My Observations

Friday, 19 December 2008

A Modern Bonfire of The Vanities

Filed under: Uncategorized — AE @ 11:00 am
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By Ali Ettefagh

The Great Economic Readjustment of the 21st Century is progressively turning tragedy to a farce as 2008 is nearing its end. The opaque and complex stories of Bear Stearns and the $700 billion bailout fund, the bankruptcy of Lehman Brothers and the unravelling of Detroit Three is baffling to most people. Alas, we are facing the start of a new chapter in epic scales of greed and grotesque human conduct. In New York, if not elsewhere that is yet to be uncovered, The Bonfire of The Vanities – 2008 edition – is blazing away as it makes all excesses of the 1980s, and Tom Wolfe’s novel, seemingly quaint.

Just during last week, we learned of two massive frauds– Mr. Bernard Madoff and his fleecing of investors to the reported tune of $50 billion or so, and attempts of a prominent Manhattan lawyer, Mr. Marc Dreier, to sell non-existing bonds worth about $380 million.

Both were classic “rock solid” reputation types, the kind you will inevitably meet if you hang around Manhattan long enough and circulate in certain circles. Most astonishingly, both men were at the height of their respective careers with all trinkets and aura of New Yorkers of a certain manner: Upper East Side apartments and homes in the Hamptons, exclusive club memberships with charity golf rounds, non-profit board seats, and staffed yachts. Mr. Madoff’s yacht was called Bull, perhaps a reference to markets or bull of some other kind! Mr. Dreier was an aggressive corporate lawyer, educated at Yale and Harvard, who regarded almost any tactic as acceptable provided he won. Contemporary art with their “brand name” multi-million dollar price tags oozed from the walls of in his offices around the world.

Neither men were 29-year-old, know-alls with a computer model fed with statistics– the kind that could not understand risks in finance because they had never seen a down year. Nor were they ignorant, inexperienced lucky dudes to land the right timing in an IPO. And their clients and contacts were not fools. Religious charities and rich Jewish retirees in Florida, Swiss private banks, billionaire families and large money management institutions are amongst their all-star bamboozled clients. Messrs. Madoff and Dreier simply exploited an era of insanity in finance.

But where did it all start? There must be many others in New York or London who, with a quick look in the mirror, will see traces of Dreier and Madoff in their own lives as they chase the same status, trophies and rewards. And how many of them might have taken a short-cut or two on the way up? More importantly, which ones will be found swimming naked when the proverbial tide goes out?
Perhaps this is where utter failures of basic policing and regulatory controls are most augmented. It was one thing for regulators to place (too much) trust in free markets, but to yield to pressure and under-regulate mortgage brokers, banks, auditors, ratings agencies and investment firms is quite a different matter of spectacular consequence.

Many people in the business were suspicious of Mr. Madoff. They could not understand how he made such consistent returns in good times or bad. His trading strategy and management structure was a mystery and disclosures were skimpy, but seemingly enough to game enforcement of laws. Twice the Securities and Exchange Commission investigated him, in 2005 and 2007, and twice they found nothing to stop his pretence. It took a man with a name straight from a Wolfe novel, Andrew Calamari, to announce the SEC’s belated complaint—but only after Mr. Madoff was turned in by his two sons (and deputies) in his firm.
The Dreier and Madoff affairs show us, more than the disintegration of investment banks or badly managed industrial companies, how the depth of greed in the past two decades has corroded the basic economic system and how corrupting it became to force men, of very comfortable lives, to grab for more in breach of decency and beyond the filters and early warning system of the law that must protect stakeholders in that system. They are also reminders that the system has failed to learn from the Enron or Worldcom jumbo frauds, despite the mandates of the Sarbanes-Oxley Act on more transparent bookkeeping and auditing. However, the most significant teaching might not be simply about purported rotten apples. The knock-on impact will evolve to a presumption that anyone who became insanely rich these past few years in the financial services sector is probably under suspicion.


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