25 September 2010

Con Man Universe Description

A Confidence Man is an individual or group that runs a corrupt game or scheme so as to defraud those who pay into or invest in such a scheme.  I will horrendously oversimplify this, as the multiplicity and complexities involved in con games, as well as types of them, are enormous.  Still they all boil down to just a few major factors.  In the universe of the Con Man (and associates) there are only a few classes of people outside of those actually running the thing:

1) The Plant(s) - These are individuals who may know about the scheme or game, or may only be willing to accept minor payment to take part in the game or scheme so as to make it work.  Plants are the individuals who 'win' or get pay outs early on in the system.  These are the individuals that give a patina of legitimacy to the scheme or game so as to entice others to take part.  Plants can also be individuals who are of a later class, but so early on in the scheme or game that it 'works' for them.

2) Rubes - These are the individuals who buy into the game or scheme as 'legitimate' but have no knowledge that a game is going on.  Plants can be first generation Rubes who unknowingly play the game or pay into the scheme but are in that select segment that must get a payout, of some sort, so as to keep the mollified and have the illusion of an above-board operation remain.  Rubes who become Plants via this unknowing pay off of a fraudulent scheme or game in its first iteration also serve as recruiters to get more people to play the game or buy into the scheme.  The more gullible Rubes there are saying that the scheme or game is legitimate, the greater the long term pay off for those running the game or scheme.

3) The Mark - The Mark are the individuals in the high profit zone for the game or scheme.  Marks can be from any level of Rube-dom, but they are the ones who will buy into the scheme late enough so that they will not get their money back.  Marks may be unintentional players who just want to have some 'fun' or who have a predilection to believing the scheme works due to the number of Plants and Rubes.  When the game or scheme fails, these are the folks who lose the most.  Once a confidence scheme is fully operational after the first level of pay outs, anyone paying in can be said to be The Mark.  The Mark is the target of the swindle.

4) Those who see through the game or scheme for what it is.  These are the people that the game or scheme derides, calls them 'unsophisticated' or 'stupid' or otherwise castigates them.  That serves the two-fold purpose of assuring the Rubes and future Marks that they are the 'smart' ones who are going to 'make' money off of the scheme or game.  The level of attacks on those who see through the game may be intense enough to convince them to become Rubes, which also makes them qualified to be Marks.


Consider the world of Bernie Madoff with a scheme built up out of the 'intelligent' investing class of rich individuals.  He originally made his name as a smart trader on Wall Street, and with a good history of some ability to pick stocks he gained the reputation of knowing what he was talking about.  That portion of the patina to his con game ran through until just a few years ago, but the con, itself, started in the 1980's.  The con started with friends and family, and then became a 'word of mouth' affair that described the 'incredible deal' that Madoff had for those willing to invest in his organization.  The deal was that Madoff had a 'secure' group of stocks and bonds that were 'market proof': they gave a steady yield no matter what the market did.  His immediate friends and family became Plants and they created the aura of Madoff being able to 'out-smart' the market and even had pay offs to show for it.  Thus the investment scheme gained legitimacy as it was seen as being able to pay out as it said it could do.  For nearly two decades the population of Rubes expanded and so did the population of Marks.

The external population was kept at bay as they were not privy to the investment scheme system.  Part of making the aura of stability was that it went after rich individuals and conned them into believing that their money gave them good and smart advice via this system.  Madoff's system was recognized for what it was when a mathematician exposed the fraud in 2001, but by then the Universe of Rubes and Marks was large enough to convince Congress and Regulators that the scheme was legitimate.  Like any Ponzi Scheme it requires a new generation of individuals to pay into it, and lacked funds to actually pay out as there were very few actual investments in the scheme at all.  The numbers were made up.  As the latest recession started to tremble into the upper reaches of the markets, those individuals finding their investments evaporating went to Madoff to get their money back, as he said they could do.  He hoped to weather out the storm, thought it would be minor, and was able to pay off the first few people asking for funds as he hoped to retain the air of legitimacy via their becoming Plants.  As the numbers wanting their money back increased, the system could no longer pay out to them and the scheme was revealed for what it was.


Enron's mess of water and energy trading followed a similar set of lines in the buying, trading and selling of energy and water as commodities via the State run system in California.  Enron's attempt to hold financial pay outs steady, however, led to misreporting finances, that then steamrollered once the fraud was uncovered.  It went from controlling a majority of the private power sold in California to nothing in a period of months.  Here the scheme was the utilization of the ever increasing energy needs in California to purchase energy outside the State and put it through the State's regulatory system which was stifling the creation of new power facilities in the State.  In this case the Rubes set up the system to run the game, and the people of California were the Plants and then the Marks. 

