Allen Stanford, Ponzi Operator

Patrick Kidd says that Allen Stanford is "another victim of the biggest economic crisis since the 1930s"; Joe Wiesenthal says that nobody is accusing Stanford of being another Ponzi scheme. So before this meme takes root, let's be clear about this: Stanford is not a victim, he's a crook, just like Madoff. And yes he was running a Ponzi scheme. Just like Madoff. The only real difference was that Madoff's returns were variable, while Stanford's were fixed.

I'm not sure why Joe is so convinced that Stanford had a genuine investment operation:

Even the SEC concedes that the money was actually invested. What's more, it's not clear that the truth is that different from what the company was advertising.
They always admitted on their website that client investments went towards alternative investments. So it's very possible that assets they thought were completely liquid have now become frozen...
It's easy to imagine that Stanford's returns exceeded what they've paid out over the past several years, during which private equity and real estate vastly outperformed the market...
Bottom line is that the company's fraud doesn't appear to be nearly as baldfaced as Madoff's and Stanford's clients may end up with more than pennies on the dollar, assuming any of it can be found.

A couple of factual points here: firstly, the SEC is "conceding" nothing. All they're saying is that the overwhelming majority of Stanford's funds disappeared into a "black box" controlled by Stanford and his CFO, James Davis. Now, given that it's hard to simply obliterate $8 billion, that money had to go somewhere, and I daresay some of it wound up being "invested" in some form or another. But there's absolutely no evidence to suggest that Stanford's assets ever exceeded its liabilities.

What's more, there's quite a lot of evidence to suggest that a lot of Stanford's "investments" were in the kind of micro-cap stocks beloved of pump-and-dump operators. That's not investing in something liquid and then seeing it freeze up, it's gambling, and it's often illegal.

And while it's possible to imagine that Stanford's returns exceeded what they paid out, that's largely a function of the fact that they weren't paying out much if anything. Once you've invested in Stanford, you're very unlikely to redeem your CD unless you really need the money: after all, you trust the bank (otherwise you wouldn't have invested there in the first place), and you can get much higher interest there than you can anywhere else.

Meanwhile, it's impossible to imagine that Stanford's returns exceeded what Stanford claimed those returns to be. As the sole shareholder of Stanford International Bank, Stanford had every incentive to maximize, rather than downplay, his reported returns: it was those returns which gave his investors confidence that he could pay them back.

So right now I have no reason to believe that Stanford wasn't just as baldfaced a liar as Madoff. And I frankly don't have much hope that the money in Stanford's "black box" is going to be found -- not unless Stanford himself gives it up. A Ponzi scheme is any scheme where you promise high returns which are actually fictional. Ponzi schemes work so long as there are net inflows, and they fail as soon as you get net outflows. That description fits Stanford to a T.

Comments

[Stewie:]

It is simply flabbergasting that anyone could write an article defending this guy.

Feb 18 06:17 AM

[Leftfield:]

I know we can split hairs, and this guy is a crook, but, I see little fundamental difference between Stanford and our financial and political leaders. They may keep the game going longer still, though, and they have cover of government power, explicit and implicit. And they've conned the voters so far. Same end result eventually.

Feb 18 07:41 AM

[raytayzmd:]

,,,truly, the REAL crooks are the investment bankers who concocted every kind of oddball derivative imaginable in order to have something that they could make a commission from selling...so now we have mountains of these things that few seem capable of either valuing or even understanding!...


On Feb 18 07:41 AM Leftfield wrote:

> I know we can split hairs, and this guy is a crook, but, I see little
> fundamental difference between Stanford and our financial and political
> leaders. They may keep the game going longer still, though, and they
> have cover of government power, explicit and implicit. And they've
> conned the voters so far. Same end result eventually.

Feb 18 12:28 PM

[matthutch:]

"truly, the REAL crooks are the investment bankers who concocted every kind of oddball derivative imaginable in order to have something that they could make a commission from selling"

how can you call a person who does this a crook? do you ever see infomercials or pass the home shopping network on the way to another station? i see a bunch of pretty oddball stuff for sell, all to help them "make a commission [of sorts] from selling". back in their respective days, cars, radios, tvs, personal computers, cell phones, etc were all fairly oddball such that many people never expected them to catch on commercially. just b/c you don't (and it turns out they and many people who bought them) understand them, doesn't mean they are crooks for coming up with them, even as we look back and see there were problems.

