Saturday, December 20, 2008

The Madoff Mess

First of all I want to say that I haven't published for over two weeks because I have been very busy with business: Renting out a room, designing a house and producing a workshop on rational egoism. As these settle down, I expect to have more time for my blog.

I am reading the accounts of the Madoff fraud scandal with much interest. The Wall Street Journal has run accounts of the breadth and depth of those affected by the collapse of Bernard Madoff's investment fund. It was a Ponzi scheme that consistently paid 8 to 12 percent returns based not on his earnings from his investments but on the ability to attract new people who wanted to "be in on" what the fund had to offer - consistently high returns. When the economy went south and his customers wanted their money, he was unable to provide it because the new people who provided for his payouts were no longer coming online. He had swallowed his "Jonah" and now was sick and rolled over, belly up.

I say "be in on" because Mr. Madoff was very selective of his "customers." If they were loud about his fund, he might stop doing "business" with them. He was dictatorial in this respect. Also, Mr. Madoff operated under the radar. He lived modestly given his income. He was very private, not a big socializer. He was uncomfortable in social settings, especially large ones.

The thing that is amazing me is that his customers, besides having a lot of money to invest, seem to have one of three characteristics. Either they are in the money making business in the abstract world of finance or they want to "make a difference" through their charities and foundations or they want to show their "class" by having an exclusive investment which they "chat up" with those they are trying to impress.

Normally a business produces a service or product and it makes a profit based on whether the product is one people want and it keeps the cost of its means of producing the service or product less than its income. In this way, it is directly tied to reality. If it doesn't watch all the factors which enter into producing the product and lets any one of them get out of control, it is threatened with failure - loss of its assets and its profit making power.

But as one purchases financial instruments up the line from that base, it gets to be a more complex problem to know how the company(s) in which one invested are tied to reality. If one doesn't have a means of tying the abstractions back to their concretes, one loses control of his investment and he is now in the hands of someone else's behavior and judgments. He has lost his independence which is fundamentally his own ability to obtain and judge the facts.

Clearly character becomes monumentally important. Quickly, the basics of character are rationality, independence, honesty, integrity, justice, productivity and pride. Having someone with whom you are dealing meet these standards (the explanation of what these standards are is a whole other subject which I am not going into here. Read Ayn Rand's "The Objectivist Ethics" in her book The Virtue of Selfishness for an explanation and derivation of them. Essentially they are the attributes of a healthy mind) is the means of judging character.

Looking at the list of shattered investors, it is interesting to learn who they were and what was important to them. Clearly they were interested in the high returns. But they sacrificed their judgment in order to obtain those returns. Many were charities who are in the business of "doing good" by helping other people.

Doing good in today's culture is not a function of having a profitable business. In fact if you are a good and healthy business, you are suspect. We hear all the time that it is good "to give back" as if the product we offered which people wanted in order to better their lives is insufficient, even criminal, as a way of making a living. In order to gain moral credence, one has to give some of his profits to charity or give back by forming a fund that helps some lesser soul.

I assert that this fact blinds people. They have taken their eye off the ball and they do not judge people by the standards that work in reality. Their doing good is not objective. They don't judge the good they do by producing something that is a value for human life and that another person decided to buy. Instead, they "hope" they are doing good by their self-referential standard of how they feel giving money to someone else.

The financial people who were swamped in the scandal live in the rarified abstractions of earning money without knowing how and for what it was produced. This cuts them off from reality and proper judgment, i.e., the virtue of justice.

Beyond these two categories, there are those who love exclusivity and being on the inside when others are out. These are the really superficial people caught up in a bonfire of vanities fueled by a bogus idea of "class." The current conversation around class is such bullshit and in my mind, completely discredited. It is a conversation to stop learning and the onrush of life's events. If not that, we call it something else.

This altruistic view of the good is big, big, big in our culture right now. We have elected a president who played to the idea of being classy and being all things to all people. Specifically he supressed the details of his life just as Madoff did. There are many red flags around him once you begin to look at "the seams on the ball coming at you" rather than just the ball. Once you look at the details, the seams on the ball, and judge them by the moral principles above, the whole thing goes into slow motion. You can see where this thing is going.

Madoff's investors would not do that and they are paying the price. (They could have judged because they are capable.) For some it is a very, very heavy price: multimillionaire to broke in the blink of an eye.

When some of these investors go to the government asking for the taxpayers to bail them out, as are many others unwilling to be a judge of character, because they are such "good" people, don't support that. You will be supporting your own demise and culpability in this disease of our culture.

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