Geneen Roth Interview

Geneen Roth, author of When Food Is Love (and many other books), and a friend of the family, has a podcast of interview she gave after losing nearly everything to the Bernie Madoff fraud. She also has a nice piece in the Huffington Post on the same topic.

It's very touching to me how mature, responsible, yet real are her reactions to losing so much money. The same goes for my mom and my stepdad, my stepmom, and so many of the people I know who lost all or nearly all.

A Funny Madoff Video

This video is by a family friend, Matt Weinstein, who, together with his wife Geneen Roth, is part of the circle of family friends that includes my family that invested with Madoff and lost everything. (I wrote about it in an earlier post)

My Family Was Madoff-ed

Investing with Bernie Madoff was, for the most part, a family tradition. By now nearly everyone knows that he was running a massive Ponzi scheme, paying out investors "returns" of 12% a year from the money coming in from new investors.

My step-mom, Saphira Linden, my dad's third ex-wife, had been investing with Madoff since the late 1980s. She believed in the fund and Madoff himself so strongly that she urged me to invest in it, even in my grad student days, when I was taking on large amounts of student loan debt. She gave me a gift once, $1000 that was invested with Madoff. She only asked that I add $100 to $200 per month to it.

The account was through a family friend named Richard Glantz, who got lots of people involved with Madoff. The pitch was always the same: this guy is a financial genius, and he doesn't take on new clients, but I can get you in. Ritchie was what later became known as a "bundler". It doesn't seem like he knew what was going on, but at the same time, it doesn't seem like he asked too many questions about where the money was coming from. This is the pattern all the way down the line: nobody asked too many questions. Why bother? The returns were there, the money was there. Until it wasn't.

My mother and stepfather, Ken Macher, were also heavily involved; they had all their assets with Madoff, and as Ken moved into semi-retirement, and then full-retirement, they lived off their returns. (My stepdad is also a talented musician, and he recently released his first album, which I highly recommend)

In the summer of 2006, I got worried about a financial crash, so much so that I gathered the family and close family friends together and delivered a truly apocalyptic lecture and slideshow about the risks to the financial system: spiraling consumer debt, corporate debt, and government debt, massive trade deficits, the weakness of the US dollar, etc. I recommended holding all or a substantial portion of assets in gold. I predicted the stock market would take a major hit. (I was thinking it would be on the order of 90% or more; which I still believe will occur). There was a lively discussion, and one of the questions was, how do we hold assets in gold when we're living off our returns from Madoff, which are steady and reliable, 10-12% a year, every year?

I said buy gold and sell a bit of it each month to live on. The gold price was about $550 an ounce back then. Any money put in gold would've nearly doubled, even considering the hit that gold took during the fall of 2008, when it fell to $700 from over $1000. But now gold is back, pushing against the $950 mark. No doubt we'll look back on the days when gold was below $1000 with awe, wishing we could go back in time and buy more at those prices. (Compare the performance of gold to the Dow, which went from about 11,000 in the summer of 2006 to over 14,000 before heading down to its current level of about 8500; over this period, a 23% decline)

The results of my slideshow were as much as I could've hoped: my family and friends took it very seriously, and began to explore the reasons for owning gold, immersing themselves in the economic literature which argued such a financial crash was a strong possibility, and in the end, they shifted 5-10% of their assets into gold and silver. (Ritchie wasn't at that lecture. I wonder what he would've said, or if it would've influenced him in any way.)

I never criticized Madoff directly; to do so was the question the financial acumen of the family, substituting my own. Each time I asked questions about what his strategy was, where the returns came from, it was a blank. I said that the investment strategies of the past would probably not work in the future, because what's coming is a new paradigm. I had no idea the whole thing was a fraud. I just knew I didn't like the secrecy. I had taken out the money my stepmom gave me (I never added anything to it).

My father and stepmom never got involved with Madoff. My dad never believed in the returns. He had worked in the mutual fund industry, and didn't really believe that the market could be beaten over the long term.

My mom and my stepdad, having lost everything except the gold (a small percentage), were philosophical. My mom said, "it's exciting to think about living more sustainably." They began growing vegetables and composting, and are exploring all kinds of different options.

When the news hit, back in December of 2008, I felt a lot of regret. Why hadn't I tried harder to learn more about Madoff? Why hadn't I done more? I should've been more forceful.

I'm proud of how my family has responded to the crisis. It's been hard, but they have used it as an opportunity to look within, to grow, to turn the trash into compost, out of which comes something alive and new. May we all learn to do the same.

Bernanke on Financial Innovation

While there are legitimate financial innovations, e.g. the stock market, options, shorting stocks - many financial innovations are merely more sophisticated ways to gamble or rip someone off.

Fed chair Ben Bernanke offers an interesting argument about three financial innovations that he considers worthwhile and important. These are: credit cards, mortgages, and bank overdrafts.

There is a certain wolf-in-sheep's-clothing aspect to Bernanke's speech.

He says, in effect, gosh, some of these financial innovations haven't gone all that well. It's very challenging for regulators, because on the one hand, we don't want to stifle innovation, because that makes all our lives better. On the other hand, sometimes things get out of hand, we ought to consider how these innovations will react when they are "stressed", and recognize that regulation may be needed. Who could argue with these mild-mannered banalities?

Yet if we step back and ask the question, why should the Fed have a role to play in preventing people from getting fleeced? That doesn't seem like the Fed's role. People get ripped off all the time. It seems to me that a better defense against that than the Fed could ever be is this device called the internet. It sure seems like a great way to spread information to other consumers not to do things that end up being a huge rip-off.

And why would the Fed place restrictions on financial activity at all? We already have laws against fraud. What else is needed?

We have to recognize that the Fed has an impossible task: to prevent a house of cards from collapsing. The fractional reserve system is fundamentally insolvent. This is what creates a danger to financial stability in the first place. The reason that somebody not paying their mortgage may mean I lose my job is because banks are running the biggest fraud in history, an epic pyramid scheme that makes Bernie Madoff seem insignificant. And the job of the Fed is to oversee this fraud, to make sure that we keep it up, to continue to shovel an ever-increasing share of society's surplus value into the coffers of the banks. This is why it strikes me as rather disingenuous for Ben Bernanke to worry that complex mortgage products may not ultimately help the consumer. Talk about dodging the real issue.