Happy Ponzi Day!

| March 3, 2011 | 4 Replies

Charles Ponzi was born 129 years ago today, so I guess that makes it Ponzi Day today.  The man for whom the pyramid scheme was named though, was a chump.  Today’s schemers have been many times more successful.  By the time Ponzi’s scheme peaked in 1920, Wikipedia notes that “he had made $420,000 ($4.59 million in 2008 terms).”  See what I mean?  $4 and half million isn’t even enough for today’s ponzi artists to get out of bed.

Charles Ponzi, archetype for today's financial wizards. Image via Wikipedia. (commons)

For example, let’s look at the currently best-known ponzi artist, Bernie Madoff.  The amount missing from Madoff clients’ accounts was nearly $65 billion, although that includes fabricated money– actual losses total about $18 billion.  Even at $18 billion though, that’s still almost 4,000 times the ponzi scheme than Ponzi himself.  Madoff made headlines again this week, saying that “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”  And who better to know Ponzi schemes than the man who bested Ponzi?

And yet, he’s right- there has been no real reform.  How can there be?  Dick Durbin (D-Ill) said “the banks…are still the most powerful lobby on Capitol Hill. And they frankly own the place.”  Spencer Bachus (R-Al) said last year that, “In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks,” which seems to dovetail nicely with the “reform” that has allegedly happened.

Much was made about the Wikileaks data dump that was supposed to implicate a major bank in shady financial practices.  Unfortunately, the world still waits on that leak, but the behavior of regulators and bankers in the meantime has been very instructive.  The New York Times reported last year that the supposed regulators were even more scared of the leak than the bankers, as they feared the leak would expose just how little regulating was actually being done.   Bank of America, assuming that the shady practices to be revealed were theirs, went on the attack against Wikileaks and journalist Glenn Greenwald, seeking proposals to “pressure” him to give up his outspoken support of Wikileaks.

And still there have been no prosecutions of any major players in the financial meltdown.  Angelo Mozilo of Countrywide is still free somehow.   And the story is the same for major executives at the banks and financial institutions that everyone agrees were at the very heart of the meltdown.  Joe Cassano at AIG, Dick Fuld at Lehman Brothers, etc… ad nauseum.  There have been more arrests of people protesting fraudulent foreclosure practices than there have been for those committing the fraud in the first place.

The Academy Awards were the other night, I’m told.  Accepting the Oscar for best documentary for his movie Inside Job, director Charles Ferguson said, “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that’s wrong.”  He explained further in an backstage interview with Reuters:

He believes Americans, who lost homes and jobs in the millions because of shady mortgage lending and bank collapses, are disappointed that “nothing has been done.”

“Unfortunately, I think that the reason is predominantly that the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement,” said Ferguson.

And some of the most incredibly fraudulent practices continue today.  Derivatives, universally acknowledged to play a major role in the 2008 financial crisis, are as actively traded as ever, and as secretively.  From the New York Times:

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

Too bad we don’t have any regulators in America anymore.  If we did, I would hope someone would step in and examine the case of derivatives trading around General Motors.  The Wall Street Journal reported this week (subscription required) that banks were trading credit derivatives known as credit-default swaps (CDS) tied to GM debt.  The only problem is that GM’s debt doesn’t exist, and therefore there shouldn’t be any such derivatives.  Blogger Karl Denninger explains the fraud at the heart of these transactions (emphasis in original):

The banks argue, I’m sure, that this is a mere technicality, and that the price of these CDS reflect the “credit-worthiness” of the company.

There’s a problem with that premise though.  In order to default GM would have to have debt upon which to default.  And if they were to declare bankruptcy (an act that normally is a trigger on a CDS) in order to collect your “winning” bet you would have to tender something that doesn’t exist.

It was bad enough during the “go-go” years when these banks put together complex instrumented constructed in whole or part of these CDS, comprising many times the actual value of the bonds that existed.  This resulted in some interesting circumstances when the company went bankrupt – suddenly the bonds were worth many times their actual recovery value, because in order to get paid for your “credit protection” you had to have one.  So people would pay up for a worthless piece of paper, simply to be able to collect their winning bet.  I would not be at all surprised if a forensic series of audits found that the same bond was used more than once – that is, CDS holder “A” would buy said bond (which he didn’t have) of the bankrupt entity for 20 cents on the dollar, tender it to the writer of the CDS, collect, and the writer would then sell the bond for 25 cents to someone else who then used it for their CDS transaction.  We’ll never know, of course.

But this is a particularly outrageous development in that if a credit event does happen (e.g. bankruptcy) the alleged protection is in fact worthless, since there are no bonds – at any price – to be had.

Neat trick though, I wish I could sell stuff that doesn’t exist.  But I can’t, those rights are reserved for our financial overlords.  They also get the rights to basically free money, so I guess this shouldn’t be surprising either.

So let’s celebrate Ponzi day, the day when we can all gather and reflect upon the corrupt plutocracy which is siphoning money away from the productive elements of society and pushing it up to the top 1% of Americans.  Happy Ponzi Day!!

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Category: Consumer Protection, Corruption, Current Events, Economy

About the Author ()

is a full-time wage slave and part-time philosopher, writing and living just outside Omaha with his lovely wife and two feline roommates.

Comments (4)

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  1. Erich Vieth says:

    Simon Johnson had this to say:

    "If you want to fix the United States budget, keeping the deficit under control and reducing government’s debt, you must address the risk-seeking behavior of big banks. No fiscal strategy can be credible without addressing the major problem that brought us to this point

    . . .

    [T]he simple fact of the matter is that our fiscal position has been ruined by the behavior of big banks — and these banks are now free to make the same or larger mistakes as we head into the next credit cycle.

    The unfortunate fact is that those who style themselves as fiscal conservatives largely stayed on the sidelines during the financial regulation debate. And the problem of too-big-to-fail was absolutely not addressed adequately either by the Dodd-Frank legislation or the subsequent Basel III framework (as The Financial Times reported this week).

    There is no way to handle the failure of a global megabank, and the management of such banks know this and so do their creditors (as Gillian Tett noted in a trenchant Financial Times column). This amounts to carte blanche for further uncontrolled expansion of risk-taking."

    http://economix.blogs.nytimes.com/2010/10/14/in-t

  2. Tony says:

    It never ceases to amaze me what is going on on the other side of the Atlantic. Not that we don't have this kind of dealings, but we are (at least) a number smaller and at least 15 years behind, if not more, with regards to your state of the art capitalism. Oh well.

    One thing I read some time ago: Isn't it an open secret that the SEC was set up by the big four (or five?) investment banks to keep out the concurrence? No wonder that the supposed regulators are even more scared of the leak than the bankers.

  3. Anonymous says:

    The most successful Ponzi schemes are those run by the Federal Reserve and the International Monetary Fund.

  4. Brynn Jacobs says:

    A stunning admission from the "Shadow King" of Wall Street, Blackrocks' Larry Fink. With $3 TRILLION dollars under management, he's in a position to know what markets like, and <a href="http://www.zerohedge.com/article/shadow-king-wall-street-markets-love-totalitarian-markets?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29&quot; rel="nofollow">he says "markets like totalitarian governments." Unfortunately, like so many other things, what is good for the markets is bad for people.

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