Ponzi R' Us

[Dottore]

Sobering article from Salon:

I WAS FLEECED BY MADOFF

The financial guru's Ponzi scheme cost me 30 years of retirement savings. How could he do this to me -- and why did I let him?

By Geneen Roth

Jan. 07, 2009 |

I was standing in my kitchen wondering what to have for lunch when my friend Taj called.

"Sit down," she said.

I thought she was going to tell me she had just gotten the haircut from hell. I laughed and said, "It can't be that bad."

But it was. Before the phone call I had 30 years of retirement savings in a "safe" fund with a brilliant financial guru. When I put down the phone, my savings were gone and my genius financial guru, Bernie Madoff, was in handcuffs. I felt as if I had died and, for some unknown reason, was still breathing.

Since Madoff's arrest in December on charges of running a $50 billion Ponzi scheme, I've read many articles about how we Madoff investors should have known what was going on, how believing in Madoff was no different than believing there were WMD in Iraq. And I wish I could say I had reservations about Madoff before "the Call." I wish I could say I knew better about getting such consistently good returns, but I did not. Besides, everything I "knew better" about -- stocks, smart financial advisors, real estate -- had also proved disastrous: Our financial advisor embezzled a quarter of our money 10 years ago, I lost another third in the stock market during the boom times, and we bought our house at the top of the market and sold at the bottom. Considering that, Madoff seemed like a respite -- his fund showed occasional losses, along with small, steady gains. (I'm keeping a list of people who want to be notified of our next investment so they can sprint in the other direction. Feel free to add your name.)

It was always more important for me to find work that I loved than to be rich. I know this is a ridiculously privileged attitude since so much of the world must concern itself with getting food. But I was (and still am) one of the privileged: I've always had clean water, clothes to spare, enough to eat. And so I spent years washing dishes and being a maid so that I could write poetry. Then I spent more years as a sales clerk and an avocado-and-cheese-sandwich maker in a health food store so that I could write nonfiction. I lived out of the back of a station wagon, brushing my teeth and washing my face in public bathrooms so that I could keep writing. I started my first groups for emotional eaters, a topic about which I've written six books, in someone else's living room. I chose to do what I had to do for money so that I could do what I wanted to do for love. And when the money started coming in, when my book was on the New York Times Bestseller List, it was like getting a paper bag filled with Monopoly money. I had no idea what to do with it, no way of relating to the fact that I now had hundreds of thousands of dollars. Or, as James Grant, editor of Grant's Interest Rate Observer, says, "Insofar as there is a lesson in history, it's that human beings are not good with large sums of money, anything over $136."

Did I hear that diversification was smart? Absolutely. Did I choose to ignore that advice because I also got conflicting advice about Madoff being, as someone said, "the Jewish equivalent of T-bills"? Yes. I chose to find very smart people who (I thought) were as smart in their fields as I was in mine, and I chose to listen to them.

Since the Call, I have chanted the mantra of "How could you, why did you, what's the matter with you?" Another, even meaner version of this is, "It serves you right. You thought you were above it all, different than everyone else. Well, guess what, honey? You're not." I have also been eager to blame someone else -- anyone else -- for the mess I am in: my friend Richard, who offered to let my husband and me into his Madoff fund; my accountant, who encouraged me to put all my money in one place; my friends, who all did the same thing. Where does the blame end? My father taught me to take risks, to accumulate wealth. He said it didn't matter how I did it. But this was after 40 members of his family were killed in Auschwitz and his motto became, "God abandoned us. There is no such thing as morality, and it's every man for himself." Do I blame my father, who has been dead for eight years? Or is it Hitler's fault that I put my money into a Ponzi scheme?

Unlike many people who lost everything in Madoff, and unlike so much of the world, I still have money to live day-to-day. I am still teaching, and I am still writing, and there is still nothing else I would rather do. But still. I go to sleep at night oscillating between ranting about Madoff and being terrified that we won't be able to keep our house. Then I realize that, for me, the real suffering is not living without money; it's living with this rage. The devastation is horrible, but if I don't allow myself to feel this, then I can't learn what there is to learn. I will not see, for instance, that I participated in the fraud by being willing to close my eyes about what Madoff was doing.

I often asked Richard, the head of our feeder fund, how Madoff made such consistently good returns. Although Richard tried to explain it to me, it was clear he didn't know, either, because I'd leave our meetings still unable to explain to anyone else how it worked. But that didn't deter me. And so, rather than put my money where my values were -- into real things, real people, real companies -- I allowed myself to be part of this insane leveraging of money upon money. I allowed myself to be sucked into the belief that as long as I was giving away large chunks of money, as long as I was doing good work in the world, it was OK to participate in a venture that was not contributing to anything in which I believed. I engaged in the money split to which we as a culture subscribe: We say we believe in wind energy, but we put our money into oil. We say we believe in education and healthcare, but we put our money into advanced weaponry. We say we want to stop violence, but we allow genocide in Darfur. I can't change the culture's behavior, but I can change my own.

