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Cat Portrait: Vinson

Krugman on Madoff

There is a lovely column from Paul Krugman this morning: The Madoff Economy. Here's my favorite part:

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

About ten years ago, I spent a while investing in the stock market. And while, in the end, I think I did make a profit before spending the money on my kids and on computer equipment and such, I noticed one very interesting thing. I had an eye for a certain kind of stock profitability chart. And while it yielded a number of nice jumps in share prices, it also yielded a whole lot of shareholder lawsuit mailings. While many of the companies I invested in were doing good work, a number of them (such as Enron) were cooking the books. Once I realized that the charts I had an eye for had a disproportionate chance of involving cases of fraud, I got much less interested in researching investments and spent my money on karate lessons and summer camp and computers instead.

Madoff isn't the only fraud around, but reading about his investors' misadventures makes me feel fortunate that I lost so little (in comparison to his victims) to the frauds I bought into.