Slouching Towards Wall Street… Notes for the Week Ending Friday, March 4, 2011
Such Stuff As Dreams Are Madoff
I’m not the kind of person I’m being portrayed as.
“I always had a good feel for the direction of the market because of the order flow I was seeing.” So said Bernard L. Madoff to journalist Steve Fishman in a lengthy cover story in New York Magazine (27 February, “The Madoff Tapes.”) At one point, Fishman compares the complexity and depth of the tragedy in the Madoff family to the House of Atreus — which makes us wonder at our willingness as a culture to accord epic stature to this pathetic tale of a truly evil person whose shameful web likely snared many folks of questionable moral character all looking to share ill-gotten gains, as well as honest drudges who sought the best in professional guidance.
Madoff’s statement seems more than disingenuous — pardon us the observation. Madoff’s order flow was immense. In the New York story he is quoted as saying that he made $100 million a year in the years before he embarked on his scam. Even if this $100 million is top-line revenue, it’s a nice chunk of change for trading small lots of stock. Indeed, at the volume Madoff was executing, in many of the stocks on his desk, he was the market. “Seeing order flow” in this context provided Madoff with one of the most reliable sources of real-time inside information in the history of the financial markets: he saw all the trades before the marketplace saw them. How could he not make money?
Additionally, Madoff’s market resided within his office. He matched buyers to sellers and only then put trades out onto the tape for all the world to see. If he wanted to make a bigger profit on a transaction, he had the power to adjust pricing, and no one would know the difference. He had the ability to trade ahead of every customer order that came his way, and most likely did so repeatedly. This was the ongoing scam, the Perfect Crime that so many Madoff investors believed they were cashing in on when they forked over their millions for him to manage.
The fecal storm swirling around the SEC over their failure to catch Madoff is certainly well deserved, but it has obscured the fact that FINRA — formerly the NASD — was responsible for oversight of Madoff’s operation for decades, and they never found anything at all. Kind of makes one wonder whether they were instructed not to look, what with Madoff being the chairman of their marketplace and all. Maybe someone can ask the former chair of FINRA why the organization so persistently failed to catch what Madoff was up to. (The former head of FINRA is easy enough to find: today she is chair of the SEC.)
One bit of Madoff’s tale is remarkable, and was the nugget of reward we took from reading this story. He talks about the heads of Banco Santander, Credit Suisse and UBS all coming to visit him when word of his money making prowess began to spread. The credulity this attributes to these heads of global financial institutions calls to mind the spectacle of US Senators, UK Members of Parliament, and other high government officials and business executives being interviewed by Sacha Baron Cohen in one or another of his outlandish personae and taking seriously questions from Ali G about the US response to terrorism in the wake of 7/11. How could these people not have known they were being duped? Where were their aides, their staffers, their publicity flaks? Could it be that the heads of major global banking houses really took Madoff at face value? Was he the Borat of Wall Street?
In prison Madoff continues to receive special treatment. The article recounts an exchange with the prison therapist who supposedly assured him that he is not a sociopath. “You have morals,” she reportedly told him. “You have remorse.” After relating this conversation, Madoff was able to see himself in a better light. “I am a good person,” he told Fishman. We wonder whether this counts as “rehabilitation.”
Other inmates reportedly look up to Madoff because of the enormity of his crime. Fellow Butner Correctional Facility headliners Jonathan Pollard and “Vinny the Chin” Gigante have taken a back seat in the latest season of American Correctional Idol. Reading this bit of Madoff’s conversation reminded us of deeply troubling, and profoundly beautiful passages from the works of French novelist Jean Genet — whose own life sentence for recidivist convictions for theft was commuted after artists and writers from all over the world petitioned the French government.
In The Miracle of the Rose, Genet describes in vivid, angelic prose the effect on a group of inmates when Harcamone, the murder they all revere, but rarely glimpse, is paraded past their cells. The poetry arises as petty crooks, who would never have the nerve to commit murder, behold the grandeur of one who has taken human life and remains unrepentant. In this sense, too, the workaday soldiers grunting under their shields, sweating in their armor as they wait for an assault in which they will kill, or be killed, compare with the dreadful grandeur of a Menelaus, an Agamemnon or an Achilles.
