Economy  
comments_image Comments

Bernie Madoff's Shady Schemes Should Have Set off Alarms Long Ago

One ponzi scheme after another is exposed on Wall Street, and so far all we've heard is: "Who could have known?"
 
 
Share
 
 
 
 

See if this sounds familiar:

An ambitious and risky undertaking carried out with hubris, and featuring the weeding out of anyone who raises alarm bells, little-to-no transparency, an oversight system in which no central authority is accountable, and the deliberate manufacturing of ambiguity and complexity so that if -- when -- it all falls to pieces, the excuse "who could have known?" can be used….

Is it Iraq? Fannie Mae? Citigroup? Bernie Madoff?

The correct answer is: all of the above.

When you look at the elements that were crucial to the creation of each of these debacles, it's amazing how much in common they all have. And not just in how they began but in how they ended: with those responsible being amazed at what happened, because…who could have known? Well, to paraphrase James Inhofe, I'm amazed at the amazement.

In fact, when historians look for a name that sums up the Bush II years, they could do worse than calling them The "Who Could Have Known?" Era.

Each of the disasters listed above was entirely predictable. And, indeed, was predicted. But those who rang the alarm bells were aggressively ignored, which is why it's important that we not let those responsible get away with the "Who Could Have Known?" excuse.

Let's start with Iraq -- specifically the reconstruction of Iraq. This weekend the New York Times got its hands on the unpublished 513-page federal history of the reconstruction. It's not pretty. As the Times puts it: it was "an effort crippled before the invasion by Pentagon planners who were hostile to the idea of rebuilding a foreign country, and then molded into a $100 billion failure by bureaucratic turf wars, spiraling violence and ignorance of the basic elements of Iraqi society and infrastructure." As a result, almost six years and $117 billion later, many essential services are only now reaching pre-war levels.

The report quotes Colin Powell on how the Pentagon, to cover up its failures, "kept inventing numbers of Iraqi security forces [that had reached readiness] -- the number would jump 20,000 a week! 'We now have 80,000, we now have 100,000, we now have 120,000.' "

Hmm, making up numbers to realize a short-term gain, but which end up making the inevitable long-term reckoning much worse? Sounds a lot like what was happening at Citigroup at around the same time.

In late 2002, Charles Prince was put in charge of the company's corporate and investment bank. The banking giant was already knee deep in toxic paper and aggressively looking the other way.

He was so successful at averting his eyes that when, five years later, as Wall Street began to feel the initial shocks of the mortgage meltdown, he was told that the bank owned $43 billion in mortgage-related assets -- it was the first he'd heard of it. Isn't that something he should have known? Or did he prefer not knowing?

Prince had plenty of help ignoring the obvious, particularly from Robert Rubin. According to a former Citigroup executive quoted in the long New York Times analysis of Citi's downfall, despite ascending to the top of the Citi food chain, Prince "didn't know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin."

When it all came tumbling down, both Rubin and Prince portrayed themselves as helpless victims of circumstance, because…Who Could Have Known?

"I've thought a lot about that," Rubin said when asked if he made mistakes at Citigroup. "I honestly don't know. In hindsight, there are a lot of things we'd do differently. But in the context of the facts as I knew them and my role, I'm inclined to think probably not."

 
See more stories tagged with: