The Bezzle

[libertango]

jaylake uses his link salad to point to this piece in the New York Times about our current fiscal insanity. Excerpt about the Bernie Madoff theft:

"What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end."

This all reminded me of a passage in John Kenneth Galbraith's The Great Crash, 1929 (pp. 132-134):

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in -- or more precisely not in -- the country's businesses and banks. This inventory -- it should perhaps be called the bezzle -- amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.

...

Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed. Most important, the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market. He now confessed."

Comments

[farmgirl1146.livejournal.com]

Yes, it isn't the lack of laws it is the lack of oversight.
I wonder how many palms cross and charities gifted with other people's money to keep Madoff unexamined.

[pecunium.livejournal.com]

Probably none. The cycle is self-perpetuating. People who are near the tip of the pyramid have no interest in seeing things go bust (if they suspect), and the later joiners need the scam to keep going; at least a little longer, so they can get their money out.

Since this was a dividend scheme, everyone who is in has to worry about the real assets, should they try to leave.

Absent an active outside overseer, there is no one to press the charge (in that wise this sort of thing resembles the "private presecutions" of yore), and so it continues, with everyone looking over their shoulder in fear this is as questionable as it looks.

[farmgirl1146.livejournal.com]

I agree with your point.

However, it is the people who were not any where near the pinnacle of this pyramid scheme who are bedazzled by the glamour of wealth. I have seen how some people "get behind" someone when that someone supports something, like a charity, that the person is involved with. The Madoff character, for lack of a better phrase, then is elevated to a position of grace -- "He's such a good guy, he wouldn't do anything wrong."

As far as money crossing palms, bribes are as old as civilization, however I will consider other reasons why regulators ignored complaints about Madoff for about ten years.

I had a client in the securities security business, and the company saw their business (and everyone else's in that sector) decline with every passing year of the Bush Administration. The products were not bought because no one was ever audited. Since the inception of Sarbox, not one substantial firm has ever had a thorough Sarbox audit. I read over a year ago that only small "unsuccessful" firms had been audited. I am not saying that they should not be audited, I am saying that large successful firms and those in between should be audited, too. I was shocked at the descriptions of the audits that I have read. Shoddy. Definitely shoddy.