Saturday, March 14, 2009

A Lesson From Minnesota Fats: Bernie Madoff Hustled the Hustlers, But Are They Victims?

I will conclude my endless blithering about my lost and recovered iPhone with the following life lesson. As we were cruising down the highway, I was squeaking through my tears, having nothing else to say about what an idiot I had been to drop this cherished item in a parking lot, "It's not fair. It's not fair. It's just not fair." My companion, in an effort to comfort me said, "I'll buy you a new iPhone." And I said, "No,no,no. That's not the point." Fast forward to a conversation on the airplane home from vacation, surrounded by pink-skinned, peeling northerners in Mickey Mouse gear. My companion asked me what I meant when I said that "it wasn't fair." I explained: knowing that an iPhone was a huge luxury in times like these, I had taken all steps to be prudent about the purchase. I had calculated the increased monthly charges, and I had paid cash (or the debit card equivalent thereof) for the damn thing. It was cash I had saved for that purpose over a period of several months and that existed over and above the money I normally budget, not just to pay regular household bills, and to put in my savings account, but for upcoming things that now count as luxuries: my rowing club membership, for example, or grooming the dog. "But despite all that," I explained, the iPhone "was just gone. For no reason. As if I had never had it in the first place. It wasn't fair."

It was only later, writing this post, that I was able to connect my horror and rage at my own stupidity to that stomach-churning scene in The Hustler (Robert Rossen, 1961), where Minnesota Fats draws "Fast Eddie" Felson so deep into his hustle that Felson loses all caution -- and then Fats takes him apart, cue stroke by cue stroke, leaving Felson collapsed and broke.

So imagine my surprise when I ended my week long news fast this morning and stumbled on this article about responses to Bernie Madoff's guilty plea by those caught up in his scheme, in the Business section of The New York Times. As Joe Nocera writes, the victims in this case were also accomplices to their own demise for not having inquired as to how they were receiving such out-of-scale profits for their investments. In doing so, they disregarded some basic investing guidelines that -- if your parents didn't teach you -- reading a simple investment how-to book (or the business pages of any newspaper) would. These rules include:

Don't put all your money in one fund;

If the investment manager can't explain what s/he is doing to grow your money or return profits in language you can understand, you should not invest; and

If the profits you are receiving seem to good to be true, they probably are.

The institutions and individuals who invested with Madoff disregarded all three of these rules, to their peril, despite obvious "tells" that have been documented everywhere, like quarterly reports printed on a dot matrix printer, and the employment of a single auditor for what was supposed to be a vast and labyrinthine fund. Now, as Nocera writes, many investors insist that it is the government who is primarily at fault, and that they should have access to a "victim's" fund because Madoff ought to have been scrutinized by government regulators early and often. In other words: it's not fair, it's not fair, it's not fair.

Now, I opened with my boring little parable, because I do not think these people should be mocked. Their pain is real, and they have been irreparably harmed. I do think, however, they need to reorganize their view of themselves as victims if, as Nocera tells us, they really think that they ought to be reimbursed by the government for their pain. In fact, they they gambled and lost. All investment, whether it is legally structured or not, is a gamble, as those of us know who have watched our TIAA-CREF fall, fall, fall.

I do hope the Madoff "victims" return to their senses soon. I, for example, fell into a yawning chasm of grief over a far lesser object that could be easily replaced. The idea that my cherished iPhone could simply disappear -- and that it was returning to me far more joy than any material object ought to return in a sane universe, had also never occurred to me, I admit. But when I returned to my right mind, did I think that someone -- the government, perhaps -- should have handed me a new iPhone because I could not resolve my grief and embarrassment over my own foolishness? No. Why? Because I had never bought the damn insurance that would have permitted this outcome: insurance was an act of prudence, one that I rejected, because never in my life have I lost or broken an expensive electronic item. But that was, on my part, a calculated judgement that the future would replicate the past.

