How Greed Moves MarketsBy
History of Greed:
Financial Fraud from Tulip Mania to Bernie Madoff
By David E.Y. Sarna
(Wiley, 416 pages, $29.95)
After pleading guilty to defrauding his clients of billions, Bernie Madoff told investigators how he became a crook in the first place. Apparently, the Ponzi artist lamented, he'd suffered embarrassing losses with a European bank in the early '90s. Instead of confessing this to his clients and blemishing his reputation, Madoff began generating fake returns. Once he started, he explained, it was just too hard to stop. "I wish they caught me six years ago, eight years ago," he sighed.
There's a name for this kind of embarrassment. One $65 billion Ponzi scheme later, the word "Madoff" translates into "greed" in any number of languages. So much so that most readers won't need to scan the subtitle of David E.Y. Sarna's History of Greed: Financial Fraud from Tulip Mania to Bernie Madoff to guess which noteworthy figure dominates its pages. And although Sarna, a former high-tech executive who maintains the popular blog greedwatcher.com, spends a quarter of his book dissecting the Madoff scandal, the most important lessons come from greed's distant past.
Sarna begins his history with the creation of naked short-selling at the world's first stock exchange in Amsterdam. In 1609, Dutch merchant Isaac Le Maire assembled a secret society to place bets that Holland's Dutch East India Company would tumble. How was he so sure? He wasn't, really, but he was trying to start a French charter company to compete with it. Once the news of the bets against the company got out, its shares plummeted. Le Maire made a killing—not only shorting the stock but also doing it with shares he hadn't borrowed. When the government caught on, it banned short-selling altogether—a fitting start to a historically divisive practice.
Think AOL broke ground using inflated stock to snap up Time Warner (TWX) in 2000? In the 18th century, Scottish financier John Law persuaded the French government to grant him exclusive fur and mineral trading rights in its New World territories. This allowed Law to sell shares in his Mississippi Company and extend his tentacles to Africa, China, and East India. Law was the toast of France, until shares collapsed and the Scotsman, in full drag, fled for his life.
As Sarna shows, financial villains have weaved through history for centuries, but none actually causes booms or busts. The real threat is that, as the economy has become global, greed has been democratized. Any speculator with a bank account now has the chance to make a quick buck. Colorful characters like Le Maire have given way to inelegant crooks like "Crazy Eddie" Antar, the megalomaniac electronic chain store owner who went to jail in 1997 for bilking his company. He gets his own chapter here. The author is similarly fascinated with Lou Pearlman, the former manager of the Backstreet Boys, who's now serving 25 years in prison for a Ponzi scheme involving phony airline and travel businesses.
Sarna parses his given subject with the distinction between "immoral" and "criminal" greed. While the immoral variety is bad, he writes, the higher-proof stuff is what sparks economic calamities like the Great Recession. He explains our current predicament by declaring, somewhat clumsily, "Greedy financial promoters, investment bankers, and their cohorts and all-too-willing accomplices were all allowed to run unchecked."
Alas, if only Sarna had read his own history. In 1630s Holland, he writes, chimney sweeps and noblemen alike obsessively bought tulips as the flower's price soared. When the music stopped, nearly all lost their ruffled shirts. Four centuries later, millions of Americans from various tax brackets invested their life savings in homes they couldn't afford and financial transactions they didn't understand. Sarna believes that by studying Le Maire and Madoff we can prevent the next Allen Stanford—and subsequent economic catastrophes. However, if history proves anything, these fraudsters aren't the real problem.
Yet Sarna has good reason to believe the human foibles that have wreaked financial havoc on us all these years can be corrected. History of Greed's book jacket neglects to mention that he pleaded guilty in 2006 to conspiring to commit securities fraud and served nine months in jail. Had the author interviewed himself, he might have gained valuable insight into what sparks already wealthy people to take risks—even illegal ones—to enhance their coffers. When I asked Sarna why he omitted such a significant biographical detail, he confessed that his wife asked him to. Like Bernie, she was simply embarrassed.