Smoke Meet Fire

In the world where there is usually smoke there is usually fire. And that seems of late to follow bankers in Wall Street or Bond Street to Players in locker rooms.  Where there are those with money and power and fame it almost seems natural to presume, not assume, that they will do what it takes to get there and do whatever they need to stay there.

I write a great deal about the fraud in banking and I have never about sports and yet it is the most synonymous part of our American Unicorn Mythology as the Marlboro Man.

I was listening to BBC America this morning discuss the travails of Lance Armstrong and the ultimate result of the revelation that his biking success was largely due to drug use and more importantly to the immense logistics due to covering it up.  And of course with that was the "well we knew it but hey we couldn't prove it" nonsense that almost always accompanies such stories.  I recall when I lived in San Francisco and suddenly Barry Bonds awoke one morning to find himself with a s super power of home runs. 

I remember loving Sports and then somewhere along the line I realized that they weren't all what they were cracked up to be. One only has to look to Muhammad Ali to see that toll.  The current stories of the hockey players, rugby and footballers who are slowly losing their minds due to the repetitive blows to the head are all one needs to stop enabling in whatever role that means, observer or player.  But in America sports are another up by the bootstraps legacy of how braun can trump brain in making one rich and successful. Emphasis on braun as the brain can only take so much trauma before it finally stops.

I lived in Austin when Lance Armstrong made this amazing recovery from testicular cancer to ride to not one but several Tour de France medals.  His fame was suddenly appointed to some type of amazing genetic heart he possessed that until the cancer was also dormant and then kicked in to ride him to health and success in all areas.  Then leaving his family for fame and relationships with Sheryl Crow ironically to disengage when she too had cancer always left a bad if not ironic taste in my mouth.  Perhaps her illness was too close to home for him or would it show that when one is recovering from a life altering illness naturally its not as effortless as it seems. 

The same can be said for the rich and famous in banking. When Bernie Madoff was riding high despite the fact that those in the know and experienced thought this made no sense, when a whistle blower not only blew but blew loud and often was ignored, it was quite awhile before the losses became no longer ignorable. 

Or we have John Corazine of MF Global, or the London Whale of JP Morgan Chase or now Steve Cohen of SAC Capital Advisors who seems to be the next guilty of only by association as one after another of his former staff are arrested and prosecuted for financial fraud.  My mother always a great source of colloquialisms said "you are only as good as the people you hire or work for" Clearly they needed her as the head of HR in some Wall Street banks.

Blind eyes when it comes to money seems to be the common suit be it in banks or sports. I won't even touch the numerous and disturbing sexual molestation charges that have become commonplace in the locker rooms of many Universities.  Again where there is money there is this need to not upset the apple cart. 

Is this a male dominant thing? Is it because women are not present nor when they are are so marginalized that even when alarm bells ring they are ignored. Clearly with regards to the banks and their issues that has been historically the case as recorded by Brooksley Born and Sheila Blair. 

I thought this was interesting from ProPublica via the New York Times with regards to the issue of ethics when it comes to performance. And it appears that its the later versus the former that matters to those Masters of the Universe. I note the word Master and it has an interesting an unflattering connotation in every sense of the word.

When Wall Street Investors Favor Performance Over Ethics

By JESSE EISINGER, ProPublica

To have one employee tied to insider trading may be regarded as a misfortune. But, with apologies to Oscar Wilde, to have six looks like carelessness.

Poor Steven A. Cohen, the powerful hedge fund manager who heads SAC Capital Advisors. People he employs just keep getting swept up in a sprawling insider trading investigation that has spanned years. In addition to the six who have gotten in trouble for activities when employed at SAC, at least six others have been ensnared by insider trading ivestigations after leaving the firm. The latest arrest, of the pharmaceutical industry analyst Mathew Martoma, is the first that ties Mr. Cohen to trades the government says were illegal.

