Mark McHugh

About This Hole in My Foot…

In Open Thread on Tuesday, August 10, 2010 at 6:38 pm

In case you don’t know, the original version of Candy from Strangers contained a bunch of erroneous numbers. In preparing the piece, I got confused between the Fed flow of funds flow table (F.209) and the Fed flow of funds levels table (L.209). The Treasury Bulletin clearly states to use L209 and I used F.209, which contains quarterly data, annualized. Dividing the changes by four does not give you the same numbers you get from using simple subtraction on table L.209. Close, in most cases, (the household sector being a glaring exception), but not the same. I screwed up and I’m really sorry.

I’ve issued a corrected version of the piece, which I can only hope gets as far as the original did, and I certainly wouldn’t blame anyone who’s angry with me. The thought that I’ve added to the deluge of poorly-prepared information in the world embarrasses me beyond words.

All that said, I still stand 100% behind the core of the piece. The point was we really don’t know who’s buying US Treasuries these days. If it’s China, the insolvent banks, or the Fed itself, they are buying them anonymously and that should be sounding alarms. Other explanations are even more terrifying, but the notion that ordinary individuals are responsible for the purchases is laughable. None of that changes. 

Bobble-head Nation

Less than two years ago it was discovered that the World’s largest hedge fund was a complete and total fraud (in fact,  it wasn’t even registered as a hedge fund). Bernie Madoff turned himself in; he was never caught. For almost fifty years, he was treated like a magic unicorn on Wall Street. Sure, there were tons of articles about how obvious the fraud was after Bernie turned himself in and to all those “journalists,” I say thanks for nothing!  You suck! 

Only one person was convinced of Madoff’s true nature and had the stones to say so in no uncertain terms, Harry Markopolos. Everyone else involved was either pretending to understand that which they clearly did not (bobble-heads), or assisting Madoff by ignoring him (if you read Harry’s complaint to the SEC, it’s not much of a stretch to put Hank Paulson in the latter group).  His book title says it all, No One Would Listen.

Harry never saw the “magic”….

The Madoff scam ended in tears for his investors, but has somehow become little more than an over-used punchline to most of us. Not me, though. It is a testament to how corrupt we’ve let our system become, how little we care about fixing it, and how likely rampant theft is to continue. The very same people who allowed Madoff to thrive remain in power, undisgraced by their failure and in some cases, promoted for it.

As horrific as the SEC’s treatment of the Madoff scandal was, FINRA’s was even worse. Yet on January 22, 2009. Barack Obama appointed FINRA president Mary Schapiro to head the SEC. This was the first time I felt like Obama had hocked a loogie in my eye (if I were smarter, I’d have realized that is was actually the second loogie – Geithner being the first). I think she was picked for the job because of her inability to spot a Ponzi scheme (that is the closest thing she has to an achievement). FYI – Bernie has referred to Schapiro as a “dear friend.”

The lesson I take away from the Harry Markopolos story is how dangerous it is when people who should be asking questions pretend to understand. I can ask questions and I’m no bobble-head. That’s why I write. And while I would never criticize Harry, I wish that I had had the chance to hear his story before Madoff was forced to confess. In short, I wish he had been a blogger. 

I’m no Harry Markopolos and everybody knows that. At best, I’m the kid pretending to be Spider-man with red underpants on his head. You’re supposed to laugh, but that doesn’t mean these stories have no relevance, or that you know the answers to the questions I ask. 

So while I’m embarrassed by the stupid mistake I made in preparing “Candy from Strangers,” I’m not embarrassed for asking the question, “Who exactly is buying all these treasuries?” and I still don’t know the answer. Do you?

  1. […] Candy from Strangers (Corrected) In Open Thread on Tuesday, August 10, 2010 at 5:33 pm  Author’s note: Numbers in the original published version of this piece were derived from fed table F.209 not L.209 (in other words, the wrong table). I sincerely apologize to all for the error. And I hope the fact that I’m a dunce won’t distract you from issues I was trying to address. A more detailed description of the error can be found here. […]

  2. Do you think the only reason Madoff went down is not spreading the stolen wealth enough to the politicians, because there have been many other questionable “behaviors” in Wall Street that seem to be accepted.

    After all, the whistleblower had been onto him for years…

  3. I don’t think that’s the only reason, Gomp. If I recall correctly, Madoff received a $7 Billion redemption and couldn’t meet it. That’s when he turned himself in (what do you think would have happened if he didn’t?).

    Taking “gifts” and looking the other way is one thing, but coughing up vast amounts of cash to keep a fraud going is another.

    Ignoring whistleblowers has been standard operating procedure with the SEC for as long as I’ve been around the markets. I will attest to that personally (I tried to turn Angelo Mozilo in in early 2007). It’s sad. I won’t bother with them ever again, unless they clean house, and by that I mean fire just about everybody there. They won’t, so reporting to them is pointless.

    I think going straight to the public makes a lot more sense these days. Something is very wrong in the treasury market, I’m sure of it. You can’t assume someone is minding the store, they’re not.

    Like it or not, believe it or not, the blogosphere is middle class America’s last line of defense.

  4. Without that 7 billion dollar redemption coming in, do you think his scheme would still be running, in lieu of the blinders the SEC seems to wear?

  5. I think he would still be in business and most people would still be pretending to understand the “split-strike conversion” (the name of the methdod Madoff told clients he used).

  6. That is truly pathetic isn’t it. It seems like because people who should care don’t really care, it opens society to predation, and that predation is a protected and glorified sport…

  7. Good point Gompers, and pathetic as it is maybe it should be expected. Our eyes are still forward facing… predation may have grown more complicated since our days of clubbing women and dragging them back to our mortgage free man-caves, but it has always been protected. Now that protection hides behind pseudo-sophisticated curtains of deceit.

  8. mark,
    saw your post on ZeroHedge. i’m sure DB would be interested — does he know about? anyhow, awesome work. you could turn your blog over to asking serious questions of people whose careers have been made by NOT answering serious questions (obviously I mean Geithner).

  9. James,

    Yes DB knows. The “questions” post was not intended to be published, I was soliciting opinion from ZH staff (it was pretty sloppy as submitted). We kicked it around at DB and either DB or you suggested I go right to the source. I’m working on the final version now.

    DB is always welcome to anything on this blog. He’s the best friend I’ve got in the blogosphere. He linked to “Giant Leaps”, when others refused so there’s a huge bond of gratitude there. I still maintain it’s the best thing I’ve ever written and people don’t understand its relevance….yet.

    I like the ZH format a lot and the way ZH actively follows the money on a day by day basis. I also like the way it’s changed from a trader’s site to content that openly discusses why this so-called market isn’t worth trading.

    My blog is a canvas to me, where I am free to paint whatever I like. Its popularity (or lack therof) is of little concern to me (of course, I’ve still got an ego, but I try to keep it in check as much as possible). I’m not crazy about the idea of defining it any further.

    But there is a lack of focus in the blogosphere – a lack of narrative development. Take for example; it’s a sprawling, never-ending mess that lacks any coherence. I’ve thought of constructing posts like “Stupid Shit Bernanke has said” or “10 reasons to hate Mary Schapiro” as a reference point for others. Certainly a depository for serious questions would be something to consider….

    But I keep cycling back to Homer Simpson’s campaign slogan, “Can’t someone else do it?”

  10. I had never seen Giant Leaps before. Brilliant. Really. I loved it. The part about the Eisenhower dollar is really cool. I study literature, so I find that kind of symbolic coincidence really satisfying — and, as you’ve shown, it’s also pretty meaningful.

  11. Thanks!

    Yeah, that’s my Mona-Lisa and it has yet to get 150 page views….

  12. Great title, too.

  13. Thanks again, James.

    For the way I try to write, that’s probably the closest I’ll ever get to perfection. I really struggled writing it too, but when I was done I was really happy about how it came out.

  14. You have done well Mark, unfortunately the sheep choose to graze, do not let it get you down.

    Every now and then one will wake up and see the light, those are the important ones.

    The rest unfortunately will be heading to market.

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