Over and over again, I've asked myself: Why didn't I secure the most basic of all things -- shelter itself? Why didn't I pay off my mortgage? And if I don't engage in blame, I see the answer clearly: because I believed in something else more -- I believed in accumulating. And when you believe in accumulating, you see what you don't have, not what you have. My relationship to money was no different from my relationship to food, to love, to fabulous sweaters: I never felt as if I had enough. I was always focused on the bite that was yet to come, not the one in my mouth. I was focused on the way my husband wasn't perfect, not the way he was. And on the sweater I saw in the window, not the one in my closet that I hadn't worn for a year.

Although I never would have chosen this path, and although it still feels terrifying at moments, I know I can never see the whole picture in the chaos of the moment. And sometimes, sometimes I am aware that there's an unimaginable, uncharted world on the other side of this loss, like stepping through the Narnia wardrobe.

On this side of the loss, there is the necessity -- the urgency-- of staying in the moment. This breath. This step. This splash of sun. The money I lost will never come back. But if I wander into fear -- what if my husband or I get sick and we can't pay the medical bills, what if there is an accident and we can't work, what will we do when we get old -- I'm lost, too.

[widebody911]

Can someone explain to me again how the stock market as a whole isn't just one big Ponzi scheme?

[vash]

she is a good writer.

[BReif61]

Originally Posted by widebody911

Can someone explain to me again how the stock market as a whole isn't just one big Ponzi scheme?

I'd also like this explanation. One thing has always bothered me about it. When you earn money; where does it come from, and where does it go when you lose it.

[Heel n Toe]

Originally Posted by Dottore

My father taught me to take risks, to accumulate wealth. He said it didn't matter how I did it. But this was after 40 members of his family were killed in Auschwitz and his motto became, "God abandoned us. There is no such thing as morality, and it's every man for himself."

Weird that someone whose family suffered that kind of atrocity thinks that is logical justification for saying there is no such thing as morality.


Madoff is the ultimate example of "no such thing as morality, and it's every man for himself" thinking. I guess it's not a good idea to trust someone like that.

[Seahawk]

Back in the old days the stock market was based on fairly unambiguous financial tenets, which I had to memorize in college. This link is informative:

http://beginnersinvest.about.com/od/financialratio/Financial_Ratios.htm

Investments were based largely on these principles. There were, of course, exceptions.

A lot changed in the '80's and 90's, most of it detailed in two Michael Lewis books, 'Liar's Poker' and 'The Real Price of Everything'.

I frankly do not recognize the market today compared to the days when I was 12 and my Dad would invest half my savings into a stock (say $100.00) that I would track with him in the newspaper when he got home. Those days are over: healthy companies with all the right numbers detailed in the link above fall victim to the most spurious of data (unemployment figures for example) that have little or nothing to do with the companies market or business position.

Ponzi scheme? Not really but I won't be re-entering the market in any manner other than investing a specific, grossly undervalued asset with the knowledge that hookers and blow may have been a better, more enjoyable pursuit.

I have been extremely lucky in the market, not from a financial gain standpoint but from avoiding losses.

In 1987 I left on my second cruise with the Navy in July for six months. In those days there was little to no connectivity at sea so I decided to pull all my stock portfolio into a six month CD while I was underway. By luck I missed Black Monday, October 19th, 1987.

Due to acquisition rules governing DoD Program managers of large projects, I had to pull all active stocks into a blind, very low risk fund during my tenure as PM, which started in 2004 and ended when I retired in September of this year. I left everything in place because by then the wobble had begun. Again, luck.

Dottore, keep the financial postings coming, they have been informative and apolitical. Plus I think the more folks read about the mechanisms of investing the more attractive the old, tried and true methods of building wealth become.

[billwagnon]

The article wasn't about the stock market.

[HardDrive]

Originally Posted by Heel n Toe

Weird that someone whose family suffered that kind of atrocity thinks that is logical justification for saying there is no such thing as morality.

I understand it. I wish I didn't.

We grow up in a world where religion and morality are fed to us as truth. Then one day, you become aware of the terrible reality of it all. You see clearly. And morality looks like thin crepe paper decorations on the sides of an ever hungry dragon.

[Dennis Kalma]

The morality thing started with the Baby Boomers, the flower children that said "do your own thing" and "if it feels good, do it".

The slippery slope started there and has infected every aspect of our lives....it was always present in every human, but it became part of culture thanks to us boomers....

Dennis

[looneybin]

I've got an even better ponzi scheme for you - it's called social security

[Mo_Gearhead]

If I'm poor and Black/Hispanic/etc. and walk into a Seven-Eleven, produce a gun and get a few hundred dollars and get caught ...I will be in jail.

If I am white, well respected, a philanthropist, pillar of my community, belong to the right clubs, hand out money to politicians, etc. ...and hang a 'shingle' outside my door that says; "Guaranteed Returns. Trust Me." People flock to my door, throw money at me and later I lose a few billion dollars of their money and get caught ...I get 'house arrest'.

We need to educate the poor, so they can participate more fully.