What past did many Madoff investors believe would be replicated? Why, that the the government works in the service of the wealthy, and furthermore that the wealthy would protect each other from the inevitable failure of an overinflated bull market. They believed that they were special, and that they always would be. After all, this is what happened in the late 1920's: as any economic history of the Great Crash of 1929 will tell you, wealthy American investors knew there was something wrong far earlier than anyone else did, and began cashing out as early as 1927. That the closed club of the "classes" had, by 1990, come to include elevated members of the "masses" like the Madoffs, did not obviate our "victims'" assumption that they would be cared for by other wealthy, powerful people like themselves. Elie Wiesel echoed earlier interviews when he explained outside the court house: “it was a myth that [Madoff] created around him....that everything was so special, so unique, that it had to be secret. It was like a mystical mythology that nobody could understand.” Mr. Wiesel added: “He gave the impression that maybe 100 people belonged to the club. Now we know thousands of them were cheated by him.” (Quoted in Nocera, 3/14/09)

Many of these people who were in the club refuse to admit to this day that they are not special, only suckers after all. As touch football lingo goes, "suckers walk." But they believe they should be repaid federal taxes that they paid on "profits" that didn't exist (wrong: you cashed the checks and spent the money); and worse, they think the justice to be had here is for the defrauded privileged to be reimbursed by the government rather than accept responsibility for their own foolishness (as the poor who were suckered into bad mortgage deals and credit card debt are supposed to.) It seems to me one of the paradoxes of this historical moment that deregulation was apparently just fine -- regardless of the terrible consequences it had for 95% of the world's population - up until the point at which those who benefited from de-regulation were reaping the consequences and losing stashes of money that were either ill-gotten in this century or in previous ones.

Yes, here's the news: if you are living off of inherited wealth, regardless of what you have done in this generation, the money that supports your gracious living and your philanthropy is 19th century and 20th century blood money. You know what wasn't fair? The Ludlow Massacre, that's what. And chattel slavery. And the murder of indigenous peoples. And every CIA-sponsored coup that delayed democracy so that American corporations could pillage the hemisphere. And that you privatized the entire world, dismantled the social safety net, and sent your children to private school while the public schools were turned over to the testing industry: that's not fair either. And it's not fair that some people don't get to go to college and others get to go to Harvard because their families have always gone to Harvard (or Zenith, or Yale, or Stanford or (add the name of your favorite elite university here ___________.)

So I say, Madoff victims, I am sorry for your pain. And now it is time to roll up your sleeves, get to work like the rest of us and learn the lesson that most of the world knows: life isn't fair, and it's the people who learn to take care of themselves, who accept their losses and improve on them, and who build an ethical community around them who survive such withering blows. Along with the three basic rules for investing, let me offer in closing the three basic rules for how we might re-educate ourselves as a society, starting at the top and working down, as we leave the Age of Madoff behind.

Not everyone who has suffered something terrible is a "victim," nor should we be living in a Manichean world where fault is punished and innocence rewarded. The label of "victim" is over-used, in my view, and needs to be actively re-defined. "Victim" now implies that the person who has suffered The Terrible Thing has no culpability; the obverse of this is that if the person who has suffered can be proven to have made a fatal decision, wittingly or unwittingly, s/he can't be a "victim," and is therefore entitled to no consideration or sympathy. Ergo, unmarried mothers deserve no help from the government; women living off unearned income who lose it to a well-organized scam should be reimbursed by the government so that they can resume their former lifestyle. Instead, we need to realize, as a society, that all people suffer from a complex mixture of flaw, fate and fault some of which the government can correct and most of which it can't. We have good examples of how whole societies have benefitted from putting a floor under poverty, acting on the right to health care, housing, nutritous food and education. It is much harder to imagine how a society benefits from preserving the right to plastic surgery, the Hamptons, Whole Foods and Deerfield Academy.

Don't whine. You were rich. Now you are not. Pull up your socks and go on.

If you are making vast profits without working for them, and living as though that money will be there forever, you are gambling. And people who gamble sometimes lose. That doesn't make it wrong to gamble: I say this as someone who is not only in the stock market, but wagers on horses for sport, and often profit. But it does make it perilous to gamble with your food money or your mortgage, very few people make a living at gambling, and it is the gamblers who allow themselves to be so gulled by out sized winnings that they can't leave the table who become the mark.


Fie upon this quiet life! said...

Some brilliant insights here. I particularly like the fact that you point out that American "old money" is blood money. I guess I didn't really think about it that way before, but it's so true.

