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Who Do I Blame?

There was a lot of hype this week about the 'battle' between Jon Stewart (of the Daily Show) and Jim Cramer (of CNBC's Mad Money)Jon Stewart had been pointing out that CNBC was a cheerleader for Wall Street on the way up and failed to point out the risks that led to the bubble bursting.  In particular, he picked on Cramer for recommending that people buy Bear Stearns stock before the company went bust.  Like everyone, Stewart is looking for someone to blame for our economic mess.  He wasnt' saying the Cramer and CNBC were primarily responsible, but they had a chance to point out the risks and didn't.

You can watch the unedited interview here.  This is the link to part 1, and parts 2 and 3 follow.  I don't recall any previous Daily Show guest getting so much time.  And, although very interesting, this isn't as funny as most Daily Show interviews.

To Cramer's credit, he mostly agreed that CNBC could have done a much better job.  In today's 'who do I blame?' environment, I fully expected Cramer to blame someone else for missing the risks (he did point out that some CEOs lied to him).  There are so many people at fault in this economic mess -- Democrats, Republicans, Bernanke, Paulson, Phil Gramm, the SEC, the banks, Wall Street traders, AIG, and on and on.  We can't focus on whose fault it was, unless you can find people who broke the law.  Instead, we have to focus on how we are going to change to make sure it doesn't happen again.

We need a culture of transparency.  If we add regulations, they should be in the area of forcing people to open their books and show what they are holding and how it's valued.  I don't want to limit what kind of deals people can strike.  I just want all investment firms to have to show what they're holding.  If the level of risk is clear with an investment, you can judge whether the firm holding it has sufficient capital to weather that risk.

We also need a culture of responsibility.  The Boards of all the big banks and AIG should be holding the executive teams accountable for putting the company at risk.  If that's not an offense worthy of being fired, I don't know what is.  And yet, most of them are all still in place.  I guess they blamed someone else for the mess.  And, the shareholders should hold those directors responsible and consider voting them out at the next shareholder meeting.

Joe Nocera's column in today's New York Times covers the same subject.  He writes about the Madoff scandal and that the victims want some sort of compensation.  If Madoff can't come up with the money, some want a government bailout.  What a minute!

Surely Madoff was the master liar.  He fooled a lot of people, and managed to hold off or fool the SEC, too.  But, there are also many examples of people who actually tried to do some diligence on Madoff and walked away.  Quickly.  In fact, people's own greed is the reason why they were wiped out by Madoff.

I still tend to believe that many of his investors had an inkling that he was doing something wrong.  But, as long as it was working in their favor, they didn't ask questoins.  I am sure that none of them suspected that it was a gigantic fraud.  But, perhaps he was front-running the trades of his other customers to benefit these select customers.  In any event, it was 'don't ask, don't tell.'  As long as the returns (seemed) to keep coming, they left well enough alone.

But, that doesn't excuse people from giving Madoff most or all of their money.  Even the most inexperienced investor understands that you have to diversify.  Why?  Because you don't know for sure what investments will perform well in the future.  And, you don't want to lose too much if one of your investments is a total failure.  So, as Nocera points out, the victims who were wiped out because they gave Madoff all of their money, can only blame themselves.  Surely Madoff is at fault for losing the money they gave him.  But, they are at fault for giving Madoff all of their money.  And, it was only greed that led them to do so.  They assigned zero risk to the Madoff investment, which justified giving him everything.  Shame on them.

I've made plenty of mistakes in my investment career.  I have been wrong on technology, on markets, and on people.  But, in each case I was the one who gathered the inputs and made the decision.  So, I have no one to blame but myself.  And, I wish that we could develop a culture where we stop trying to blame others for our decisions and try to understand how we got it wrong ourselves.


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I have long had a theory that fraud, like intelligence and some other traits, is randomly distributed in the population. The SEC and others seem to think, and behave, as if fraud was the special provenance of small time brokers, small time investment bankers and microcap companies. As a result, it is relatively easy for the big time guys to get away with big time fraud for a long time -- because the SEC isn't looking. I believe the efficient market hypothesis is in part responsible for this attitude. (Basically, the theory goes, if you are big your are being followed by all kinds of investors and analysts and whatever there is to know will come out and be reflected in your stock price. For this reason, the SEC gives bigger companies more leeway in their filing obligations (such as favorable incorporation by reference rules etc.)than it give small companies.) I don't have a clue how many Enrons, Madoff's, Adelphia's et. al. it will take to change the behavior of the regulators. To your diversification point, at some point you have to come to the conclusion that the regulators will never learn and you have to diversify your investments and your accounts to mitigate fraud risk.

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