[Mo_Gearhead]

Can someone explain to me again how the stock market as a whole isn't just one big Ponzi scheme?
__________________

You can't be serious? Or are you just bitter?

[DanielDudley]

Originally Posted by Dennis Kalma

The morality thing started with the Baby Boomers, the flower children that said "do your own thing" and "if it feels good, do it".

The slippery slope started there and has infected every aspect of our lives....it was always present in every human, but it became part of culture thanks to us boomers....

Dennis

I don't think it was hippies that got busted during Watergate...

[svandamme]

buy tulips !

http://en.wikipedia.org/wiki/Tulip_mania

[Dixie]

I've got an even better ponzi scheme for you - it's called social security

I know an even bigger ponzi scheme. It's called Medicare.

[competentone]

Originally Posted by widebody911

Can someone explain to me again how the stock market as a whole isn't just one big Ponzi scheme?

Originally Posted by BReif61

I'd also like this explanation. One thing has always bothered me about it. When you earn money; where does it come from, and where does it go when you lose it.

I'll try to give you the basics. Though I will have to admit that the "theory" behind the stock market is not happening in much of today's stock market.

If an entrepreneur has a business idea (either for a completely new business, or for the expansion of an existing business), he may not have the capital required to actually put the business idea into practice.

The entrepreneur could find some source of capital from private investors, or perhaps obtain a business loan from a bank, but often -- for many different reasons -- these sources of capital are not available or not desired.

Selling stock through an "initial public offering" is one option the entrepreneur has to raise capital. Essentially, a lot of people make a small investment -- technically taking an ownership stake in the business -- through the stock offering.

The stock market is not like a Ponzi scheme since the shares represent ownership of businesses. The stock market provides liquidity to those who have purchased shares -- few would want to partake in initial public offerings if there was no secondary market where the investors could sell their shares at some later point in time.

Over the years, the stock markets have become "standardized" and the methods of raising capital and trading the stock after the initial public offering have become major operations.

The idea behind stock ownership is that eventually -- and it may be many years down the road -- the shareholders in a company will be able to share in the profits from the company in the form of a dividend payment.

In today's markets -- and this is a problem I've been "ranting" about for years -- there are many people involved in "investing" in the stock market who give little to no thought about the nature of their investment.

One can see ridiculous valuations in certain stocks -- people will be willing to hold stocks with crazy price-earnings ratios, yet, if they were approached with the same "numbers" from someone looking for a small business investment, they would never consider such an investment.

People will let their expectations run wild when "investing" in the stock market -- looking at it more like a "lottery" where they might "win" rather than looking at it with an analytical business mindset.

The "earning" or "losing" of "money" in the stock market represents changes in what people are willing to buy, or sell certain stocks at.

Too many people look at their stocks as some sort of equivalent to "cash" rather than understanding that their stocks are valued at the last trade that has taken place in that security. If peoples' views (their views are the "market") changes, their stocks can be valued (through the "bidding" process of the market) at more or less than what they originally paid for the stock.

Changes in "values" of stocks and the businesses underlying them -- or changes in the value of anything -- doesn't represent "money" going or coming, it just represents the "mass conclusions" of the people making up the markets for the trading in those stocks.

Few people understand, that unless they had sold a stock when it was high, they never really "had" the money the stock was valued at.

[Dottore]

Originally Posted by competentone

Changes in "values" of stocks and the businesses underlying them -- or changes in the value of anything -- doesn't represent "money" going or coming, it just represents the "mass conclusions" of the people making up the markets for the trading in those stocks.

I spent an entire lunch trying to explain this point to my dear old mum, who lost a bundle after 9/11 and just couldn't understand why. "What's it got to do with X Co? They make pharmaceuticals"—she kept insisting. She still doesn't quite get it.

One problem is the media. Everywhere you turn the media is milking the "Economic Meltdown" story—to often ridiculous lengths in my view. This of course feeds the negative market sentiment—often much more even than real factors, such as the fundamentals of the companies in question.

A friend of mine, who is much more astute in these matters than me, is tracking a portfolio of companies whose share prices have suffered significantly almost wholly because of current market sentiment, and whose underlying businesses are largely unaffected by the current economic malaise. He's buying these one at a time, and I suspect he will be very rich very soon.

[David]

A con man is a con man. This has nothing to do with race, religion, or generation.

Another pelican's idea that Modoff should be charged with treason is right along with some SEC employees!

[pwd72s]

"Did I hear that diversification was smart? Absolutely. Did I choose to ignore that advice because I also got conflicting advice about Madoff being, as someone said, "the Jewish equivalent of T-bills"? Yes."

P.T. Barnum was right...

[stealthn]

What really bothers me is this is nothing new, you work your ass off trying to ensure you, your clients, etc. are "compliant" to all the regulations and audits, yet some of THE biggest Companies and people can still do this for years and get away with it until it's too late.

There are no controls anymore (or morals for that matter) and greed is greed, just look at the government, banks and insurance companies, all trying to get rich and now look at the housing market.

It sickens me about as much as the rear end of the Panamera ;D