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Where's the Bezzle?

As the gruesome details of the Madoff Ponzi scheme unfold, several other cases of broker fraud and insider trading have also made the headlines. Well know Texas Internet entrepreneur Mark Cuban was charged with insider trading in November; on December 18th federal prosecutors accused Mark Devlin, a Barclays employee, of helping run a $4.8 million insider-trading ring based on information illegally obtained from his wife. This is certainly the tip of the iceberg; there will be more to come.

Discovery and public punishment of thieves, embezzlers and financiers whose greed crossed the line into criminality is a necessary part of the recovery and rebuilding process. The responsibility, resources and effectiveness of the oversight agencies will come under scrutiny, and the stringent regulatory environment just over the horizon will be a factor in an overall return of confidence. But we may be outrunning the news. We are likely to see a motley parade of rogues in the coming months, though none, we hope, the scale of Madoff and Co.

A simpler and perhaps more elegant explanation is offered by John Kenneth Gailbraith, in his book, “The Great Crash of 1929”. In it... he discusses a phenomena of the prosperous 1920’s, massive cases of personal and corporate embezzlement that only came to light after the markets crashed. Embezzlement is a unique crime in that even as it enriches the embezzler, while undiscovered, it makes the embezzled feel no poorer. Thus at any given time there is a sum of money, the bezzle, or the amount of undiscovered theft, that exists in our calculations of wealth and is, in a sense, double counted. According to Gailbraith, the prosperity of great boom times makes us all a little less likely to count and monitor as carefully, and audits and controls a little less stringent then they would be when things are not so good. This, of course unravels when markets and economies unravel.

Steve Weber
Registered Investment Advisor, Principal
The Bedminster Group

 

TAGGED: Investments
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