Trillion Dollar Meltdown

Yesterday I finished listening to the audio verson of a powerful book by Charles R. Morris explaining the recent collapse of the financial markets called Trillion Dollar Meltdown. Published in late 2007, the book predicted all of the disastrous events of the past eighteen months and how they came to be. The scope and clarity of its many insights and anecdotes are worth pondering more deeply. I will get to those shortly.

Morris begins by giving an overview of the past six decades from the perspective of wealth creation, business expanse and retraction, the market drivers during this period and the political context of it all. You really cannot understand particulars without an overall context and often Americans forget this simple fact. What is happening today is an outcome of decisions made over a period of decades, not days, weeks or months.

According to one review on Amazon the book is written toward university level students, and it may be heady for some but even if you have a marginal understanding of economics and markets, you will glean plenty in my opinion.

I remember in high school my father invited a representative from the Dreyfus Fund come to our Bridgewater home to help teach me how to invest my savings. The fellow had stock market charts with all kinds of data, along with prospectuses and documents designed to show me the power of investing my money in the market. Well, I took $500 out of the bank and opened an account. I never saw that money again.

This is not an argument against investing. It is simply a statement that there's no such thing as a sure thing. This period in which I salted a few hundred dollars away was, according to Morris, the tail end of the Liberal/Keynsian era in economics. The resulting collapse of the markets in the 70's, with a simultaneous inflation so that your real holdings in dollars was about 75% less than they had previously been worth, culminated in Carter's disastrous presidency. (This is not to say Carter was not or is not a good man.)

It could be argued that half the debacle of the Carter era (double digit inflation, double digit interest) was due to the circumstances he inherited. In the end, it is during desperate times that a sea change can be set in motion. Thus was Reaganomics born, a new period of deregulation as Chicago-school economics gave the boot to Keynes.

Milton Friedman's ideas carried the day and the market climbed higher (with a few hiccups along the way) than anyone could have even dreamed. But, and it is an important part of the equation, part of the reason markets climbed so far is that the enormous size of the Baby Boom generation was becoming older now and, staring at retirement with a little more earnestness, they began to save more. This resulted in increased stock valuations. It also gave unscrupulous money managers increasing quantities of cash to play with, which was leveraged in extremis.

Morris shared how computers helped companies create financial instruments (bonds, etc.) that were so complicated even the people who sold them did not understand them. It was an amazing run. And when variables shifted, some companies had no idea how to determine their own true valuations. Some of these disappeared completely.

Add to this the increased debt loads and the absurdly high real estate valuations and you have a witch's brew of disaster in the making.

Though Morris published the book before Obama was elected, he accurately predicted that the pendulum is about the swing the other way. It certainly wasn't good to see 401K retirement plans shrink in value by 40% while the men who managed them made quarter million dollar a year salaries on average.

There are ideologies at war in the economic realm of which the average person usually has the most simplistic understanding. And this particular author lays some heavy blame on the Alan Greenspan camp. Morris gives the impression that he is in love with Paul Volcker.

Funny thing how every time things are good, the reigning president takes credit, and when things are bad the reigning president says he inherited it. And how politicians are ever trying to re-assure us that things are not as bad as they seem.

Not everyone who reviewed this book on Amazon liked it. Some found it biased against free market economics. One called it "A Coherent Rant." But I still found it raising good questions. He compared the complexity of the markets to Yertle the Turtle, in which everything is so interdependent that when you modify one variable it can have a serious impact on the stability of the whole.

My great-grandfather was scammed late in life by a fellow who was going to invest great-grandpa's life savings. The man lost everything and had his heart torn out. It's a scary thing to work hard and save and do all the right things only to have it plucked away with no legal recourse. This tragic family event led to my mother being more careful with her retirement assets. I myself took a measure of comfort in knowing (or believing) that the U.S. investment markets were the most regulated and reliable in the world, unlike many nations where there are no disclosure requirements or where banks can close and without warning take all your money saved (Russia) or where the government can devalue their currency by 50% overnight (Mexico 1981).

So how is it that a man like Bernie Madoff, former head of the NASDAQ stock exchange can make off with 50 billion dollars of other peoples' money right there under the big spotlights of our regulators? How about all the funds that invested in Enron because of the high returns and the approving nods of auditor Arthur Anderson?

Morris predicted a financial mess and he predicted right. What many of us wish to know is what happens next? Yesterday's paper carries a feature story with newly elected Senator Al Franken claiming the economy will "come back strong." I want to know how that will happen and why? Unemployment keeps rising. Our investment in bailouts and overseas military enterprises continues unabated.

I am especially curious what book being published today will be the one that most accurately portrayed the next two years? Maybe we'll find out in five. If sooner, you can be sure I'll write about it here.

The Human Cost of Madoff Investment Scandal

When the story broke last week, one could sense it would have far reaching consequences, perhaps on the scale of a Jonestown or major earthquake in terms of subsequent suffering. The former head of the Nasdaq Stock Exchange had allegedly built a Ponzi-style scheme into a fifty billion dollar black hole of other peoples’ money.

Many images come to mind when I read of this seventy year old scammer with so much credibility that he could lead armies of people to part with their hard earned cash. I mean, this Bernard Madoff was a respected man in the New York financial scene. He was trusted and looked up to.

Next I read this story of the fund manager who slit his wrists after losing more than a billion dollars of his clients’ money. Then I understood something. Madoff did not have to meet the eyeballs of the very human faces whose hearts would be crushed by this shameful crime. It would be the investment brokers and fund managers who took it on the chin. Those who still had a conscience, like Rene-Thierry Magon de la Villehuchet, suffered pain and humiliation. In his shame, as a result of failing to protect the best interests of those who trusted him, he took his life.

Investor who lost big to Madoff kills himself
Tuesday December 23, 8:45 pm ET
By Adam Goldman and Tom Hays, Associated Press Writers

Investor who lost more than $1 billion of client money in Madoff scandal commits suicide
NEW YORK (AP) -- A fund manager who lost more than $1 billion of his clients' money to Bernard Madoff was discovered dead Tuesday after committing suicide at his Manhattan office, marking a grim turn in a scandal that has left investors around the world in financial ruin.

Yesterday I spoke on the phone with a New York publisher who had aunts and uncles who were among those fleeced masses. She said they were devastated. They lost their life savings and it triggered a memory from my own family's history.

My grandmother grew up in West Virginia. Her father ran the hardware store in Cairo, a small rural town east of Parkersburg. At some point in her early teens, her father suffered losses in the business and the six children were separated to live with various cousins while he strove to get the family back on its feet. The splintered family was reunited in about a year, a considerable achievement requiring much labor and sacrifice.

After the kids were grown, and he had spent a lifetime saving for retirement, he was persuaded that rather than keeping his money in the bank he should invest it. The investment broker into whose hands he gave his life savings would take it to Philadelphia and the family would be secure for life on the yields or interest or whatever tale was told. I do not know those specific details. What I know is that the man never returned nor was ever heard from again.

When the truth dawned on him that he'd lost everything, Winfield Scott McGregor was devastated. It is said that till the day he died he was a hollowed out man who spent much of his time in a rocking chair on the porch, staring off into the distance. He never regained the spring in his step, never bounced back. He was a broken man.

The Madoff swindle might well be history's biggest, fifty billion dollars. A lot of those betrayed were common folk who trusted the investment community. Many will fight this in court, hoping to retain something of their dignity if not what is rightfully theirs. But many others will be broken, overcome with resignation, adrift on a roiling sea of sorrows. This is the human cost of the Madoff scandal.