This blog has been saying for a while that financial fraud is more pervasive than the officialdom wanted to acknowledge. We believe it is not uncommon at big firms (see last night’s discussion of Merrill, including comments), but no one wants to open that can of worms.
However, small fry (even biggish ones, as long as they are independent entities, not famous brand names) are fair game, and mini-Madoffs are popping up right and left. From the Financial Times:
US federal regulators have warned of a “rampant Ponzimonium” as they disclosed they are investigating “hundreds” of possible scams in the aftermath of the $50bn fraud allegedly perpetrated by Bernard Madoff.
Bart Chilton, a commissioner at the Commodities Futures Trading Commission, the US regulator, said the watchdog was “seeing more of these scams than ever before” in commodities and other futures markets.
Mr Chilton said the CFTC, which patrol commodities and financial futures markets such as derivatives on stocks and foreign exchange, was investigating “hundreds of individuals and entities, many of which were related to Ponzi scams”.
The CFTC has filed charges against 15 alleged Ponzi schemes so far this year, compared with 13 during the whole of 2008. If the rate were sustained, the regulator could end the year filling more than 60 cases, officials said.
US regulators have said they are detecting more scams than before as the publicity surrounding Mr Madoff‘s case prompts some investors to question the credibility of returns.
But this is the first time a senior regulator has publicly put the number of investigation in the “hundreds”….
Mr Chilton did not provide details of the investigations but it is likely the majority of the cases relate to small investments, in the range of a few million dollars to $50m (€37m, £35m).
To his credit, Chilton has also been willing to say, contrary to party line, that there was such a thing as manipulation in the commodity markets.
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An inflating debt bubble can hide almost any dodgy scheme and make lousy business models look brilliant. It is really tricky to regulate that properly, in particular when the animal spirits cloud people’s judgment.
The televised and magazine-style media’s coverage of the ponzi schemes has been so weak. The “Madoff” leader is vilified, big numbers tossed around, victims’ stories of ruin profiled… no good effort at explaining where the money went, barriers to tracking it down, etc.
If this “mass ponziconomy” story is going to break, the media has really done us and itself a huge disservice by not making the investigation/restitution process common second knowledge.
If the bonus outrage wasn’t enough, the fear that all things finance are secretly ponzi schemes, may drive us into counterproductive hyper-populism… maybe that works out well for the established bailout recipients.. the public can fume about the rotten “ponzi” folks and the greedy execs, and not take a hard look at the laws/policies/ideologies, oversight bodies, and ratings agencies that let the sewage flood the pond.
This is another problem about not completely cleaning up books. One doesn’t understand how those bubble were created.
As a result, I can guarantee you, that bail out and injection money will be used for yet another commodity speculation.
And that will lead to even bigger damage than when Bush ultra cheap money and soft injection causes global commodity bubble in 2007.
This time, the commodity bubble will destabilize dollar, since all big central banks will dump dollar.
We’ve had fifteen years of ‘Greed is God,’ and many in The Industry prey early and often. That’s not to say there aren’t honest johns in the world of finance, American division; it’s just that with all that creditfizz brewed in the vast of the Federal Reserve System, a guy could buy himself a license to print money if he just shave a few points, on-sold the corpses, and put on a happy face. That was yesterday’s ‘normalcy,’ just the place that the Ben-Paul-Tim-Sum cabal want to get us back to. Somebody ‘splain to me again why we need Team Fido stealing our money for the Wide Boys.
on the merrill cds thing..i dont actually think its a simple as it seems on the surface. the commentors are right that merrill is using the index to hedge against a single tranche cdo. the marks of that single tranch cdo are market implied marks not mark to market marks, which means the firm determines the value of the cdo and therefore the hedge. they cant really mess around with the value of the cds contract but they can mess around with the value of the CDO.
the thing is the cds is used to hedge against the cdo. but the companies in the cds index were bankrupt companies(it contianed the worst companies out there today(….so there is no way the marks on the cdo could have been that different than what the same companies in the CDS index. but yet they were. this is the fraud….credit events occured in the CDS contract, and merrill probably had to pay out, but with the CDO, they didnt mark it because in that case, those marks are market implied.
The real point is that Ponzimonium is already here. All that’s happening now is discovery. And don’t forget that derivatives are often mark-to-fantasy and there are undoubtedly many companies that are effectively Ponzi schemes “making money” via overvaluing their expanding derivatives books. In many cases the proprietors don’t even realize they’re running Ponzi schemes. The Koolaid is strong in the financial industry.
FairEconomist is on point.
Let’s remember that the recession will uncover what auditors could not (or were not allowed to): massive fraud! Let’s start to think that CDS contracts and similar derivatives may hide that. Deleverage frauds will not be easy.
Finally a peek at the nasty truth, can’t what till the towel is ripped off.
Grosse Pointe….have a drink richard, the real hand grenade/shit fight is yet to come.
who needs tea parties?
what we really need is a couple of 1873-style banker parties.
I think they are trying to deal with this by sacrificing a few (or a few hundred) notable examples, and then saying “see, there were just a few bad apples and we got them!”
My feeling is that they will keep doing this, and the really massive frauds will be kept under wraps as long as possible–they hope forever.
Remember what happened the last time corporate fraud was being unveiled, enron, worldcom … then … then….
“Bart Chilton, a commissioner at the Commodities Futures Trading Commission, the US regulator, said the watchdog was “seeing more of these scams than ever before” in commodities and other futures markets.”
They’re seeing more of them? Is that because they were walking around with their eyes closed for the past 10 years and now, for whatever reason, they just happened to open their eyes?
John Kenneth Galbraith called it the “bezzle”: all the fraudulent profits booked during the boom, which eventually come to light when the boom ends.
There’s been an advert running on WGN radio here in Chicago for a couple of years where this guy says he will give you 10 or 15% credit for your money when you invest it with him. He goes on to talk about how he’s got some sure system that will bring you huge returns with no risk. I think he is still advertising on the Tribune station.
Interesting!