The Wizard of Lies

and the Sordid History of Capitalist Investment

A review of the film

Director: Barry Levinson

Story by: Diana Henriques

Starring: Robert De Nero, & Michelle Pfeiffer

Network: HBO

The new HBO film The Wizard of Lies dramatizes the life of Bernard Madoff, who created a ponzi scheme that bilked investors of about fifty billion dollars.  As the story unfolds, we see how Madoff not only bilked his investors, he also ruined his family. At the end of the film a character raises the question as to whether Madoff should be considered a sociopath on the level of a mass murderer.

In the course of the film, we learn that some of the largest banks in the world also invested their funds with Madoff. So, this begs the question: Do these banks share responsibility for Madoff’s scam? My opinion is that a better question to be asked is: What has been the history of capitalist investment? I believe that answering this question will place the Bernard Madoff story in it’s proper context.

The revolution of the thirteen colonies and slavery

The revolution of the thirteen colonies that began with the Declaration of Independence initiated some progressive reforms. Before the revolution a person’s status in life was determined by birth. If you were of the Gentleman class you had rights that no one else had. The revolution as well as Shays rebellion, for the first time, established the idea that at least male land owning citizens had rights.

A basic contradiction to this state of affairs was that, at that time, the primary source of wealth came from slave labor. In fact, owning slaves was the most dependable way of establishing wealth. While chattel slavery was abolished with the Civil War, the legacy of that system continues to this day.

After the Civil War, the government adopted the 13^th, 14^th, and 15^th Amendments to the Constitution. These Amendments abolished slavery and gave every citizen full rights in this country. Then, in 1877 the Republican party President Rutherford B. Hayes made a deal. He effectively gave political power to organizations like the Ku Klux Klan in the former confederate states.

This meant that in those states the recently adopted Amendments to the Constitution had little or no real meaning. In fact, racist mobs murdered literally thousands of people and the government did nothing to indict the murderers.

The labor movement

After the Civil War working people toiled in horrendous conditions for wages that barely fed a family. Workers routinely lived in one-room dwellings with their family. Health care was something that was largely unknown to large numbers of workers. Because of these conditions many parents told their children to work in factories so the family might be able to make ends meet. These were the effects of capitalist investment.

The labor movement organized a series of strikes over a period of about fifty-seven years from 1877 to 1934. Then, in 1934 during the years of the depression, there were three union victories that paved the way for millions of workers to join unions.

Then, in 1955 Black workers in Montgomery, Alabama refused to continue adapting to the segregationist laws of that city. For 381 days they boycotted the busses of that city demanding the right to sit anywhere they wanted on those busses. This marked the beginning of the Civil Rights movement that forced the government to outlaw the segregationist laws of this country.

How did capitalist investors respond to these events? They literally closed down factories and moved their businesses to nations where wages are about two dollars per day. The massive construction boom in China can be explained by the decision of investment bankers of the world to place their money in a place where the wages are abysmally low.

The many scams before Madoff

One of the capitalists of this country in the last years of the 19^th century was Anthony Drexel. Drexel was a mentor to J.P. Morgan who’s bank became JPMorgan Chase. Because Drexel had investments in factories in Philadelphia, he needed engineers to manage these factories. So, he started the engineering school of Drexel University.

Drexel’s bank became Drexel Burnham Lambert. One of the top traders of this bank was Michael Milkin who specialized in the seemingly lucrative business of junk bonds.

In 1989 Milken was convicted of racketeering and securities fraud. While junk bonds didn’t have a very good name, they were regulated by the government and Milken violated those regulations. As a result, the $350 billion bank of Drexel Burnham Lambert was no more. Milken would serve close to two years in a federal penitentiary.

After Milken was released from prison he established a charitable trust fund business. Milken organized a fund that allowed affluent investors to avoid paying taxes by establishing charitable trust funds. Many of these charitable trust funds contributed to medical research.

Because of this relationship, Milken was asked to speak at the 2008 graduating class of Drexel University College of Medicine in Philadelphia. There were graduating students who protested Milken speaking at the event since he had served twenty-two months in prison for racketeering.

We might compare Michael Milken’s charitable trust funds with the reality of Cuban medicine today. Before the Cuban Revolution, Cuba was a nation that was largely illiterate. Today, everyone in Cuba knows how to read and Cuban doctors have trained thousands of doctors from all over the world free of charge. Cuban scientists have also invented several treatments for diseases.

So, on the one hand, Michael Milken’s charitable trust funds in no way have stopped the advance of poverty in the world. Cuba, while it has much fewer resources than capitalist investors, has made it a priority of educating and treating some of the poorest people in the world.

Derivatives

Then, in the year 1997 Robert C. Merton and Myron S. Scholes received the Nobel Prize in economics for their method to determine the value of derivatives. Derivatives are extremely complex bets on the future of the stock market. The U.S. government felt that this so-called discovery was so impressive that they allowed derivatives to be completely unregulated.

Today, anyone can Google the question: How much money is invested in derivatives? Google’s answer for this question is $1.2 quadrillion. That is one-thousand-two-hundred trillion dollars. This amount of money is about equal to twenty times the gross national product of the world.

What does all of this mean? Michael Milken and Barnard Madoff went to prison because they violated the investment laws of this country. Today the entire world economy is totally dependent on extremely volatile investments that are completely unregulated.

Conclusion

When we consider what capitalist investments are, there are two ways to look at the question. First, managers of corporations are routinely obsessed with cutting costs. Some of the consequences of this obsession are that today about half of the world lives on two dollars per day or less, about one billion people don’t have enough food to eat, and 30,000 children die every day due to preventable diseases.

The other consequence of capitalist investments is that they are inherently unstable. The depression of the 1930’s happened, and the near collapse of the stock market in 2008 is a historical fact. We should consider that the reason for these crises comes from the very nature of capitalism. When corporations are driven to sell more and more commodities, while they also cut costs, economic collapse is inevitable.

In fact, we see in the film Wizard of Lies that Bernard Madoff had an idea of this problem. He saw how the collapse of the stock market in 1987 liquidated massive amounts of funds. He felt this was unacceptable and committed fraud in an attempt to bypass the ebbs and flows of the market. As this film shows, his scheme was a complete failure. As the history of capitalist investment shows, these investments will sooner or later have the same fate as Bernard Madoff’s scam.

While the media in this country argues that Cuba gives us a view of the past with it’s old cars and old buildings, there is a completely different reality. Cuba has demonstrated through it’s actions that it is indeed possible to have a government that makes human needs more important than profits. This is not a story of the past, but a story of how we can all have a profoundly better future.