Genet was never much of a success as a criminal, but he produced a body of work that places him in the upper ranks of Western literature in the 20th century. The humble footsoldier who retched and died on the plans of Troy had his personal tragedy recounted in The Iliad and serves to this day as a reminder of the dreadful consequence of the trope that Might Makes Right.
Seeking our own epic figures, contemporary popular culture has made a pathetic simulacrum of the Outsider as Hero. “Greed is good” is the banner cry of this phenomenon. Watching “Wall Street II, Money Never Sleeps” was a pathetic experience. The movie was idiotically conceived, atrociously written, largely miscast (Frank Langella — how are the mighty fall’n!) and generally dreadfully played. We were willing to set this aside for the opportunity to watch Michael Douglas re-embrace his scoundrel role, and there were glimmers of the old Douglas, the old Gekko. “Wall Street” was thrilling enough that we were willing to sit through a replay, even though we knew beforehand it would not live up to its ancestor. Madoff is, we submit, not worth a sequel. A cover story in a major popular magazine indicates either a weakness of our culture’s moral fiber or a dearth of journalistic imagination. More likely, a combination of both.
We Americans love our rascals. But we generally prefer them to have some redeeming feature that outlasts them. A railroad or a national bank, or even a hoard of swag taken in a daring robbery and never recovered. Bernie Madoff did nothing of the sort. He has neither personal characteristics nor a legacy of industry to survive him and shine through with the passage of time. Are we so starved for news today that we have to push cover stories about Madoff? Or is this what we call the Lookaway — the classical Wall Street misdirect? If you keep looking real hard at Bernie Madoff, you might forget what the rest of the folks out there are still up to.
On Wall Street one learns that the world is divided into Those Who Do, and Those Who Are Done Unto. This appears to be largely true throughout human history. What morphs a pathetic, horrible human being into a tragic figure is our tabloid culture’s willingness to accord mythic stature to a dirtbag. All we can say about the Bernie Madoff story is, we hope it will soon be forgotten — though we fear there will soon be a miniseries, a novelization, a Hollywood movie and, yes, a Broadway musical.
Bernie! Can’t you just see it?
The Greeks had their dreadful heroes who caused the deaths of thousands and destroyed empires. Wall Street may yet produce an Achilles, but it is not Madoff — we may yet see an Odysseus, but it is not Lloyd Blankfein. Meanwhile, America sits open-mouthed, riveted by the reality show as Washington and Wall Street destroy what is left of our legacy. We wait in vain for our Aeschylus.
The above haiku was written by Joseph Summer, composer and sometime opera impresario. He is not known for his poetry — indeed, he may have forgotten that he wrote these fractured lines. We cite this as evidence that you never know when something you wrote will resurface, nor in what context, nor with what consequences.
It was in this vein that the SEC issued guidance in July 2008 for public corporations’ use of social media. Among other concepts, the release acknowledges that corporate blogs may serve as disclosure for purposes of material non-public information practices, and led to the exemptions permitting corporations to announce their earnings by posting them on their corporate website, rather than issuing a press release.
They also opened a labyrinth of reporting, disclosure and retention issues for corporate investor relations departments and their legal counsel to ponder. We maintain that regulators keep their concept and interpretive releases deliberately vague, so that any behavior they like can subsequently be deemed to lie within the scope of some Rule or standard. We recognize that both regulators and industry participants view these as “unintended consequences” of overly broad regulatory language. Don’t kid yourselves. They intend it fully.
Here’s an unintended consequence of corporate use of social media. A guest column for the National Association of Corporate Directors’ blog (nacdonline.org, 20 January, “Social Media and Compliance — It’s All a Matter of XYA”) paints a scenario of how personal blogs, LinkedIn and Facebook pages of corporate employees can be deemed corporate communications, and how the interplay between employees with partial — or false — information, and seemingly innocent comment s on third party observations about a company can form a mosaic that would have regulator salivating.