An investment manager has defended Mr. Cohen as the Michael Jordan of the investing world. But what if he is the Lance Armstrong?

While Mr. Cohen has not been accused of any wrongdoing, you have to wonder whether his returns have been generated not only through his trading brilliance but also through a culture of cutting corners and pushing employees to the point where they break the law. In the United States, you are innocent until proved guilty, and nowhere can that be seen more than for a man who can generate amazing investment returns.

Astonishingly, investors don’t seem to mind terribly. They added as much as $1.6 billion in new capital to SAC’s flagship fund from 2010 to the end of 2011, when the insider trading investigation was in full bloom, according to Absolute Return, an industry trade publication.

“Insider trading isn’t acceptable in our culture of compliance, and we don’t give a wink or nod to the contrary,” said a SAC spokesman, who declined to make Mr. Cohen available for comment.

At least some big institutions have begun to contemplate thinking about perhaps withdrawing money from Mr. Cohen. Congratulations. What took them so long? Citigroup’s private bank has told its clients not to put in new money, according to Bloomberg. What about getting their clients out? Why hasn’t bank given that advice before this?

A Citigroup spokeswoman explained that the private bank “typically puts funds on watch when there is significant news around a company; that is not a recommendation to move or keep money in the fund.” She declined to comment on Citigroup’s relationship with SAC.

Blackstone is thinking hard about it, according to reports. Think think think. That firm declined to comment.

Several prominent funds-of-funds still have money with him. Société Générale, the big French bank, decided to redeem its money only after the latest allegations. Given all that we know, how in the world do major institutional investors still have any money with Mr. Cohen?

The biggest, most sophisticated investors certainly put an enormous amount of pressure on hedge funds. But almost none of it is about ethics and clean culture. It’s about performance. A fund that runs a few ticks lower than its peers for several months running can get put out of business.

But investors seem to demonstrate little interest in whether the person is ethical and trustworthy. Shouldn’t their threshold be a wee bit higher? After all, these institutions are mainly investing other people’s money. Investing money isn’t quite a sacred trust, but it’s a trust nonetheless.

Many institutional investors have so perfected the art of looking the other way that they make bystanders on a New York City subway platform look like models of social responsibility.

The operating standard is to allow fund managers — or affiliated businesses or employees — to go as far as they can until the moment they are caught doing something wrong. Through their actions, Citigroup, Blackstone and the others are sending a message that they will forgive rotten ethics for great returns.

This is a long-standing Wall Street custom. Citigroup and JPMorgan played handmaiden to help
 Enron commit fraud, according to the Securities and Exchange Commission. The two banks didn’t admit or deny guilt in settling with the regulator.

There is a point where willful blindness turns to complicity. Investors profit from any added juice that SAC might gain, whatever its source. And if Mr. Cohen were to face charges, they would pay no price.

Major banks and investors around the world shoveled money to Bernard L. Madoff despite doubts about his purity. Some thought that Mr. Madoff was using his brokerage firm to front-run. In other words, they thought he was cheating on their behalf, not ripping them off. And that was an enticement.

The arrests and bad trades are finally hitting close to SAC, but there is nothing new about the questions surrounding Mr. Cohen’s business. He was always one of the most aggressive traders on Wall Street. Speculation that he may have tapped into legally dubious information wasn’t just whispered in private but splashed across the pages of The Wall Street Journal in a 2006 profile that raised questions about whether his firm traded improperly.

In SAC’s defense, a person familiar with the firm pointed out that two of the employees charged with insider trading started their scheme before joining the fund and had admitted taking extraordinary steps to circumvent SAC’s procedures while another was trading in his personal account.

“We expect our people to play by the rules and act with integrity,” the SAC spokesman said.
The firm has more than 30 legal and compliance officials in addition to a dedicated technology team devoted to compliance, says the person familiar with the firm.

But given how forgiving institutional enablers are, one wonders why Mr. Cohen even bothers.