by
Bill Bonner
Poor Bernie. The man has been ordered to spend 150 years in the hoosegow. What for? Who did he kill? A century and a half seems a little excessive for a financial crime. You could hold up three liquor stores and rape a whole convent and still not get 150 years. With a little bit of good lawyer-ing, a history of child abuse in the family, and good behavior in the big house, you’d be back on the street in 18 months. But all the papers seem delighted. “Locked up for Life!” says one of today’s headlines. The judge “threw the book at him,” says another. His victims wanted him to get no mercy. The judge gave him none, imposing the maximum sentence. He is “extraordinarily evil,” said the man on the bench. Justice has been done. Right? Here in the building with the gold balls on the roof, we’re not so sure. We stand up for lost causes…die hards…and scalawags. Besides, we’re not convinced that Bernie is extraordinarily evil at all. He seems much more like an ordinary evil to us. They say he defrauded investors out of $65 billion. The amount is unusual, but the crime is as common as income tax evasion. Who gets 150 years for evading income taxes? Heck, in civilized countries it’s not a crime at all – but a civil misdemeanor, subject to fine and retribution, not punishment. But didn’t he lie to investors? Well, yes…he exaggerated the returns investors were likely to get from his fund. But if you put every fellow on Wall Street who does that in jail, you wouldn’t have any room for stick-up men and wife beaters. Isn’t he the biggest financial scammer of all time? Well…he’s the title-holder now. But he has a lot of competition close on his heels. Bernie’s crime was taking money from people under false pretenses…and then being unable to give it back to them. How is that different from the financing activities of the US government? This year alone, the feds will borrow 50 times as much money as Bernie managed to take in during his whole 20-year career. They can only pay it back by borrowing even more money from more lenders. This is not very different from the typical “Ponzi” scheme, except that it’s the government doing it. Eventually, the suckers are going to lose a lot of money. And when you balance Bernie’s sins against his virtues, we’re not sure the man doesn’t come out at least as well as many of his accusers. While Bernie was pretending to make his investors rich, the SEC was pretending to protect them from Bernie. In fact, neither were really doing what they claimed. Which is to say, both are guilty of ordinary evil. As we pointed out yesterday, nothing is as dangerous as good luck. Madoff was not extraordinarily evil; he was just extraordinarily lucky. He was plying his trade when the feds were pumping up the biggest financial bubble in history. No wonder so much hot gas came his way. His luck ran out when the bubble popped. And now a court has found him guilty of fraud and a judge has ordered him locked up for a period equal to roughly the time between the end of the US War Between the States and the resignation of Richard Nixon. While Bernie is behind bars, the SEC and FED officials are still at large. Both are clearly guilty of dereliction and negligence. But, what is the point of keeping Madoff in prison? He represents no threat. Rather than pay $30,000 per year to keep him locked up, we suggest that he be forced to do community service work. He should be pressed into service as the next head of the Federal Reserve after Ben Bernanke’s term expires in December. With Madoff in the big office, there would be no longer any illusions about what sort of bank the Fed is running. Illusions are aplenty. In the popular mind, the slump of ‘07–’09 is coming to an end by Christmas. Practically everyone says so – including Ben Bernanke himself. All the bailouts and stimuli are paying off, they think. Soon, it will be business as usual. Yesterday, the Dow rose 90 points. Oil rose a bit too – to $71. The 10-year T-note rose too…with a yield falling below 3.5%. And gold held steady at $940. If the markets know what happens next, they’re keeping mum. But this morning comes news that the Dow is off more than 100 points on news of a consumer confidence pullback. Apparently consumers are getting concerned about the jobs situation and the supposed “economic recovery.” We have already told you, dear reader, why we do not expect business as usual ever again in our lifetimes. From WWII to 2007, the world economy had a single important driver – the US consumer. At the beginning of that period, he consumed because he earned. By the end of it, he earned because he consumed. That is, the more he was willing to borrow and spend, the more the whole world economy seemed to bubble up. But now, that era is over. As Jeff Immelt, head of GE says, “You’re going to have a world where the US consumer won’t be the main driver.” Clearly, the US consumer no longer has the positive effect they once did on the US economy…and it’s only going to get worse from here. “Where was the SEC?” asked a sign outside of the courtroom where Bernie Madoff was sentenced. Good question. And guess what. We have the answer. While Madoff was taking in his billions…and the biggest financial bubble was preparing to explode…the SEC was asking questions – of your editor! Yes, dear…dear reader. All over the world, responsible authorities are demanding a more muscled approach to financial regulation. “Bernie Madoff’s life sentence should galvanize regulators everywhere,” says today’s TIMES of London editorial, speaking for the majority. But it was not muscle that kept the SEC off Madoff’s case. At the very moment when a freelance informant was tipping off the SEC about Madoff…the agency’s goons were beating up innocent victims…and grilling innocent publishers. The New York Times reports: “The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. [Richard] Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C. “In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.) “The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him. “Mr. Kwak’s life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker – he certainly can’t afford to retire – he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was. “‘It pretty well wiped me out,’ he said a few days ago. He is extremely bitter.”
Stay tuned. The election results were counted up last night. The Kirchners – the husband and wife team that governed Argentina – lost. The winner was the man accused of drug dealing…Francisco Narvaez. As we remarked above, we’re suckers for underdogs, die hards and scalawags. That is probably one of the reasons we like Argentina; it is all those things and more. It is a measure of the lost cause status of the pampas that news of the election was hard to find. We looked through the TIMES and found no mention of it. The International Herald Tribune did pass along the news – on page 4. Something went wrong in Argentina. The country was once a rival of the United States of America – with nearly the same income per capita…and about the same prospects. Now, it has less income per person than Chile and exports less beef than its tiny neighbor, Uruguay. What went wrong? Well, life is not exactly under our control. We doubt that a group of Argentines ever got together and decided to become a second rate country. Things happen. July 2, 2009 Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Copyright © 2009 Bill Bonner
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The
story of our own brush with the SEC will have to wait for another
day. It is still subject to a gag order imposed by our own lawyers.
The case is still undecided – four years later. We can’t
tell the whole story yet…but we can pass along the moral of
it now: anyone who believes government regulators will stop investors
from losing money to fraudsters is dreaming…