Sept. 29 (Bloomberg) -- David Sarna’s “History of Greed” exposes the swinish side of finance. Will it also, like Gordon Gekko, inspire impressionable college kids to get up to no good?
The mere thought may repulse Sarna, a management consultant and former high-tech executive who remains passionate about the uses and abuses of markets.
“Capitalism is not about stealing, swindling or screwing the little guy,” he writes in this uneven yet handy compendium of frauds and scams. “It is about the individual improving his or her own situation by producing something of worth that improves the lives of others.”
We can only hope that his text doesn’t succumb to the law of unintended consequences. Witness how Oliver Stone’s assault on barbarians-at-the-gate capitalism in the original “Wall Street” turned many an MBA student into a trader or investment banker.
Contrary to his title, Sarna’s book isn’t a history. The great financial scandals of old -- John Law’s Mississippi Company and the South Sea Bubble, for instance -- are just briefly summarized in one chapter. In place of a continuous chronicle, Sarna offers up a series of sometimes dense case studies on fraud in its myriad forms, especially those practiced in the U.S. in recent decades.
Drawing on court records, news reports and his own unpleasant run-ins with flim-flam artists, Sarna takes us on a tour of the sleazy back alleys of markets. He lucidly explains how some unscrupulous operators manipulate shell companies while others pump up stocks they later dump at inflated prices. If you’re bent on becoming the next Bernie Madoff, these profiles in greed form a veritable guidebook on how to build your own financial weapon of mass destruction.
The book rehashes many familiar stories, yet the diversity of the scams still boggles the mind: One ring of people has been charged with fraud in a scheme to steal millions of dollars by falsely claiming refunds on fraudulent income-tax filings, Sarna says. Other swindles look as complex as Swiss timepieces: They tick through layers of stock promoters, short sellers, day traders and money launderers.
The book’s cover sports a pink piggy with a con man’s face. The account climaxes with the orgy of Ponzi schemes whose magnitude and duration grew exponentially during the housing bubble. Many targeted members of their own religious groups, preying on the trust found among Orthodox Jews, for example.
Each Ponzi claims to have his own secret sauce for outperforming the market, be it in metals arbitrage or currency trading. Madoff famously attributed his too-good-to-be-true returns to a strategy known as a split-strike conversion.
Ponzi schemes flourish during booms -- when investors are less likely to tap their savings -- and collapse during busts, when redemptions outpace new investments. That’s what happened during the meltdown. How many investors might have been saved from ruin if Alan Greenspan had dared to prick the dot-com and housing bubbles during his tenure at the Federal Reserve?
Sarna derides venture capitalists as “vulture capitalists” and tends to lump short sellers together with crooks. He does acknowledge that short selling -- a bet that prices will fall -- is “a legitimate investment strategy.” Yet he attempts to tar a pioneer of the practice, Isaac le Maire.
Le Maire, a former Dutch East India Company director, famously shorted the monopoly’s stock in 1609. He lands in the rogue’s gallery here because he sold more shares than he owned, “making him the first naked short seller.”
Sarna glides past the reality that the company’s directors were abusing investors: They milked their positions for private benefit, failed to pay dividends and withheld information about financial results. They were, in today’s parlance, destroying shareholder value, as Paul Frentrop has explained in his book, “A History of Corporate Governance.”
For those tempted to try out the scurrilous techniques described in these pages, Sarna offers a warning -- a whole chapter of punishments meted out to convicted financial felons.
Fraudster Sholam Weiss, for one, was sentenced to 845 years in prison, easily topping Madoff’s 150 years. Now incarcerated as inmate 32610-054 in U.S. Penitentiary-Canaan in Pennsylvania, Weiss has a projected release date of Nov. 23, 2754.
“By way of comparison, the punishment for murder can be as little as 10 years in some jurisdictions,” Sarna writes.
“History of Greed: Financial Fraud From Tulip Mania to Bernie Madoff” is from Wiley (398 pages, $29.95, 19.99 pounds, 24 euros). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)
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