One key point the blog raises is the low level of expertise around social media in most corporate IR departments — ranging from little to none — and the consequent low level of anything resembling surveillance or archiving that seems to be the norm “at literally hundreds of public companies studied.”
We mentioned last week that the SEC is asking registered advisers about their social media policies, and we have heard that examiners are writing up findings on firms that do not have written policies and documented procedures around the use of social media.
Now, looking at how this appears to be viewed in the world of public company reporting, we want to raise this to a higher level: we believe regulators will look, not only at what is being Facebooked, Linked, Tweeted, blogged and otherwise fired off into in the adviser’s own name, but they may consider employees’ own personal blogs, tweets and other bits and bytes to be fair game, if they detect communications that seem to relate to the industry and to the employees’ activities. In the world of public company reporting, this issue affects both management, and the boards of directors. In the world of financial firm, this goes right to the top of the org chart and, as with our captioned haiku, a little can say an awful lot.
The blog paints a convoluted — and completely believable — scenario which includes public company employees posting on the company’s behalf to the company’s own blog, Facebook and LinkedIn pages. In the scenario, a couple of employees also post on their personal social media, some with comments on their company, some with links to other people’s media comments or Wall Street analyst reports on their company. The SEC guidance would indicate that these personal postings are also attributable to the corporation. Firms that permit employees to post on firm-branded social media also need to be aware of the instantaneous nature of social media: it is not possible for the process to be both controlled, and spontaneous, and when more than one employee has access to social media, conflicting information is almost guaranteed to be conveyed.
Investment firms that do not have a strict policy about personal use of social media may be shocked to find out how much their employees are Tweeting, blogging, Facing, Linking etc-ing about where they work. A personal Tweet that contains an embedded link to a firm press release may find its way into an outside dialogue in an unintended way. As with their guidance for public company reporting, we think the SEC is likely to view this as the financial firm’s responsibility. A bar located in a highway rest stop can not say they did not promote drunk driving. If a firm does not completely prohibit behavior, they will be seen as condoning it. We believe firms may need to prohibit any discussion of firm business in personal communication — though based on historical practice, we believe the SEC will not require firms to prove that their employees do not put business related information in their personal social media postings. If you like, you can call that the Good News.
All The News That’s Fit To Quash
You don’t want to put your head in the ground, especially when the ground is trembling.
Thomas Jefferson famously remarked that universal literacy, combined with a free press, are fundamental to a free society. Repeated efforts by national governments to prevent the free flow of information about current events represent perhaps the most significant endorsement of his dictum. Sometimes, as in China and Iran, they do it by closing down the technology of information transmittal. Sometimes, as in Russia, they do it by murdering journalists. In America we stifle debate by appointing people with big resumes, and even bigger vocabularies, and then not taking seriously any point of view other than the official line. Witness the recent testimony, press conferences, and informal remarks from Fed Chairman Bernanke about the complete lack of inflationary pressures in the economy — and the pundits who line up at his side, claiming that further cuts in interest rates are just what the world needs. (We recognize that Chairman Bernanke comes from the world of academe, which may be why he seems to believe it is possible to work with negative numbers in the real world.)
When it comes to managing the flow of news, Latin American countries, understandably sensitive about being compared to recent military dictatorships, sometimes tread a fine line between outright banning of media, and more subtle pressures.
In Brazil, where the military governed from 1964 to 1985, press freedoms are tempered by laws that make it illegal to make fun of political candidates during an election. This law came under attack during last year’s campaign when comedians, gag writers and television and media personalities took to the streets to demonstrate in favor of free discourse, including free political satire. Under the law, passed in 1997, violating media outlets could be punished by fines of up to R$ 200,000 (US$120,000) and suspension of their broadcast license.
In the end, Brazil’s comedians had the last laugh when one of their own was elected to Congress. Popular over-the-top Sao Paulo songwriter and performer Francisco Everardo Oliveira Silva ran for congress on the PR republican party ticket and won with 1.3 million votes, the largest number of votes gained by any congressional candidate nationwide, and the second largest mandate in the history of Sao Paulo’s congressional voting.
