Whilst the Global financial crisis gets into full swing some of the world’s biggest banks have revealed that they have been victims of a fraud which has lost $50bn. Bernard Madoff, former chairman of Nasdaq, the US technology exchange, set up his Investment Securities nearly half a century ago. He also ran a separate hedge fund business for which he has been charged with fraud in what is being described as one of the biggest-ever cases.
According to the papers filled with US Attorney’s Bernard Madoff told at least three employees on the 10th December 2009 that the hedge fund business – which served up to 25 clients and had $17.1bn under management – was a fraud and had been insolvent for years. He said he was “finished,” that he had “absolutely nothing” and “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.”
This fraud raises once again a number of pertinent questions with regards to Capitalism and the free market:
1. This fraud has once again brought to the forefront the role greed played throughout the global financial crisis – it is now becoming an all too common occurrence. Bernard Madoff was a well respected financial consultant, he has earned a handsome income for nearly 50 years through his investments, but like Wall Street banks this just wasn’t enough. Wall Street banks made large risky bets and lent money to people with little ability to repay such loans all in the name of profits, caring little about the repercussions or the people they were all defrauding. Bernard Madoff ran a Ponzi scheme, which is similar to pyramid schemes, where investors are promised very high returns on their investment, while in reality early investors are paid with money collected from later investors. Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund – the whole fund was one big lie.
2. Bernard Madoff managed to convince many of the world’s biggest banks to part with their money with his elaborate scheme. The Royal Bank of Scotland in the UK has already announced it could potentially lose about £400 million from the alleged fraud. HSBC could reportedly lose up to £668million. Spain’s largest bank, Santander, which also owns the UK High Street banks Abbey, Alliance & Leicester and Bradford & Bingley, said one of its funds had $3.1bn invested in the firm run by Bernard Madoff. France’s BNP Paribas estimated its exposure to be more than $460 million. The French bank, Natixis, a subsidiary of Caisse d’Epargne and Banque Populaire, said it could potentially lose up to 450 million euros ($605m). Brittan’s largest hedge fund manager, Man, said it had invested about $360m in the fraud.
3. This fraud points to a systemic failure of regulation. Only a few months ago when some of the Wall Street titans were all on their knees, better and greater regulation was consistently being presented as solutions. But Bernard Madoff’s fraud is the most basic issue regulatory policy is meant to protect individuals from. All financial systems around the world have such regulation in place and as a result the fraud should never have reached the level it did. Just to put this fraud into perspective it is more than the economies of Luxemburg and Qatar.
4. Regulation like many capitalist economic ideas sounds very nice when studied in text books, but in the real world such ideas are neither applicable and can be easily manipulated. Capitalism has a history of economic crises and no amount of regulation has been able to halt the destruction caused by the continued boom, bust, depression, crash and fraud. No amount of regulation can halt the greed shown by Bernard Madoff and Wall Street banks. The only way to stop such occurrences would be to vet every transaction carried out in the financial industry which itself is not feasible. The call for regulation has always been a get out clause for free market ideologues when the free market crashes.
5. The hedge fund industry is worth over $1.5 trillion, the derivatives industry which they engage primarily in is worth over $500 trillion. As private, very lightly regulated partnerships, hedge funds are not obliged to disclose their activities to third parties. As a result they are very secretive about their activities and have until now managed to halt any attempt to regulate the industry. During the big falls in the world’s financial markets in September 2008 hedge funds were responsible for making large bets for the collapse of many banks across the world. They spread rumours about the financial situation of many banks which would lead to a collapse in the share price. With little oversight hedge funds have had a field day during the turmoil.
6. The current fraud has also shown for the all the glitz and glamour of the financial markets in essence is dominated by derivatives which is nothing other than a big casino were participants bet on what will happen in the real world. One can actually make money from the failure of companies and even earthquakes if the bet is made at the right time.
The fraud of Bernard Madoff has shown that like the large corporations individuals also have the Capitalist bug for big profits and whatever cost. The questions that need to be asked is after the number of banks that have collapsed, been forced to merge and all the firms that received bailouts where are the free market ideologues who argued Capitalism is the best we have.