Enron, by manipulating the power market, was able to create shortages and hike costs all the while showing a sound financial footing in the commodity trading scheme that it ran.  This scheme ran well enough, at an internal loss of course, that they expanded into the water markets and started doing the same thing.  When the crooked money transfers, kick-backs and executives siphoning funds from the company to leave it as a shell was revealed, the entire set of schemes imploded.  When the Plants became the Marks via the legitimacy given to the scheme via the Rubes in Sacramento, the ability to actually buy and sell power into California showed deficiencies in the accounting practices at Enron.  Whistleblowers would reveal the system, but the system itself can be seen as a creation of an over-weening State wanting to get around hard decisions and a confidence game stood up to gull the Rubes into believing that they could do so.  Rubes who set up a system to make hard decisions for them are less likely to run good oversight on the system as actually doing so gets them involved in distasteful decisions which they want to hand off in the first place.


Stepping up in scale is the Bank of NY penetration by the Red Mafia that started in the early 1990's with the collapse of the USSR.  In the post-USSR set of Republics there was a lack of hard currency as the Soviet Ruble was worthless.  Yet there were still factories, mines, and a population that could work if you could do the minimal and guarantee food for them.  Those able to get hard cash, or even work out barter systems between ore, finished goods and food gained control of the means of production as they became available.  Approximately one-third of that fell into criminal enterprises which were set up by an internal group of operatives assisted by the financier on the lamb, Marc Rich (the from previous articles on the Red Mafia, in particular this one on international finances).  Again the Rubes set up the system (the Russian government) for the Con Men to operate and once they were able to sell goods and ore for hard cash, they immediately went into procuring banks and over-seas accounts.  To get around foreign investment transaction oversight required penetrating western financial institutions, which was done via the Bank of NY (my lengthy article on that is here).  In short being able to get a couple of Plants into the BoNY system allowed for other operatives from the Red Mafia to utilize a money laundering system on a global scale that would process approximately $70 billion through it in less than ten years, and more like 7 years.  The fraud became apparent when one of the side operators (only a side operator in this area, but a major player in Russia) Semion Mogilevitch who was part of the YBM/Magnex fraud scheme that took place in the Canadian and US commodities market for permanent magnets.  That securities fraud funneled money through the BoNY and into a system of trade and transactions that still has not been teased out.

In this case the fraud system is so large, and the fronts operating with legitimacy via the legal framework in Russia and exploiting the nature of the capital and commodities markets in the west, that no one can even be sure if the fraudulent transactions have actually stopped.  When billions of dollars go into transactions for aluminum or steel, who will notice a few hundred million more in fraud bundled in with it?  In this case the Rubes in government have made everyone, globally, potential Marks.  The Plants are those individuals who actually had normal transactions go through the fraudulent system early on.  Even with the tightening of banking and financial regulations by many countries, many other countries refuse to do so as they are seen as 'safe havens' for 'troubled times' and enjoy having the benefits of large money transactions funding their governments via minor taxes.  So while a few Plants have been prosecuted, along with a Rube or two, the Marks remain defrauded.


Moving up scale from that.... and you can move upscale from that, size-wise, is another Ponzi Scheme that has been rolling blissfully along for nearly 80 years.  It has the patina and age of legitimacy.  There are lots of Plants who get pay offs from the system, and it has a full population of Rubes who, by law, are also The Marks.  This is another Rube created system by government unwilling to make hard decisions and wanting to pass on any oversight of a system that was not meant to work outside of very limited circumstances.  The scheme seems so 'nice' that Rubes don't want to admit to themselves that it doesn't work:  look at all the Plants getting pay offs!  Unfortunately as they are also The Mark there are a few people starting to realize that this system is broke (not just broken, but broke) and that paying into it will not sustain or recover it.  This system is the US Social Security Administration, and since its first pay outs in 1940 it has been creating a class of Plants to confirm that the system 'works'.

Based on the proposition that you 'invest' into an account with government, you are 'guaranteed' a set of payments equal to what you paid in plus 1% until you draw all 'your' money from the account.  Even when created private annuity systems paid out better via investments as those running annuities must keep reserve capital inside their funds system to allow for pay back of funds over time.  In good times the funds run on the excess made, stock a portion of earnings into the reserve and then utilize the rest to grow the system.  In bad times the limited payoffs cause the fund system to shrink, but retains operating expenses necessary to run pay outs from reserves to cover those who paid into the system.

The US government, on the other hand, spends the money it gets and puts a big, fat IOU in the reserve of SSA.  This became law during the Johnson Administration, and since then there are no 'reserves' of funds for SSA: it is broke and pays out in income from FICA and now from the general fund of the US government.

By definition any scheme that is able to pay out early adopters but only by growing the base of those paying in while keeping no reserves (or only a slim reserve like Madoff) is a Ponzi Scheme.

Thus SSA is a Ponzi Scheme.

Every single individual drawing 'their' promised money is involved in a wealth transfer system with the government as intermediator so that young, and relatively poor, working class individuals pay to have the older, and generally richer, generation 'retire' with a 'guaranteed income' from SSA.  Set up so that those who would get money from the system would be limited via a 'retirement age' of 63 which was also the average life expectancy when the system was started, it would never have had to pay out to more than half the older population and thus would 'work'.  Demographic trends in two directions make this unworkable: increased average life expectancy, and the child replacement rate.  I have examined this problem previously (in this article) but when this is taken in the context of a Confidence Game the perspective becomes clear - the retirement age is kept constant (even as life expectancy increases and child per family decreases) so as to create a 'faith' in the system that it 'works' and will be able to run like this forever.  Madoff would pay off some early investors entirely and that gave them faith in the system and they spread the word about it.  So, too, does SSA have a couple of layers of the Ponzi pyramid behind it giving the sense that this systems is 'workable' and 'legitimate'.  And as with any good con game, the Con Man has gained such a degree of confidence that, like Enron, even when presented with the cold, hard facts, people don't want to believe that this is the way it is actually run.

When this system comes down all of the Rubes will know they are the Mark, and some of the Plants will, also.

The system has been run, like the California energy trading system, to put off hard decisions and yet get pleasing results, to the point where the first internal audits of SSA in the 1980's put its collapse around 2050.  Then in the early 1990's it was 2030.  Around 2000 it was 2020.  SSA went into the red this year.  Every single politician since that original revelation during the Reagan Administration who has told you this system: 'works', is 'sustainable', is run 'efficiently', and is 'good' has been lying through their teeth to you or are oblivious to the ways of economics and demographics.  Yet as they take an Oath to the Constitution, and thusly to you, they have been negligent in their duties for decades.  Remember those trying to point out the problems in the system or try to 'fix' this already rigged system have been shouted down as being 'mean to the elderly', 'stupid', 'hurtful', and just plain 'ignorant'.  That has been the shouting down by the Con Men to continue the system by castigating those who recognize the con game for what it is.

We have got a problem, and in a sane world every politician who has willingly supported SSA as it stands since the 1980's should be up on fraud and negligence charges, with decades ahead of them in the Federal Pen.



Now moving up in scale...

What?  Isn't that bad enough?  Isn't the fact that our National Debt is more than all the money in the world (and that is on the optimistic side) bad enough?

My fellow Americans there is a problem that will hit us, from out of the blue, in the next few years that is not our own Progressive/Socialist/Communist Establishment Elite Politicians or of their making.  Not by intent, at least.

Nation States can give the instant aura of legitimacy, the patina of something being 'real' and 'working' even when such schemes they put forth make zero economic sense, at all.  Why?  Because they can tax the hell out of their people.  The US started running another Ponzi style scheme in the home mortgage market and the advent of the 'securitized' home mortgage by Ginnie Mae (my article on that and the destruction of the traditional mortgage market).  In this system the government 'guarantees' the risk of home mortgages via the 'securitized' system by bundling loans together.  Thus we saw loans that were pure junk get AAA ratings when they were bundled together via the fiat of government regulation.  Those regulations are still on the books, by the way.  Thus banks were forced into working with this market arrangement if they wanted anything to do with the home mortgage market, and if they didn't Fannie and Freddie had started to move in with their even higher risk loan capabilities that gained the benefit of the 'securitized' market.  That is how we got a multi-decade housing bubble: by government regulation, forcing banks to accept government assessment of risks, and then cutting down the amount needed to get a home to zero.

Didn't work so hot, did it?

Now imagine a country that does that with residential real estate, like we did, commercial real estate (that is slowly coming out here, too), and industrial real estate and facilities.  In other words a country that has its entire economy built on a bubble of bad debt that it is unwilling to own up to, but must do so as the creditors it invited in want their money out in the securities that they were given.  That country is not the United States.

It is China.

I wrote about that in The Directivity of China.  The reason I more or less live my life by trend analysis is that once a trend is established it will continue unless its underlying causative factors change.  To get its industrial growth in the 1990's, China issued debt obligations: they promised to pay back the money with a nominal rate of interest.  When those notes came due in the mid-2000's they 'rolled over' the debt as in 2003-2006 China looked pretty safe, all things considered.  Now the next debt 'roll over' has arrived and the creditors want their money plus interest.

China's problem is that it did with its entire real estate, commercial and industrial sectors what the US did with 'securitized' loans: it gave junk loans the imprimatur of being good loans via its ratings.  In fact those loans were crony capitalist loans that went to making factories that were not well run and failed.  Luckily the cronies, being cronies, could get more money by hitting up their friends in the government to continue on the patina of 'everything is working just fine'.

Thus the Con Men are the Chinese government, just as it was the US government for SSA, Fannie, Freddie, Ginnie, etc.

The plants for this, in China, are the crony capitalists and some foreign capitalists willing to take on some risky loans that might get a high payback.  Some factories actually moved to China for its low cost labor force.  Meanwhile as industrial plants failed, the government absorbed the debt, called it 'AAA delicious', and rolled over their Marks as they had established a good Rube environment in the west.  To this day you hear about how 'China is a world beater' and then hear about them having enough empty rental property to house the entire US population (Source: Marketwatch, 03 AUG 2010).  China has overbuilt entire cities expecting ever increasing wealth, and yet cannot find people to occupy them (Source: Kris Cyganiak at BuyRIC, 08 MAR 2010) even though the government assures everyone that their people are growing so rich, so quickly, that they just don't have time to move to them (Source: WSJ, Andrew Batson, 12 MAY 2010).

If that last bit sounds a lot like a Con Man trying to convince the Rubes that the game is working, and even better than expected, then join the club.  The problems of China go far beyond industry and have to do with the population, demographics, and just sheer size of China.  Yes China is the world's second largest economy.  Just as it was in 1900.  Size will get them there even on absolute poverty as the median for standard of living.  The problem is that with the debt come due, the current Marks wanting to be paid, and having put so much into so much useless building, China has nothing to repay with.  The cost of labor in China has increased, due to the cost of overhead, in turn that is due to the over-building and speculation that has gone on, which, in its turn, is based on bad debt.  When the debt gets called in the rest falls apart, and building gleaming new apartment complexes with no one to fill them does not a modern city make.  This is repeated in the commercial sector, with empty shopping malls created via crony construction companies, and private real estate via the same system and bundling together of bad loans with the AAA perfume. 


In the near future we may come to the point where any 'security' even glanced at by a government will be assumed to be junk in its status, and it won't matter which government it is, either on a global basis as they will all be assumed to be in bed with their cronies running a con game on their people.

And when China slips below the waves of solvency, just where will Wal-Mart get its stuff?

Probably Indonesia, Vietnam and a few other places... but that lovely market that everyone talked about in the 1970's... you remember the one that would see the glorious infusion of western capital to build up a wonderful system as part of the global trade concept... what happens when that drops of the radar screen of fiscal solvency?  The US can't save it as we are nearly there, ourselves, just not going at the fast rate of China.  And we can't solve the problem by spending more money.

The source of the problem, if you haven't guessed it, is not the small time cons like Madoff or even Enron, both bad enough, and, for the horror of it all, the penetration of our international financial system by organized crime.  That latter is horrific, but cannot be matched by the willingness of Nation State political systems to rip off their own people under multiple guises and not be held accountable for their actions until it is too late.  The problems in China, alone, dwarf anything that any organized crime organization could even dream of due to the scale of the population involved.  Even the Daly Machine in Chicago realized it needed to pick up trash regularly to have the patina of 'working' on its side.  Nation States are only under that much obligation to the extent they allow their people a say in their own systems, which is why it is necessary to have Plants to encourage the Rubes to buy into a scheme to become Marks... or to force them into the scheme, anyway, even if they don't buy into it.

Nice how governments over-ride good sense, isn't it?  Notice how that is also the pre-requisite to running a con game?


How do you identify a con game?

Whenever you approach a situation, and it doesn't matter if it is a proposal from government or an offer from Luigi down the street to do your windows, the question you first have to ask is: who is going to really benefit from this?  They may tell you that you will benefit, but you then have to ask who besides you will benefit?  Now with Luigi that's just a contract situation of money for services.  For a government it is taxes for a whole slew of things, that just keep on getting longer, many of which have no benefit to you, whatsoever.  If what you hear is that it is you, and only you, that will benefit, and this is not God talking to you, then you have properly identified a con game. 

Get rich quick?  A con game. 

Easy money? A con game.

A sure way to pick the ponies learned in ten minutes? A con game.

Retire with assured benefits that no one in the market can guarantee?  A con game.

A majority services economy makes everyone rich without making anything? A con game.

Do you see how this works?  Unrealistic expectations guaranteed to come true.  That is a con game.  When perpetrated as part of a system to separate you from your money it is called either fraud or taxes.

Some systems are set up by well meaning Rubes that then turn into a con game with no one running it save a bureaucracy. That is SSA, Fannie, Freddie, Sallie, Ginnie, etc. and while SSA can't lobby Congress, the others can and do so for their own bureaucratic interests.  Of course the bureaucracy has an innate goal of perpetuating a con game once it starts, and they will deny any concept that they are running a con game, even to themselves.  Pournelle's observation on bureaucracies is that in all bureaucracies you have those wanting to do their jobs and those wanting to grow the power of the bureaucracy, and the latter always come to dominate the former.  Thus no matter how 'good' a bureaucracy starts out, it quickly morphs into a large, power-hungry, cash driven organization wanting more and more at each step along the way.


Once you identify the con game, you then have to ask: who is the Mark?

You are the moment you realize you must ask that question, especially if it is in the middle of a con game.

You are the Mark.

You are being defrauded and you may already have paid a lot of money into a system that 'promises' to pay you back.

The system will only pay you anything so it can turn you into a Plant, to continue the patina of legitimacy it has.  Most Marks never get a chance to become Plants, unless it is a truly huge fraud scheme.  For the most part you have a low likelihood of becoming a Plant as a proliferation of Plants shows that the scheme is about to be revealed.

Have I mentioned that SSA is running in the red?

When you are the Mark in any normal scheme, you must stop paying into it.  There are very few schemes where you can out-swindle the swindlers and maybe get some justice, if not your money back, but those are so rare they need fictional accounts to glamorize them as they don't happen that often in daily life.

If you can't stop paying, say the government requires you to pay into a system involuntarily, then you must recognize that you have losses of throwing good money after bad that will, most likely, never come back.  Everything you paid into the system is gone: you have been swindled.

You are the Mark, the target of the swindle.

If you have any say into the system, at all, you must exercise it to end the fraud and cease the swindling.

The Rubes will attack you as mean, stupid, vicious, hating people, unrealistic, heartless, cold, cruel... remember that before you thought about it you were a Rube, once, too.  The willing Mark is the worst sort of Rube as they want to deny reality and want to willingly live in a fantasy land to their last breath.  Or their last dollar, which will probably come first. 

If you try to ignore the problem, you become a Plant to give shade to the Rubes who continue to push Marks into the system.  And if you worry about the other Marks or those Plants who can still become Marks, you do them no good whatsoever by creating more of them by letting the system go on with your nodding assent.  And that doesn't help your situation, as you are still being swindled, nor the situation of the other Marks, and while you feel sorry for the plants you could certainly find a better way to tend to the ends you desire than via the con game you are in.

Remember that in all cases, you are the Mark: you are the victim of this fraud.

You were born Free.

You can get back to being Free by ending the con game.

Your choices are:

1) The Plant - Hoping you get in on the game early enough to get out of it and offer the game an air of legitimacy.  That makes you culpable for continuing the game, however.

2) The Rube - The mindless repeaters, nodders, those agreeing to the game without thinking and those shouting down the critics of the con game.  They are the backers of legitimacy, and can't believe that they will ever be a Mark.

3) The Mark - The sucker.  The person who gets swindled. The loser. The target of the fraud.

4) The Free - Those who ensure their freedom by the hard task of guarding it, thinking about what they do, and trying to end fraud high and low when it is perpetrated upon them and their fellow citizens.  This is the hardest to do.

The choice of what you are is up to you, once you identify a con game.

Getting to Free is painful.

Waiting for the game to come apart even more painful.

You can either end it and gain Freedom, or wait for it to be ended and continue to the The Mark.

No comments: