Petters and Madoff and Bears, Oh My!

Treasured Readers,

I’m so tired of being asked about “what it’s like to lead the Hill Center, talking about ethics in this era of Tom Petters and Bernie Madoff.” First, I refuse to let our time be defined by scumbaggery, alleged or confirmed. Second, the allegations against these guys aren’t ethically interesting. If those allegations are true – and I still believe in the presumption of innocence, especially in the era of the continuous news cycle – then those guys are thieves. Each is alleged to be a very efficient, effective, and ambitious thief, but they were hardly breaking new ground, morally or commercially.

In terms of ethics, their investor-victims are a little more interesting.   In deference to the presumption of innocence, let us consider an imaginary but otherwise extremely effective Ponzi-style thief. Let’s call him T.B. Petoff.   People invest with him because he promises big returns, and for a long time, he seems to deliver them. He networks to investors, or often enough, they network to him, seeking the returns that their friends seem to be realizing.

One day, someone comes to Petoff with a great idea. “T.B,” he might whisper conspiratorially, “I’ve got a great idea.” 

At first Petoff might brush him off, being ever aware of the power of mystique. Then, he might listen.   “Waddaya got? You’ve got three minutes of my time.” Even scumbag executives like a good “elevator speech.”

“I’m going to organize all the schoolyard bullies in America, and get into their action. I’ll take 20% of the lunch money they steal – I mean, receive -  from weaker kids – you know, suckers. In exchange, I’ll give them protection and online training on the latest intimidation tactics. Maybe offer financial services to the bigger operators. We’ll have a Nintendo version out in no time.”

A guy like Petoff doesn’t see a moral problem here. He sees operational challenges, and he raises them – in order to sweeten his side of a financing deal.  Then he sells bonds or stock.  Better yet: he securitizes future earnings from the bullies, and establishes trading on the new instruments.   More important, he goes on recruiting new investors, using the proceeds to pay off the older ones, to the extent that he must. 

What about his investors? Aren’t they queasy? Most never question how he delivers his returns. Those who do get a disdainful look and a buyout offer. When pressed, Petoff creates a brochure about “online services to support young entrepreneurs.”   That’s all that anyone needs to hear.

Back to the real world, such as it is.

If the allegations are true, enormous crimes of theft took place. I am not blaming the victims, nor am I suggesting that their inattention, either moral or practical, mitigates the heinous nature of the crimes. However, if there are ethical lessons to be learned here, they certainly relate to the obligation of investors to know what their money is doing, when, how, and with whom. This is especially true of those who invest other people’s money, and never more true for those who invest money that has been contributed for charitable purposes.    There’s probably enough blame – and enough pain – to go around.

We'll talk about credit default swaps some other time.