it through.  You’ve worked hard, paid your bills, tried to be prudent with your decisions and now you are being asked to help out the profligate among us.   Why do their deserve this special treatment.  Maybe it all started several decades ago when we changed the rules at school and the workplace so that no one would be deemed a “failure”, they merely achieved differently so everyone got at least a  C no matter the worth of the work they produced.   Social status or lack of it became more important than merit and industry in effort.    Hey, failure is very valuable if for no other reason than to set a bad example of what not to do.  

Bankruptcy can revamp and revise the Big Three, it is just that management and the unions will have to downsize their piggish appetites and salaries and wages and along the way  build cars that sell and people want.   I don’t like subsidizing failure and greed and that is what we are being asked to do here.   That is not only morally  wrong but stupid to boot.   The market can sort these matters out much more efficiently and fairly than any Government program or Government bureaucrat.   It needs constant reminding that only about 6% of homes are in default and all those won’t be foreclosed.   We are letting the tail wag the dog for sure.

When the British invaded Washington during the War of 1812 it was Dolly Madison who made a point of removing some of our most valuable and historic documents from harms way.  She suprervized the removal and loading of the wagons and escaped in the nick of time before the capitol was put to the torch.   What killed and injured more British soldiers during that foray into our capitol was not any armed opposition but a very severe thunderstorm that blew up and hammered them with high winds and hail and lightening that scared them to death.   It upset their supply system and this emphasized the need to withdraw back to Cheasepeake Bay.

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