On another note... can't the people who invested with Madoff file a civil class action suit and get a little bit of their money back? Admittedly, I have not been following this story closely, so maybe Madoff is broke too and it wouldn't matter if he were sued by the people he scammed. But that course of action (suing Madoff) seems far more logical to me than asking the government for a bail out. Heck, if the government is going to start bailing out all gambling losses, I'll start hitting a casino next weekend.

JackDanielsBlack said...

TR, what would you say about the folks who took on too much home using adjustable rate mortgages, gambling that their homes would rise in value enough to keep them above water, but who are now drowning due to the sinking housing market? Do they also deserve to sink? Is a person who knowingly took on a $400000 mortgage on a $40000 salary and is now floundering a victim? Does he/she deserve to be bailed out?

Tenured Radical said...

Fie: I imagine they will file a class action suit, and my guess is that the SEC will be enjoined in the suit. But the losers aren't going to get much back from the Madoffs, I'm afraid. So far the forensic accountants (my favorite profession, bar none) have found $83 million, and the total losses are in the billions.

Jack:Long time no hear! Hope you are well. In answer to your question, I think that it is a truly knotty problem what one ought to do with those home owners, but I do think that the situations are different, both in the scale of the losses, the limits of who will, in end be harmed by Madoff (limited to investors, more or less) and who will be harmed by a collapse in the mortgage banking system (everyone); and impact each set of losses has on the whole economic system. Bailing out homeowner -- or some category of homeowner (as opposed to people who were laundering money or purely speculating)may be necessary to actually keep from privatizing the entire banking system, which I would bet both you and I think is a bad thing. And of course, homelessness on a grand scale creates other galloping social and economic problems too: having acres of empty houses and families living in motels at government expense sounds like a worse idea to me than propping up the homeowners who are capable of surviving. I did hear the other day that 60% of the people who are rescued from foreclosure go into foreclosure again -- so I repeat, it's a knotty problem.

Bardiac said...

Didn't he pay out a fair bit of money (in supposed earnings) to at least some of the people? Are they going to give it all back?

I'm afraid I have relatively little sympathy for folks with lots of money who get screwed by their greed, maybe because I think they're probably pretty sophisticated about money. But why should I have more sympathy for middle class folks who get caught in schemes?

Your second and third rules are what my family emphasized, with the difference that one should be able to explain the investment strategy after reading up/listening to the manager.

If we all practiced number 3, we'd get in lots less trouble. The thing is, the people who didn't practice that got a lot of other folks in trouble (through the mortgage practices and all).

Clio Bluestocking said...

Totally not the point: damn, Paul Newman was beautiful back in the day!

Anonymous said...

"It is much harder to imagine how a society benefits from preserving the right to plastic surgery, the Hamptons, Whole Foods and Deerfield Academy."

But but but--Tenured Radical, society benefits by being able to behold my physical perfection and that of my organically-fed family! It benefits because my brilliant children (if they exist) at Deerfield won't make all of your public school children embarassed or self-conscious about their lack of perfection and brilliance. And you all benefit by my family spending the summer in the Hamptons (while you are not) because you're not subjected to my family's whining for 2-1/2 months!

See, everybody wins.

Matt L said...

Thank you! Its a perfect post!

Because this post describes what is going around the country right now... a whole of liberals, neo-liberals, libertarians, conservatives, neo-conservatives, everyone of us crying out: "It isn't fair!"

The Madoff investors will not get their money back, the banking industry is going to loose more money and be nationalized later rather than sooner, we are all going to consume a lot less in the next decade (no matter what our class). The sooner we can get over the 'its not fair' aspects of this depression, the sooner we can stand up, dust our selves off and take some collective action to make things better for everyone.

Thanks TR!

Anonymous said...

i think youve mischaracterized madoff's victims. almost none were part of the hamptonite superrich. madoff, because he refused to answer questions, had a very hard time getting wall streeters to invest in him. most of his money came from privileged but hardly hyper-elite, working jewish people. i think the tenor of your piece would have been different had you taken into account who his victims really were. or maybe you just hate the professional upper class as much as the hedge fund post-class class.