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All these rules failed and the scheme collapsed. Law was exiled and died in poverty. The French state’s finances stayed weak, helping trigger the 1789 revolution. The idea of a “fiat” currency was perceived to be the essence of recklessness for another two centuries and the link between money and gold was not fully abandoned until the 1970s, when the Bretton Woods system expired. Of course, the parallels with today are not exact. Law’s system took just four years to collapse; today’s fiat money regime has been running for nearly 40 years. The growth in money supply has been less excessive this time. Technological change and the entry of China into the world economy have generated growth rates beyond the dreams of 18th-century man. But one lesson from Law’s sorry tale endures: attempts to maintain asset prices above their fundamental value are eventually doomed to failure. Economist.com/blogs/buttonwood Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. -111-
The Madoff affair A sidekick sings Aug 13th 2009 | NEW YORK From The Economist print edition Frank DiPascali will help prosecutors understand the Madoff fraud HOW did Bernie do it? With an old IBM computer, oodles of chutzpah and, it seems, help from multiple sidekicks. On August 11th Frank DiPascali, the senior lieutenant in Bernard Madoff’s bogus fundmanagement business, admitted to fraud and was arrested. His willingness to confess and, apparently, to co-operate—in contrast to Mr Madoff, who went to jail insisting he acted alone—is a coup for prosecutors. They will waste no time going after the unidentified “other people” with whom Mr DiPascali says he and his boss perpetrated the scam. Mr DiPascali was the main point of contact for investors, who ranged from Jewish charities to film moguls. He also oversaw the mechanics of the vast Ponzi scheme. It purported to be making steady, double-digit returns trading options on a share index. In fact, client funds sat in an account at JPMorgan and were withdrawn only to meet redemptions or to be parked in Treasuries and the like. This was “nothing more than a slush fund”, according to a complaint against Mr DiPascali by the Securities and Exchange Commission. Though there was no actual trading, the conspirators were far from idle. They cooked up phantom trading records, client confirmations and account statements to corroborate the fictitious investment strategy. They made thousands of wire transfers between the firm’s London and New York offices to make it look like it was earning commissions from real transactions. Hindsight is a wonderful thing when cooking the books. The complaint says that Mr DiPascali “picked advantageous historical prices, often near the lows, to create the appearance of a profit once the purported trade was booked.” A single computer was programmed to allocate trades, pro rata, to individual accounts. Some of the ruses bordered on comical. Worried that returns were suspiciously high, Mr Madoff occasionally instructed Mr DiPascali to book fake trades designed to lose money. They even created a fake computer platform so that, should outsiders spring a surprise visit, they could be shown “real-time” trading. Absurd, perhaps, but not amateurish. The two made full use of their deep understanding of the workings and oversight of stockmarkets to pull the wool over inspectors’ eyes. They created a list of counterparties that were unlikely to be checked on: European firms for American regulators, and vice versa. They pretended to exit their options-trading strategy and shift into Treasuries before the end of each quarter, to avoid having their fishy positions disclosed in investors’ filings. To hide the scale of the operation, which had thousands of accounts, they devised a subset of 10-25 “special” accounts, which they presented as their full universe of business. Why regulators swallowed this, when Mr Madoff was widely known to have had hundreds of clients, is a mystery. Who else was involved? Prosecutors have filed charges against the firm’s accountant, who denies them. They are looking to build cases against certain investors and “feeder” funds that funnelled their money to Mr Madoff. But the most fertile territory could be the co-workers whose help would have been needed to handle the programming and the mounds of paperwork. In court, Mr DiPascali lamented becoming “loyal to a terrible, terrible fault”. In that, he was surely not alone. Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. -112-
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Search Requires subscription Econom
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Politics this week Aug 13th 2009 Fr
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Business this week Aug 13th 2009 Fr
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KAL's cartoon Aug 13th 2009 From Th
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Asia’s rebound has several causes
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democratic region. But Brazil’s l
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World trade and commercial aircraft
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Galileo, four centuries on As impor
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Correction: America's sex laws Aug
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SIR - You mentioned the slaughter d
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Professor of the history of art Sch
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Their arrival coincides with, and i
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and integrated well.) Peru has beco
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Clean energy in the Midwest Greenin
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The economics of natural gas Drowni
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meetings on health reform planned f
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Drought in Texas Not a cloud Aug 13
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Rich animals The dog will have his
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twice the national average. But it
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international institutions and the
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Energy v environment in Canada Bomb
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further sanctions. Yet it is doubtf
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egistered voters are frauds. Yet Mr
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Australia's opposition His own wors
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Taiwan's typhoon Taiwan's disastrou
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Banyan The Burmese road to ruin Aug
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Fatah and the Palestinians Fresh fa
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Iran and human rights The crackdown
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Security in Iraq A return to the ba
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Ethiopia's resilient prime minister
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America and Africa Hillary (not Bil
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Page 148 and 149: Markets Aug 13th 2009 From The Econ
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