Close window  |  View original article

Bernie Madoff, Charles Ponzi, and Climategate

Fraud comes out eventually.

By Will Offensicht  |  December 7, 2009

Most everybody who reads the mainstream media knows about Bernie Madoff.  Although the lawyers haven't finished picking over the corpse of his investment business and won't for some years, Mr. Madoff seems to have cheated investors out of $50 or $60 billion, plus or minus the odd back tooth here and there.  As one would expect, politicians have rushed into the fray, offering to set up financial regulators to protect future innocent investors from this sort of scheme.

In addition to setting a new record for fraud, Mr. Madoff's undoing came at a time when the media wanted us to forget about the real architects of our financial collapse.  He got more ink that he was probably worth, but nobody asked, "Did he intend to commit fraud?"

Mr. Madoff seems to have started out as a legitimate investment adviser.  As the New York Times put it,

[Bernie Madoff was] a winning financier who had all the toys: the penthouse apartment in Manhattan, the shares in two private jets, the yacht moored off the French Riviera.

Although hardly a household name, he secured a longstanding role as an elder statesman on Wall Street, allowing him to land on important boards and commissions where his opinions helped shape securities regulations.  Along the way, he snared a coveted spot as the chairman of a major stock exchange, Nasdaq.  [emphasis added]

Here's Mr. Madoff, a wealthy, well-connected financier who's on important boards and served as the head of the Nasdaq stock exchange.  Nobody could imagine him being a crook, even though his investment service generated suspiciously consistent returns year after year.

It appears that when he started his investment firm in the early 1960's, Mr. Madoff earned legitimate profits trading in penny stocks.  He moved to blue-chip securities when the rules were changed in the mid 1970's.  It's unclear when he started paying off investors with money coming in from new investors, but it seems that he earned legitimate profits as an honest money manager for many decades.  He didn't start out to be a crook, he became one over time.

From Investor to Crook

We can understand how that might come about.  Here's a well-respected financier who sits on boards and runs an investment business.  The difficulty with running an investment business is that people let you invest their money only so long as they trust you to keep profits rolling in.  The moment they think they can earn more someplace else, they'll move their money.

If your profits falter, people take their money away from you in a flood, and you'll lose your main source of income.  Sitting on boards and heading Nasdaq pays more money than we'll ever see, but it won't pay for Mr. Madoff's international jet-setting life style.

It's not news that professional athletes who retire often try to get back in the game.  Some may need the money - any players who invested for their retirement with Mr. Madoff will have to go back to work.

Even if they have enough money, most retirees miss the adulation, the fame, the ego boost of being recognized.  Once a player retires, they're an immediate has-been.  Fame and recognition shut off as if someone turned a faucet.

For many, going from hero to zero in one retirement speech is too much to take and they try for another career.

As making money got more and more difficult, Mr. Madoff may have been tempted to fudge his returns here and there to maintain his image and life style.  Most of his investors were young enough that they didn't really need the money just now; all he had to do was print a statement saying their account was worth X dollars and they'd believe they'd gained the expected 10% since last year.

The most wonderful things about keeping accounts with computers is that erase marks don't show, printed statements can say whatever you want them to say, and a faked statement looks just as authentic as a real one.  That's why we at Scragged, who know full well the chicanery of which computers are capable, check our statements to the penny.  Frauds tend to be found out when someone checks carefully, but nobody checked Mr. Madoff carefully enough.

So long as more new investors came in than old investors withdrew, all he had to do was print quarterly statements, pay generous sales commissions, pocket his fees, and everything went smooth as silk.  According to the Washington Post:

Experts say the Madoff case may simply point to the inherent limits of regulation.

"The SEC going back to its formation, and the Justice Department going back to its formation, are never adequate to crime at its time. It's simplistic to look back and say that this was the SEC's fault," said former SEC chairman Arthur Levitt, who knew Madoff when both worked on Wall Street and consulted with him while at the SEC. "A very skillful criminal can almost always outfox the regulator or the overseer." [emphasis added]

Nobody caught Bernie Madoff, he was undone by circumstances.  When the entire economy started to crater, Mr. Madoff realized that his investors would finally need to withdraw money to meet expenses.

He couldn't pay because he'd spent their money as surely as our government has spent our Social Security savings, the "individual accounts" for both no more than an IOU in a drawer somewhere backed up by nothing whatsoever.  He saw that the game was up and confessed to protect his accomplices.

From Crook to Crook

Charles Ponzi, who, like Mr. Madoff, set a record for financial fraud in his day, started out claiming to earn profits by arbitraging coupons for postage stamps.  Legal profits could be earned in this way, but government red tape made it expensive to process the transactions.

Although he traded coupons at the beginning to give the aura of legitimate activity, it appears that Ponzi's scheme was fraudulent from the outset.  Given his prior arrests and time in prison, it's reasonable to assume that Mr. Ponzi set out to be a crook and didn't flee quite soon enough.

In retrospect, financial analysis have written rules for identifying Ponzi schemes like Mr. Madoff's:

Scam artists will never be at a loss for victims despite all the public knowledge of frauds.  As 'ol P.T. Barnum said, "There's a sucker born every minute."

