On a flight yesterday I found myself watching "The Wizard of Lies" movie starring Robert DeNiro as Bernie Madoff. Madoff's Ponzi scheme is the largest single act of financial fraud in recorded history. Over $65 billion is estimated to have been lost because of Madoff's fraudulent activities. The movie details how Madoff was able to fool thousands of investors into investing billions with his company. It paints a positive picture of the remaining Madoff family who the movie implies had no knowledge of Madoff's crimes. One of Madoff's two sons committed suicide two years after his father's arrest while the other one died of cancer in 2014. As sad as their deaths are, their ability to work for decades with their father without questioning his uncanny ability to continuously make money despite economic conditions still leaves many questioning their real involvement in their father's company.
I have a Bear Stearns shirt that I purchased 10 years ago, following the collapse of the investment bank. I bought it as a novelty item as its collapse would be a once in a lifetime event I thought to myself. Little did I know many firms would suffer similar fates. Bear Stearns' bailout by the Federal Reserve (Fed) in March 2008 was the canary in the coal mine that warned financial markets of the imminent collapse of all other holders of toxic mortgaged back securities. Subsequent bank failures including the Lehman Brothers were made possible by the near overnight downgrade of Bear Stearns and the subsequent run on the bank.
What's interesting then and what is still interesting to this day is that many of the same policies that allowed Madoff to run his Ponzi scheme and Bear Stearns to enjoy high credit ratings before its collapse are still in place today. Madoff was the chairman of NASDAQ and contributed generously to politicians in the United States. He also served on the boards of numerous banking and investment supervisory organizations. He was investigated nearly a dozen times by the Securities and Exchange Commission and each time the investigations were quashed. Bear Stearns similarly was given the highest of credit ratings one day and within days and weeks was given a junk rating. Its assets were repriced several times to reflect heavy losses it attempted to cover up. It was rewarded with a Fed bailout paid for by the taxpayer.
Ten years later, what has changed? What if any regulations and oversight do governments have to regulate credit rating agencies? Are their assessments based on quantitative rules that are free from the biases of employees of these agencies? Do business relationships with companies being rated by these agencies get in the way of their credit ratings? What about Madoff and his dirty dealings? Can firms freely donate money to politicians in return for nonverbal agreements for favors? The answer to all of these questions unfortunately is negative. Ratings agencies are allowed to make whatever ratings decisions they want without fear of impeachment. No quantitative formulas have been offered to the investor public to satisfy its need for transparency. Why can ratings agencies simultaneously rate a country or a company credit-worthy and junk at the same time is still a mystery to most investors
As for Ponzi scheme-like acts of fraud, we are in the midst of one that may someday rival that of Madoff's, the cryptocurrency bubble. While I have no evidence of a Ponzi scheme in the initial coin offerings of these "currencies," what's clear is that regulators are again asleep at the wheel. Ignorant investors have been taken advantage of and are plowing their hard-earned money into "securities" they do not understand with the promise of quick riskless returns. While many of these currencies have already gone completely bust or are down over 50 percent from their highs, bitcoin among them, the SEC and other government agencies have done nothing. By the time these regulatory bodies take any action it will be too late to reign in the ridiculous valuations that are certain to hurt thousands of investors. While nothing close to the housing bubble of the Great Recession or the losses of Madoff's Ponzi scheme, this bubble will burst and with it, the hopes and dreams of thousands of investors.
It has been 10 years this month since the Great Recession's first major event but we have yet to learn any meaningful lessons it appears.