Sunlit Water

December 13, 2008

Fifty Billion Dollars

Filed under: Crime — by teofilo @ 10:37 pm

For some reason I’m finding this Bernie Madoff business riveting.  Even aside from the scale of the alleged fraud, the fact that it apparently went undetected for so long is fascinating and disturbing.  In some ways it’s a perfect illustration of the extent to which trust is a key and essential underpinning of our (and probably any other) society.  Trust is so important to the basic functioning of pretty much every major societal institution that if someone can figure out a way to maintain it while building up an elaborate fraud that fraud can work spectacularly well as long as nothing happens to undermine the misplaced trust.  In Madoff’s case, it seems that he was able to keep his Ponzi scheme going by building up such a reservoir of trust and confidence that he could keep getting enough new money coming in to cover the promised payouts to existing investors for years or even decades.  (It seems to be unclear at this point exactly how long he kept this up and whether his firm was a fraud from the very beginning, which would be truly impressive.)  He also seems to have mastered the art of faking his paperwork so well that his firm even survived an SEC investigation without taking a hit to its reputation.  Once the economy fell apart, though, it seems the jig was up and he could no longer keep up the appearance of propriety.  It’s unclear, at least to me, how exactly it all came undone, but that will presumably be revealed in the course of legal proceedings.

I find frauds like this (and this smaller-scale one also revealed recently) fascinating for what they reveal about the fragility of societal institutions.  The spectacularly rapid collapse of the world financial system shows just how vulnerable institutions, even enormous ones, are to sudden losses of confidence.  It’s almost as if everything we do is based on a tacit understanding that everything will work out if no one looks too closely at what anyone else is doing.  Almost.

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4 Comments »

  1. There’s been a lot of interest in trust in behavioral economics. You might like Diego Gambetta who did a lot of work on the mafia in Sicily, and their role in trust relations/rational cooperation, &c. Or maybe this book by sociologist Piotr Sztompka.

    Comment by ac — December 14, 2008 @ 11:30 am |Reply

  2. I think I’ve heard about Gambetta’s work. This definitely seems like the kind of subject that behavioral economics would be well-suited to study.

    Josh Marshall has an interesting thought about all this, related to the parenthetical sentence in the first paragraph of my post.

    Comment by teofilo — December 14, 2008 @ 1:13 pm |Reply

  3. Looks like the most in depth SEC investigation was in 1992. I wonder if the more recent looks didn’t get into whether or not he had actually done activities he reported doing, just whether what he reported having done was (reported to have been) done properly.

    Comment by andrew — December 15, 2008 @ 4:34 pm |Reply

  4. I strongly suspect that’s the case.

    Comment by teofilo — December 15, 2008 @ 5:50 pm |Reply


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