Thursday, February 05, 2009


For those of you not familiar with this classic acronym of the mid-twentieth century, it stands for There Ain't No Such Thing As A Free Lunch. According to Wikipedia, it originated in the 1940's, and was popularized in the 1960's (when I heard it) by Robert Heinlein's classic novel, The Moon is a Harsh Mistress. (I'm not going to give you a link to the novel synapsis. It's good enought that you should go get it - the library has it if you've been laid off - and read it.)

TANSTAAFL came to my mind when I read the Washington Post's article listing the victims of Bernie Madoff's Ponzi scheme. All of these people bought into Bernie Madoff's story because they thought they could get something for nothing. They thought they could get a free lunch - endless returns, higher than the market normally gave, with no risk. Madoff's fund never had a down year, even when the market did.

The list, which was made public in a court filing, is 162 pages long, with about 80 names per page! (There's a lot of duplication for people with multiple accounts.) For the many charitable foundations, I just shake my head;
their investment advisors exercised poor judgment. I'm involved with 2 non-profits, and funding is always an issue, and the one that has an invested endowment has lost serious dollars this year. (But not to Madoff!) The same applies to the individuals (I was really sorry to see Sandy Koufax's name); they were very badly advised. But the names that really pissed me off were in this paragraph:
Several investment advisory firms, including Argent Wealth Management, Bank of America Private Bank, Citi Smith Barney, Citigroup Private Banking, Fairfield Greenwich, Fleet Bank and Ivy Asset Management, made the list, ...
It gives me cold chills. I used to work for Bank of America, and at one point I actually investigated whether I should move all my investments to the Private Bank. The answer was no (I think we weren't rich enough). These people are supposed to be investment experts. And they swallowed Madoff's scam hook, line, and sinker.

Did nobody at any of those firms have the brains God gave bastard geese in Ireland? Did nobody have a "too good to be true" alarm that went off in his head? It wasn't impossible; Harry Markopolis spent 9 years trying to convince the SEC that, on the basis of his published returns, Madoff had to be cooking the books. NPR's Planet Money blog has put up several stories about Markopolis' quest; and he was before Congress this week saying that he's got a "mini-Madoff" (only about $1 billion) to give the SEC again. I've seen the document they ignored; Planet Money linked it a couple of months ago. If the SEC ignored that, they were either giving Madoff a pass or they can't add.

We may get out of this economic mess, I don't know. But I know this: until we as a country learn that There Ain't No Such Thing As A Free Lunch, we'll be in constant danger of getting back into another one. Unless we can cure ourselves of the conviction that we can make it big, quick and easy, with no risk - that we can get something for nothing - we'll be wide open to the next Bernie Madoff.

The late great Leslie Charteris wrote a number of his Saint short stories about various forms of bunco games; the Saint made a hobby of beating the bunco artists at their own games. This was in the 1920's, but all the games Charteris wrote about are all still out there; and they all still work, because everybody believes that he can get something for nothing; and none of the bunco schemes ever work on people who understand that there ain't no such thing as a free lunch.


  1. hedera, you nailed it. There is an American thing were we want not only the standard magic leader, which is human it seems, but in combination with the American desire to strike it rich we get appalling finance advertisements from a hundred schemes.

    My favorite instance is the late night infomercials on how to become a real estate millionaire that blanketed the airwaves about 5 and 6 years ago. That's no coincidence.

  2. halbhh, what makes you think they've stopped? I see full page ads for these things in every day's issue of the San Francisco Chronicle.

  3. David Sedaris claimed that his parents fell for one of these real estate schemes, and made it work. I'm not sure if he was being serious.

  4. DB, the "ponzi" real estate type scheme does indeed work for those that get in early enough and get out before it collapses.

    A lot of people gained a lot of cash.

    The fallout when the ponzi scheme collapses is in porportion to the size of the scheme.

    In the US housing ponzi, the buildup above the long term initial value of US housing was quite enormous, so that the fall from the top back to normal erases about $8T-$10T of equity in houses.

    But it is indeed true that on the way up, a significant fraction of that $8T increase was indeed taken out and kept or spent by the "winners" in the gamble.

    It's just like winners and losers in a poker game, really.

    Part of the whole mess of it is that special tax exemptions for homes helped reduce the taxation of those capital gains for a lot of the gamblers. They only had to live in the house and hold it a couple of years.

    Many got out scott-free: they took the loot and ran, and paid no taxes on it.

    This is such an example of the consequences of tax rules being a lot more dramatic and consequential than expected.

    Perhaps if a lot of us write about this it will help raise public awareness.

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  6. hedera:

    Your post makes it sound as if you think that all speculative investments are bad.

    Some theorists believe that speculative markets are a zero sum game, that every dollar lost by someone, goes to pay a winner who benefited from the loser's loss. But that's not true. Lots of "value" literally evaporates in a crash--that "value" is just a balloon with air in it.

    On balance, I've about broken even on my investments. Big gains, big losses. The intelligent investment adviser will tell you to risk no more than you can afford to lose (and I mean lose completely, every penny). People go to Las Vegas to throw money away on gambling, and are perfectly happy to "lose" $500 or $2000 on a weekend, because it's all just "fun."

    Investing shouldn't be "fun." It's serious business. Middle-class people who invested their whole life savings in stock mutual funds or their employer's stock were risking more than they could afford. They learned a hard lesson.

    I began my investment life investing in U.S. Savings Bonds. I think I realized, even at age 8, that the interest accrued from them wouldn't keep pace with inflation. The best hedge against financial disaster is to find something that will reward your labor, and your interest (if you're lucky), and keep you occupied so you don't become bored and look for quick get rich schemes. Duty is the best recipe for the straight and narrow.

    If you don't love what you do, no amount of money, easy or not, is going to "do it" for you.

  7. I don't believe all speculative investments are bad - if I did, I wouldn't be in the stock market at all - and wouldn't have lost all the money I've lost over the last 6 months, either! (And I never kept company stock in my 401K.) I'm still in the game, because on historical evidence, eventually the stock market will recover. My gamble here is that it will recover in time for me to get some use out of the gains. But - a speculative investment requires due diligence on the part of the investor (what you said). Is the company sound? What's its level of debt? How much of the company do the officers own? Is the mutual fund management company using principles I agree with? Looking at the past record, is the volatility high or low? I'll give up the top of the tops for a fund that rides out bear markets with lower losses. And so forth.

    The TANSTAAFL post was inspired - or provoked - by the almost total lack of due diligence on the part of the investors in Madoff's scheme, in the face of clear evidence that the returns were too good to be true. Worse, the investment advisers who bought into it also didn't do the due diligence; that's the reprehensible part. Bank of America, Citi, all the wealth management firms - they should have known better. But they chose to ignore the evidence and go for the "easy hit."

    halbhh, the "real estate Ponzi" has been bothering me for a couple of decades - since the S&L mess, in fact. I don't regard my house as an "investment" in the sense that a lot of people came to do. I have to live somewhere. I choose to live in a house that I own, not because it'll make me rich when I flip it in 3 years (I hate the mess of moving, we've been in the house 22 years), but because I'm accruing some store of value over time, and because as long as I make the payments, I can't be evicted on a landlord's whim. Also, if something breaks I can fix it without being dependent on a landlord's good will. The people hit hardest by the real estate crash are the ones who chose to gamble with the houses that they live in, and it breaks my heart to see it; but it's a decision they made.

  8. hedera, yeah it's great to have your own place you can do with as you like.

    btw, I just put up Obama's opening statement last night on my site.

    I was impressed with the press conference. He's even smarter than I already thought. We're lucky to have someone of this capability on the job.