You don't have to work too hard to come up with candidates for the worst financial story of the past year.
The Bernie Madoff story is certainly bad enough. Here you have a person who used to run one of the most important financial exchanges in the world. His firm reported investment returns to his customers that were not realistic. An educated whistleblower investigated and presented credible evidence to the SEC that indicated these returns could not possibly have been generated by the assets Madoff was reporting to his customers, yet the SEC ignored the warning signs time and again over a period of years.
Madoff was finally ratted out by a member of his own family, and he admitted his firm was a Ponzi scheme that may have defrauded investors of $50 billion. When the SEC finally started investigating, they found no evidence that the firm had bought a single security in the past 10 years. That's pretty bad.
Then there is the issue of the federal government's spending. President Obama just revealed his first budget proposal. It could result in nearly $4 trillion of federal spending with a projected budget deficit of $1.75 trillion. So, we have the richest country on earth whose government has promised its citizens a package of services and benefits that is nearly double what this country's citizenry is willing to support with their taxes for those services and benefits. Does that make any sense?
Then you have major financial firms that have come to the government for unprecedented bailouts. The government responded by loaning staggering sums of money to these companies. Now, only a few months later, the value of those investments has dropped precipitously, and in some cases, it may not even be enough to keep the firms out of bankruptcy. Waste of that magnitude would usually qualify for the worst financial story of the year.
But, that's just the beginning. We have our country's gross domestic product dropping at the fastest pace in 27 years. We have major stock market indices that have dropped by about 50 percent in less than 18 months. We have home prices falling faster than any of us have seen in our lifetime. We could even be looking at the end of the existence of all American-owned automobile companies -- in a country that does more driving than any other.
Even in the insurance industry, we have seen the No. 1 carrier in the industry, AIG, effectively nationalized to stave off failure. We have seen a financial environment so crazy that while several insurance carriers have been taken over by their state insurance departments, several other annuity carriers have stopped writing business altogether because they were overwhelmed by high sales volume.
And this list of highlights (or lowlights) just scratches the surface.
So why, given all this, does the fraud perpetrated by Stanford Financial strike me as the most bothersome financial story of the year? After all, the Stanford Financial fraud has hardly had the financial impact of any of these other stories. Perhaps it is because this story, above all the others, shows how far we have collectively gone off-track in our thinking.
I had never heard of Stanford Financial until just recently. A few years ago, Stanford Financial started advertising heavily on professional golf telecasts. They started a charity program called "Eagles for St. Jude" where the company promised to pay $1,000 to St. Jude Children's Research Hospital in Memphis for every eagle made on the men's professional golf tour. St. Jude Children's Research Hospital is a nationally-known facility that treats children with severe illnesses at no cost to the patient's family. An eagle is a score of two under par on a golf hole. Pro golfers collectively make more than 1,000 eagles per year.
Besides the tie-in to one of the most respected charities in the country, Stanford Financial also has endorsement deals with several celebrity pro golfers, including Vijay Singh, who was ranked No. 1 in the world just a few years ago.
I was curious as to how I could not have heard previously of Stanford Financial since it now appeared to be so prominent. I went to the company's Web site and learned that it caters to high-net-worth individuals and that its chairman and CEO, Allen Stanford, had been knighted by a British Commonwealth nation. While I just viewed the information with curiosity and did not try to figure out how to put money with Stanford Financial, I now understand that about 30,000 people did. And, as we now know, it turns out that Stanford Financial was a giant fraud.
How did we become so greedy as to chase things consistently that are too good to be true? How did our government become so negligent that Ponzi schemes and frauds of this nature can continue undiscovered for years? How did a seemingly respectable individual like Allen Stanford become so brazen in his fraud as to work to make himself a household name through extensive advertising and sponsorship of pro sporting events?
I presume he thought he would never get caught.
Just a few months ago, as the SEC was considering Rule 151A, state insurance commissioners petitioned the SEC saying that, "We adequately regulate insurance companies." The SEC effectively laughed in their faces. Now, it has become quite clear that the state insurance regulators have done a dramatically better job than the SEC. How is that even possible in our society, when so much of our wealth is tied up with financial firms and so much of our income goes to support the federal government, that a fraud of this nature could happen?
All of this, to me, makes the Stanford Financial story the most disturbing story of the past year. Which story struck you as the most significant?
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