A week ago, I blogged
about Pellechia’s suggestion
that Markopolos should have blogged about Madoff instead of taking his
suspicions to the SEC. I mentioned then that the problem is that the
blogger would fear regulatory action for “rumour
mongering.” Now we do have Alex Dalmady blogging about another
possible Ponzi scheme.

Dalmady is smart. His five page article in the
Venezualan publication Veneconomy of January 2009 gets to
the “case study” only after two pages of general
discussion about scams and mentions the name of the entity (Stanford
International Bank) only on page 4. His description of the
whistleblower’s dilemma is very well put:

Another thing many can’t grasp is why these scams
aren’t uncovered. The truth is that most of them are
“found out” all by theselves or when the circumstances
make it obvious. … And it’s not just because the participants
are happy while they are collecting profits. It’s that a good
scam is really hard to detect and almost impossible to uncover without
inside help.

Being “almost sure” is usually “not
enough.” How do you blow the whistle when you’re
“almost sure”? It’s preferable to not get involved
and the skeptic will keep it to himself. Frankly, what does a whistle
blower have to gain? So normally he’ll back away from the
suspicious deal and leave things as they were.

His conclusion is also well hedged: “be careful with animals
that look like ducks that say that they’re something
else. Because they could be that other something, although it’s
very likely that they are just ducks.” Dalmady repeatedly
invokes the Heisenberg uncertainty principle to say that one can never
be sure of anything. He finally ends with an appeal in the postscript:
“Please, do not accuse me of destabilizing the financial
system.”

Dalmady followed that article up with a blog
post on a site called of all things the Devil’s
Excrement. His writings created quite a stir in the blogosphere with
Felix Salmon for example posting about it here, here and here.

Post Madoff, there is greater willingness by bloggers to put their
neck out and voice their suspicions about fraud. But the mainstream
media is still running scared. The Financial Times for
example gives this view of their internal decision processes at its
Alphaville blog:

PM: Well, been looking at this SIB – Sir Allen Stanford story
PM: rather fruity
PM: Anyway – think we are cleared to publish our stuff now
NH: only taken 12 hours
PM: Not huge new revelations – beyond that printed elsewhere
PM: This was a very good pick up by a certain Long Room member
NH: it was fascinating stuff
NH: and if you want to know what we are talking about
NH: there are stories in Business Week
NH: and on Bloomberg
NH: if u are interested
NH: for our story we just need sign off from the editor now

The media knows that banks are treated with kid gloves because a
bank run is supposedly such a terrible event. I think regulators and
the broader society must learn to live with frequent bank runs and an
occasional bank failure as the price of a healthy financial
system.

One of my favourite quotations from Milton Friedman is his
statement somewhere to the effect that banks are not regulated because
they are different, they are different because they are regulated. All
kinds of frauds (and incompetence!) find shelter behind that regulatory
veil.

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