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Ponzi Schemes of Passion

israel
 
I'm sure I've mentioned in earlier posts the notorious Bernie Madoff, who ran Bernard L. Madoff Investment Securities LLC from the day he started it up in 1960 until the day he surrendered to authorities in December 2008.  

Madoff’s crime, in common parlance, is that he was running a “Ponzi scheme.” This is a fraud in which early depositors are told their money has been invested in some wonderfully productive/reliable way, and they are receiving a share of the profits, when in fact what they are  receiving are phony paper returns, from the deposits of other suckers.
In Madoff’s case, the Ponzi scheme seems to have been adopted in a very cold-blooded way and operated for decades before it finally became unsustainable.

I mention him here because I've been giving some thought to the fact that sometimes the development of a Ponzi scheme is not quite so cold-blooded. Sometimes an asset manager will bumble into running a Ponzi scheme by degrees. [I am not, by the way, offering this as an excuse or even as a mitigation of the offense. It is fraudulent wherever it happens. I make the comment as an empirical observation about criminal psychology.]
Samuel Israel III, one of the principals of Bayou, (pictured above, inhabiting the planet) was from an old Louisiana family that had long been successful in the trading associated with the port of New Orleans. Although Sam the Third wanted to make his fortune in the hedge fund world around New York, he seems to have retained his faith that some gene-based trading prowess inherited from earlier Israels would help him through. And the fund’s name, “Bayou,” speaks of this faith.

But trading prowess appears not to be gene-based. Within two years after the firm got its start in 1996, it was clear that the results would disappoint investors, and would not inspired new arrivals. Thus, Israel and the others started faking the numbers at the end of 1998.

Such fakery, once indulged at all, becomes a very slippery and very steep slope. One might fudge the numbers slightly in one quarter in the hope/expectation that one’s earnings the next quarter will be sufficient to make it all good so nobody will ever notice, telling one’s self it’s a harmless bit of borrowing from a piggy bank. But if the next quarter itself is disappointing as well then the fudging has to get larger, and the since by this time the trading came reek of desperation the likelihood of ever getting the big legitimate wins that will allow one to feed the looted piggy banks drops precipitously.

But 2004 there was no actual trading underway at Bayou at all anymore. What remained was only a Ponzi scheme, inadvertently created. In 2005 the pretense fell apart.
I'm afraid there's no point, so I'm just going to letthis trail off now....
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