Hubris and Improbity

A Ponzi scheme is a swindle which offers unusually high returns, with early investors paid off with money from later investors.

Other than being the founder of Bernard L. Madoff Investment Securities LLC, the defendant is also a former chairman of Nasdaq. According to a New York Times / Reuters report, the U.S. Securities and Exchange Commission found that virtually all the assets of Madoff's company had disappeared. Another report says that thousands, possibly tens of thousands of investors now face serious to devastating losses.

To say that such kind of scam is nothing new may sound insensitive to the victims. But the fact is that every now and then a big one comes up and shakes up the investment community somewhat, and then once the dust settles, it will be business as usual all over again.

From the Enron, Worldcom, dotcom scam, to as recent as the sub-prime mortgage derivatives chicanery, intentional fraud on the part of those who were in a position to take investors for a ride plays a key part in all cases. One may assign blame to investors for greed on their part too in such cases, but fraudsters who knowingly challenge the law to prey on gullible investors should be made to take the heat, both legally and socially. After all, we wouldn't want to tell our children that greed-driven improbity that causes harm to others is something acceptable in our societies.

As Bennetts' story goes, rapacious hedge fund managers had been charging investors obscene management fees of up to 50 percent, which not only helped to inflate their ego (which in turn spurred them to take on unnecessary high risks that finally led to their downfall) but also allowed them to wallow in conspicuous consumption and outright decadence. As the author suggests, hubris is like an incurable virus that never really dies out – it simply finds a new host every time.

"And yet for every highflier who is chastened, another would-be mogul pops up elsewhere, convinced he's smart enough to game the system. 'On the day the House voted against the financial rescue plan,' the portfolio manager says, 'I was in Shanghai, where there's this huge building boom and all these Chinese Donald Trumps running around, all of them like: My penis is bigger than yours.'"

Like improbity, hubris goes hand-in-hand with greed. When US$34,000-a-night hotel rooms and 25,000-pound-sterling lunches and dinners become the norm for self-proclaimed smart brains in the hedge fund business, nothing would seem impossible for them. Nothing, except self-destruction. The sad fact is that once hubris takes hold, it usually will not let go until it kills its host, taking many others down with it.

History never stops repeating itself and perhaps no regulations and laws are ever really adequate or effective in weeding out these human weaknesses. The common lesson that can be drawn from the above stories is the importance of critical thinking on the part of an average investor as a defense against fraud and deceit. As the cliché goes: "If something sounds too good to be true, it must be." Besides that, the best we can hope for is that societies are willing to do more to instill moral lessons in the younger generation through parental and school guidance and teachings.

Related reading: Anatomy of Greed