Appearing in full clown regalia, Silva is famous under the stage name Tiririca (pronounced “Chee-ree-REE-ca”). He has written and recorded popular songs, some with notably inappropriate lyrics. (His “I’m Horny” was a record-setting hit.) When he ran for the position of Federal Deputy from Sao Paulo in last year’s elections, he appeared in campaign commercials in his clown costume and asked “What does a Federal Deputy do? I don’t know, but if you elect me, I’ll tell you!” and “Vote for me, because my family needs the money.”
Election officials originally sought to have his victory overturned, claiming that Tiririca is illiterate. There are photos showing his wife guiding his hand as he signed the literacy form required of all voters. Tiririca’s attorneys say he has a developmental disorder that interferes with his ability to write. After the election, Tiririca was photographed giving a fan an autograph unassisted, though we note that “X” can be written from any direction and still comes out looking the same.
To update this item: Tiririca announced that he supported President Rousseff’s budget measures. When it came to the vote last month, Tiririca pressed the wrong button, voting “NO” rather than “YES” for the government’s minimum wage proposal. No matter. The entire opposition in Brazil’s congress voted in favor of the government plan, giving Rousseff a major win in her first legislative contest. Tiririca sheepishly admitted he had gotten confused. It kind of takes the wind out of one’s sails when there is an actual clown in government.
Next door to Brazil is Argentina where, outside of the President and her hand-picked central banker, there were no clowns in evidence. President Cristina Kirchner has proven herself nothing if not resourceful at maintaining her nation’s delicate economic balance. Her most notable fiscal accomplishment to date is last year’s summary dismissal of the nation’s central banker, who refused to divert the country’s $48 billion in foreign exchange reserves to pay down government debt. Kirchner replaced him with a bank official more to her liking, though not so much to the liking of Argentina’s private sector economists, who believed the activist-interventionist position advocated by Kirchner and her new banker would reduce central bank autonomy, increase government spending, and still fail to come to grips with inflation.
Trying to come up with novel ways to silence the press, Kirchner last year hit on the notion of controlling, not the public’s access to the news, but the news’ availability to the public. In August, Kirchner sent a bill to Argentina’s congress proposing that the manufacturing and marketing of cellulose pulp was a matter of public interest. President Kirchner accused Argentina’s most powerful media conglomerate, Grupo Clarin, of colluding with the military dictatorship in the 1970’s to take control of the country’s only newsprint supplier, thereby establishing a newspaper monopoly. Kirchner said her objective was to guarantee open debate. A Clarin newspaper headline read “Who controls the pulp manufacturer, controls the written word,” to which President Kirchner said she could not agree more, accusing the Clarin group of creating a monopoly on free expression by selling newsprint to different publications at different prices.
Speaking of prices makes us think of Inflation, a topic that’s on everyone’s mind today — except, apparently, Fed Chairman Bernanke and his cronies. President Kirchner, who faces re-election in October, almost never lets the “I”-word pass her lips, saying government figures demonstrate the economy is in good shape. But independent economists say the government statistical office has been falsifying inflation figures at least since 2007. Many of the independents report inflation at more than twice the official rate, and they accuse the president of trying to silence them before the elections. Independent economic consulting firms are being investigated by the government statistical office. If the government finds that the publication of the independent statistics violates the law against deceptive business practices, independent firms could face fines of up to US$ 120,000.
Note to Bernanke: bet you never thought of that?
Speaking of Brazil, former President Lula has launched a new career as a public speaker. Addressing a conference of executives from Korean mobile device maker LG last week, Lula spoke for 40 minutes in Sao Paulo’s Transamerica Expo Center. Most of the talk was devoted to praising his own accomplishments during eight years in office. Lula’s fee was not disclosed, but professionals who organize such events estimate he would have been paid R$ 200,000 (US$ 120,000) for the privilege of publicly praising himself for the better part of an hour.
Note to labor economists: we praise public sector employees for taking below-market compensation in return for their years of public service. We suggest models should also amortize after-career benefits. If Bernie Madoff rates the cover of New York Magazine, how much of an advance will Tim Geithner receive when he writes his memoir?
Email me when ComplianceEdge publishes or recommends stories