Grounded! Well, sort of…

When I was a kid- “Grounded!” was the worst news. No movies, no bike riding, no going out to visit friends, nothing. It was the ultimate punishment. And it was usually for some dire offense such as a broken window, failure to heed a parent or the super bad offense of trying out colorful language recently heard in the living room.

As far as I can tell, I never lied to people for umpteen years and stole $50 billion dollars. Nope. Not me. Yet, the NY Times and Bloomberg this morning are reporting that Bernie Madoff who is the central figure in the $50B fraud, is receiving house arrest (“grounded”) as part of exceedingly generous bail terms pending further legal proceedings.  THAT is a good deal for him. He even gets to go out (with electronic monitoring) but has a 7 pm curfew. Man- I never had it that good when I broke the living room window. This guy is GOOD.

If I had stole $50B when I was a kid, I would still be grounded. I bet ‘ol Bernie is catching up on his soaps on his big screen TV in his multi-million dollar apartment. This could be the best thing to ever happen to him! Imagine how good he will get on his video games. He can twitter to his heart’s content, work out with his Wii and really be a Facebook bavog. He can catch bargain matinees of new movies before 7 pm and even hit the gym. He doesn’t have the headaches of falsifying multiple businesses on a daily basis– that has GOT to be a hard job. Enjoy Bernie! This is probably the most carefree time of your life. Fortunately, you stole have enough money to really enjoy yourself.

Funny thing I have noticed about the American legal system and white collar crime. We sure do seem to love it. In fact, we can barely bring ourselves to punish these guys. But, god help you if you are hispanic (or african american) and mug a white, wealthy member of the community for $250 bucks. You may never see the light of day again. If it is your 3rd offense in California, you are simply done.  But if you are an amazingly good fraud and cheat, you get home arrest and a curfew. Yet I have to wonder at the amount of damage that a guy that allegedly steals $50B causes verses an alleged mugger of $250.  I mean, how many people’s lives and businesses are crushed by a guy that steals this much?

I would like to posit a new theory of market efficiency. I shall call it the “Cynical Theory of Market Efficiency.” The premise is that the market is efficient inasmuch as it discounts all information and takes the most cynical direction from among the many future possibilities. If you run into Bernie some afternoon at Central Park, ask him what he thinks.

All that glitters…

Just read the story about the allegations against Bernie Madoff.  $50B- wow. Stunning not only in the magnitude, but scope and time span that this seems to have occurred within. Some immediate thoughts that come to my mind regarding this:

  • It has got to hard to lose $50B (assuming that this number is accurate) without considerable help… I can only wonder what happened with firm compliance? Kinda makes me wonder if compliance was based in Nigeria… What about audits? Who were his investors and how often did they review due diligence?
  • It REALLY is hard to make money over the long term in the market. When you consider the caliber of investors experiencing significant losses this year, it reinforces how challenging the markets really are. Ask most VCs (which I consider essentially value investors), and they will tell you that their hit rates are low but returns on those high. And most returns in that industry are concentrated in relatively few firms. Even standard equity investors best hit rates are maybe 50%+. Making money in a long term systematic fashion is improbable in a reasonably efficient market. The alternatives? Cheat or create a structural advantage.
  • What else is lying around out there? Is this the first “cockroach” among many?
  • The investment industry is rife with poor business practices and this is an example of how it can play out. Given that the nature of returns are episodic and performance unmangeable (remember, “past perfomance is no guarantee of future performance…”), there is little advantage in scales of economy when you could go out of business next week. If you scale up to reduce your cost structure, then what happens if the unpredictable occurs? Also, there are considerable fixed costs in highly professional business practices- and in a business that has considerable performance risk, it makes perfect sense to keep fixed costs to a minimum. It must be terribly painful to pay for a professional audit that proves you were trounced by your benchmark.
  • There is nothing new under the sun. This financial business is so attractive that there will likely always be a new version of a “shortcut.” The lure of wealth appears to be the ultimate narcotic.