From Scientists to Crooks

What has this to do with global warming?  Given the release of the Climategate emails, we see precisely the same situation unfolding as with Mr. Madoff's investment firm.  When scientists first started warning about the coming Ice Age in the 1970s, nobody paid much attention.  When they started talking about global warming, however, people gave them research money.  Why?

It's simple - they repackaged the crisis.  They didn't tie the Ice Age to human activity, it was a natural event.  Nobody could do anything about global cooling, so why pay scientists to study the problem?

They learned from this experience, however, and claimed that global warming is man-made.  It was all the fault of us greedy Americans tooling around in SUVs and spewing earth-destroying carbon with every breath.  They laid a guilt trip on us.

This is the same scam anti-poverty agencies work.  Back when Americans believed in original sin, that is, they believed that people were born bad and you had to reform them one by one, nobody did much about slums.  People who cared went into slums to help individuals reform themselves and move out to better lives, but nobody tried to clear or uplift an entire slum as a whole.  Slum dwellers were inherently sinners; they'd rot there until they reformed themselves and moved out on their own, some with help and some without help.

The social scientists worked a scam on us by claiming that people in the slums were bad, not because of anything bad in and of themselves, but because we let those poor, innocent victims live in bad neighborhoods.  If only we'd give them billions to clear the slums, we were assured, they'd provide good environments and good schools for everyone and everyone would be good.

We gave them billions, they did their thing, brand-new modern high-rise "projects" were built with every amenity - and people still live in slums of their own creation, having destroyed the fancy new environments we put them in by acting just as badly as before.

The only difference is that now they're more of them because welfare encourages women to have babies without fathers.  It seems that the original-sin theory was right all along: people reform themselves one at a time.  You can help them along that path, one at a time, but you can't do it for them; and a welfare check is no substitute for a father.

When the social scientists started rattling the begging bowl, skeptics told them to stuff it; there would always be poor people and it wasn't possible for the government to reform people unless the people wanted to reform themselves.  The social scientists called them "racists," claimed that the only thing wrong with their programs was that they were under-funded, went on spending money, and whined about selfish middle-class Americans who weren't willing to sacrifice to Save the Poor!  It worked: they got their money, and merrily went about making the problem worse so they could ask for yet more.

When climate scientists started rattling their begging bowl for research money, that was OK; it didn't hurt anything much for them to collect data about climate and weather.  The scientists took our money, collected data, wrote computer models and published papers.  So far so harmless, but they came to believe that the seas were going to rise 20 or 30 feet - you can buy a coffee mug that claims that - and started screaming that we had to Save the Planet!

By some strange coincidence, their plans for Saving the Planet required that we give them a whole lot more of our money, just like Saving the Poor!  How odd!

Unfortunately, the globe didn't cooperate.  Instead of getting warmer, it started getting cooler about 2000.  Instead of getting thinner, Antarctic ice is getting thicker.  So what to do?

As with Bernie, they used their computers to fudge the data, but why?  Why abandon science for fraud?

Ya Gotta Believe!

Bernie Madoff probably thought he really was a genius investor.  He sat on boards, people gave him money, he schmoozed with the great and the good, everybody told him how smart he was.  When things started to go sour, he truly believed that he could turn his investments around.  This belief made him feel justified in trimming a little, then a little more, then a lot more, and so it went.

Similarly, "climate change" has been declared a religions belief by the United Nations.  Fox News reports:

Environmentalism should be regarded on the same level with religion "as the only compelling, value-based narrative available to humanity," according to a paper written two years ago to influence the future strategy of the United Nations Environmental Program (UNEP), the world's would-be environmental watchdog.

Climate change advocates exhibited the religious fervor of True Believers from the beginning.  People pointed out that Mt. St. Helens cooled the earth 2 degrees for a couple of years, one volcano had far more effect on climate than the entire sum of human activity.  Scientists fought back by saying, "Our models show," but they destroyed data and wouldn't let us see the computer code because we mere mortals might misunderstand.

Like the social scientists, they called their opponents, "Stupid," which is not a scientific term.

Like Bernie, they faked their data and covered up the fact that the earth was getting colder, rather as Bernie was able to cover the fact that there wasn't enough money in his piggy bank.

Much as Bernie was undone by the unexpected financial crash, a hacker broke into the climate research computer and splattered their fraud all over the world.  They're trying to cover themselves and their friends are trying to stop anyone from doing any serious investigating, but destroying government-funded data is very illegal in Britain; there may even be jail time.

Now that Bernie's been exposed as a fraud, nobody will invest any more money with him.  Now that global warming has been exposed as a fraud, will people want to hear Al Gore's speech any more?  There are calls even to revoke his Oscar!

What's more important: will we let our government take trillions of dollars from us in energy taxes to Save the Planet based on a fraud which has already been exposed?  You wouldn't give your money to the Bernie Madoff of Wall Street, why give money to the Bernie Madoff of Global Warming?

The saddest part of all this is the damage done to the reputation of science as a whole.  Most people know little of science and have trusted scientists to tell the truth about their research.

Climategate shows scientists as petty-minded, bureaucratic politicians who suppress dissenting ideas and run roughshod over the truth like true believers everywhere.  How can lay taxpayers trust scientists when they've seen such well-known scientists lie, cheat, and steal to maintain their power over the research agenda and then try to cover up?