Flaming the Victims
Two recent items have me wondering about overinvesting in victim claims: (1) Christine Hurt’s new article on the implications of the Madoff scandal, Evil has a new name, and (2) Janet Tavakoli’s claim (if the link doesn’t work, this is also squibbed in the margin) that financial institutions caused the mortgage mess, the “biggest fraud in history.” Both tell important—and perhaps accurate—stories about massive frauds that certainly produced victims. But both overlook an obvious point: Not all victims are created equal. As Pogo said, “we’ve seen the enemy, and he is us.”
When Madoff first hit, I heard two interesting things from (reasonably) reliable sources which complicate the victim calculus. First, one person who claimed to know a number of Madoff investors, said that many believed that Madoff was able to guarantee outsized returns because of his access to inside information. This, of course, is a kind of securities fraud. So, my friend said, “everyone knew Madoff was committing fraud—they just thought it was a different fraud.” You have to wonder how innocent investors were if, as Hurt reports, they were sworn to secrecy when they gave him their money.
I realize I will likely be flamed by holocaust survivors for insensitivity to their losses. To the extent they were innocent, of course, I have nothing but sympathy for them. The point, however, is that, as Madoff’s bankruptcy trustee is learning, there is little moral clarity in some of these claims.
Second, we should not overstate the severity of Madoff’s punishment. A lingering question I had about the case was why he turned himself in at all. Given the cash to which he had access, it seems implausible that he could not have fled to some remote, pleasant place without an extradition treaty. Why didn’t he?
The answer other friends on Wall Street gave was this: He hadn’t simply screwed the Jews–he also screwed the Russian Mafia/Mossad/Name your other secret, powerful organization. In other words, he believed—perhaps quite rationally—that spending the rest of his life in a federal prison—and taking the fall for his family—were vastly preferable to being murdered by victims who were most likely to take matters into their own hands.
As for Tavakoli’s claims about the mortgage mess: It is alluring to say that the entire real estate bubble was the fault of the investment banks. While they were clearly major malefactors, there were failures at every point, as I argued briefly here, from origination to foreclosure. Tavakoli speaks as if the banks were the sole source of the problem.
But this massive failure cannot really be called a fraud in a conventional sense, and certainly not attributable to the banks alone. It is something else—I am not sure what—because too many people had the wrong (or right) state of mind. For example, fraud generally requires some kind of intent to mislead by act or omission. But, so far as we can tell, many of the serious risks associated with mortgages being sold into securitizations were disclosed. Even the Magnetar Trade—surely the most brazen manipulation we know of so far—was effectively revealed to investors, who all knew from the selling documents that it was possible that the sponsor was going to short the mortgage-backed securities it was selling.
I think all of this reflects a culture of denial and entitlement with which we have yet to come to grips. Republicans genuinely believe, after having nearly destroyed the economy, that they are entitled to reclaim the wreck. GM’s bondholders—professional investors who for years have used bankruptcy to force others to absorb losses—don’t like it when the same is done to them.
This may simply reflect the inevitable costs of a society that lives in the illusion that it is governed by the “rule of law.” The rule of law requires rights, and we all think we have lots of them—including the rights both to attempt to screw each other and to compensation if we are unsuccessful in that attempt.