Feb 18 12:37 PM

[matthutch:]

again, seeing you misunderstood my post, "concocting" something, even if it doesn't work, isn't fraud. people need to buy it before there is a problem. even selling something that doesn't work as well as you thought it would isn't fraud. how many products have all of us bought over the years that broke or didn't work right? was it fraud in every instance? of course not.

by the same notion, not understanding the risks, even if you came up with the product, isn't fraud. there was fraud at the loan origination level. sure. but that requires no derivatives. securitization has been around for awhile and wasn't invented by bankers. tell me what these fraudulent derivatives were.

and no, looking at something post hoc that didn't work doesn't mean it was fraud. fraud requires deception, and the broad use of these derivatives show no indication of fraud. it shows ignorance and stupidity. if it *was* fraud, meaning the bankers knew the risks and misrepresented them to their clients, they forgot to tell the guys on the next floor, b/c they fell for it hook line and sinker from the bankers at competing firms. if they knew about it and deceived those to whom they sold the derivatives, why are bear, lehman, merrill no longer with us and so many other firms on government life support? it's ludicrous to say they fully knew the risks and lied.

and i'll add that the compensation structure is screwed up as well. as long as compensation is measured in relatively small annual increments and the risks of a series of decisions can build up over two or three years, we'll see this again. people will take risks if the consequences of those risks occur a few years into the future and they won't be held financially responsible for assuming those risks (ie forfeited bonuses, etc). enron, for example, had similar problems, where they had people getting paid for future/expected profitability as they brought in deals with no recourse if the deals weren't as profitable as expected.

Feb 18 02:36 PM

[pockyclips ...:]

$ 500 million of TARP money should be used to build Gitmo-like prisons for all these financial crooks as a lesson to others.

Feb 18 03:59 PM

[secmaven:]

Nobody put a gun to the head of any investor who bought into Stanford or Madoff, or the sellers of CDO's and other fancy financial products.

Feb 18 04:07 PM

[ROLEXDAYTONA:]

all wall street runs like a ponzi scam, money itself is a scam.
i think the barter system is the most fair one.

Feb 18 05:00 PM

[bthomas:]

Please explain how CDO's laden with high risk mortgages garner AAA ratings. No amount of accounting subterfuge with complex statistical models can make it true . It is crooked.



On Feb 18 12:37 PM matthutch wrote:

> "truly, the REAL crooks are the investment bankers who concocted
> every kind of oddball derivative imaginable in order to have something
> that they could make a commission from selling"
>
> how can you call a person who does this a crook? do you ever see
> infomercials or pass the home shopping network on the way to another
> station? i see a bunch of pretty oddball stuff for sell, all to help
> them "make a commission [of sorts] from selling". back in their respective
> days, cars, radios, tvs, personal computers, cell phones, etc were
> all fairly oddball such that many people never expected them to catch
> on commercially. just b/c you don't (and it turns out they and many
> people who bought them) understand them, doesn't mean they are crooks
> for coming up with them, even as we look back and see there were
> problems.

Feb 18 07:53 PM

[matthutch:]

"Please explain how CDO's laden with high risk mortgages garner AAA ratings. No amount of accounting subterfuge with complex statistical models can make it true . It is crooked."

first of all, the ratings agencies are a federally-imposed oligopoly. that whole system needs to be overhauled.

second, my comment was in response to the idea that people who "concocted every kind of derivative" are crooks. again, coming up with product ideas is not a crime, nor is it crooked. if that were true, all the people coming up with crazy ideas that never turn into commercial successes would be filling up our prisons. instead, misrepresenting something that is known to be incorrect is fraud. i think you'll have a hard time proving that the rating agencies (who are not investment bankers, by the way, who were the object of the original post) acted in bad faith in putting together their models. i'll assume you know how the cdo's and cmo's were structured and how they justified the ratings. just like everyone else who bought mortgage-backed securities, they underestimated the risk. it's easy to see what the problem was ex post, but it as easy to see them ex ante. of course, there were some who did, but as the saying goes, economists have predicted nine of the last three recessions.

this isn't the first time in the history of mankind it's happened either. it wouldn't be right to say that every time someone underestimates risk and tries to sell something based on that idea they were being deceptive.

Feb 18 08:54 PM

[Chuck:]

According to Reuters, tinyurl.com/ccbj2z the government is going to allow victims of 'Ponzi Schemes' to deduct up to 95% of their losses.

So, why should I not join in an investment that I think will unravel in the next 5 to 10 years? I get the profit by getting in early, double my money, hope I get out early, and if not, I can deduct the FULL amount that they said my account is worth on D-Day minus 1.

So If I put in 1 million, make a million over 7 years, take out 1 million, let the rest ride, loose it, then I can still deduct 1 million from my taxes in the out years.
Sounds like Win-Win to me? Thanks to the Gummint for saving me from myself?

Mar 17 02:59 PM