The Book of the Week is “Serpent on the Rock” by Kurt Eichenwald, published in 1995.
This volume contained an egregious error. It appeared in an anecdote about a member of the Belzberg family, Canadian Orthodox-Jews. In the late 1970’s, Belzberg was acquiring a large quantity of stock of the retail brokerage named Bache, so one of Bache’s executives met with him, to find out his intentions.
As the meeting ended, the author wrote that Belzberg shook hands with the Bache executive. That was obviously a fictionalized detail of the story, because Orthodox Jews do not shake hands with, or touch others, except for close family members.
Anyway, in the second half of the 1970’s, tax shelters became trendy in the securities industry. In the 1980’s, Bache (with a shady reputation in the first place) sold tax shelters in the form of limited partnerships of various kinds (oil and real estate were the most common) and reaped fat fees of as much as 8%. On a bunch of them, printed marketing communications illegally contained material omissions and misstatements.
Bache’s clients were clearly unsophisticated, because anyone with a minimal knowledge of finance should have seen that the objectives of the investment were contradictory: “income, growth and safety” (!)
Brokers dispensed with the printed prospectuses (which contained disclaimers required by law), and focused on verbally selling the money-losing financial instruments to their clients. They lied about the projected financial returns (14 to 15%, when they were pretty sure there would actually be disastrous losses). They called the investments “safe”– a word that should NEVER be used on Wall Street. The proper lingo should be “low-risk” and only when that’s the truth. The limited partnerships were “high-risk.”
One man, Jim Darr, became particularly powerful in the Direct Investment Group, and engaged in a boatload of excessively greedy, unethical activities and white-collar crimes that made him fabulously wealthy. In 1983, he flew all the way to a small thrift bank in Arkansas to get a home loan of $1.8 million to purchase a mansion in Connecticut. At that time, there were plenty of local lenders he could have approached.
Another sleazy character, Clifton Harrison, after pulling his last act of unbelievable thievery, gave the excuse, “I’ve just been borrowing some money against future fees.” Read the book to learn more about the various individuals who shaped Bache’s history, and what became of them.
ENDNOTE: The above shenanigans happens every few years in the United States. The line from the movie “That Thing You Do” describes it perfectly: A very common tale, boys, a very common tale. Here is a brief elaboration of the last forty years:
Steps of the American Politico-Economic Cycle
- An extremely pro-business president comes to power.
- Excessive deregulation ensues.
- Shady financial instruments and money-making vehicles spike in popularity (tax shelters, savings and loan associations, goodwill valuations, junk bonds, derivatives, dot-com stocks, stock-options-repricing, subprime mortgages, payday lenders, for-profit colleges, the PACE program, etc., etc., etc.)
- Out-of-control greed ensues.
- Profiteers of all political persuasions dispense with ethical behavior.
- The bubble bursts. A financial crash ensues.
- Lawsuit time!
- The impoverishment rate accelerates for the middle class and the poor.
- Election time. “It’s the economy, stupid.” Whether true or not (usually not!), campaign-propaganda convinces voters that the president is solely responsible for their personal financial situations.
- The reelected president, or one from the same party, continues some of the same hog-wild policies, or the new president reverses what he can. Re-regulation ensues.
- Time for another round of Survival Roulette (See this blog’s post, “Blind Ambition”).
- Opposition-propagandists pull strings to reverse what the new president reversed. They make voters impatient for improvement, even though undoing the damage takes years and years.
- Election time. Repeat steps 1-12.