Thursday, August 5, 2010

Nassim Nicholas Taleb Blows the Cover on an Insider Scam

There's a limit to how much money the FDIC will insure for any individual on any given account. That limit is currently $250,000. Unless, that is, if you are "in" with Alan Blinder.

Blinder currently teaches at Princeton and served on President Bill Clinton's Council of Economic Advisors (Jan 1993 - June 1994), and as the Vice Chairman of the Board of Governors of the Federal Reserve from June 1994 to January 1996. Treasury Secretary Geithner is currently waving around a report by Blinder and Mark Zandi that claims the Obama Administration has done wonderful work with its political payoffs stimulus package. Stanford Professor John Taylor has issued a major critique of the Blinder-Zandi study for its weak modeling techniques and failure to use actual data.

But, issuing a bogus report which props up the current administration has its advantages. Nassim Nicholas Taleb explains:

Last year, in Davos, during a private coffee conversation that I thought aimed at saving the world from, among other things, moral hazard, I was interrupted by Alan Blinder, a former Vice Chairman of the Federal Reserve Bank of the United States, who tried to sell me a peculiar investment product. It allowed the high net-worth investor to go around the regulations limiting deposit insurance (at the time, $100,000) and benefit from coverage for near unlimited amounts. The investor would deposit funds in any amount and Prof. Blinder's company would break it up in smaller accounts and invest in banks, thus escaping the limit; it would look like a single account but would be insured in full. In other words, it would allow the super-rich to scam taxpayers by getting free government sponsored insurance. Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.

I blurted out: "isn't this unethical?" I was told in response, "We have plenty of former regulators on the staff," implying that what was legal was ethical.

It has taken me so long (18 months) to react to the event partly because Prof. Blinder is scholarly, gentle in manners, the kind of likable person with whom I would have an intellectual conversation on occasion. In addition, having spent the last few years immersed in the classics, a certain sense of grandeur (from which I am looking for a cure) inhibited me from the reporting of journalistic anecdotes -- Alan Blinder is certainly not the worst violation of my sense of ethics; he probably irritated me because of the prominence of his previous public position and due to the context of the Davos conversation, which was meant to save the world. But I have to transcend my human proclivities and swallow my sense of grandeur: someone used public office to, at some point, legally profit from the public.

Tell me if you understand the problem in its full simplicity: former regulators and public officials who were employed by the citizens to represent their best interests can use the expertise and contacts acquired on the job to benefit from glitches in the system upon joining private employment -- law firms, etc.

Think about it a bit further: the more complex the regulation, the more bureaucratic the network, the more a regulator who knows the loops and glitches would benefit from it later, as his regulator edge would be a convex function of his differential knowledge. This is a franchise.
Taleb is right on here. All these new regulations and agencies create power centers that those in power and near power can very easily use for their own long-term advantage. We don't often hear about what really goes on because there are few who have the balls, that Taleb does, to report on these insider activities.

The only point that I have to disagree with Taleb on is his view that Blinder is likable and "gentle in manner". I have come across many government employees here in D.C. I have told Federal Reserve employees that I think the Fed should be abolished (We have touched base a few times since those conversations), just last night I told two DOE employeets that the DOE should be abolished (When they departed, after two rounds of drinks, they shook my hand and said it was a very interesting conversation) and despite the fact I brutally pound on Phil Swagel, he still treats me with respect every time our paths cross. I can not say a conversation with Blinder went as smoothly.

During Bernanke's double-digit money printing phase between late-2008  and early-2009, I ran into Blinder at an event. I suggested that if Bernanke continued his double digit money printing ways that the economy would be heading for severe inflation. Blinder disagreed. I asked him if he knew what rate the money supply was growing at, he didn't. When I told him the rate was near 15% and then asked him if he thought there was still little chance of inflation if Bernanke continued printing at those rates, he brushed off my inflation fears.

I then said to Blinder, "Jeez Alan I'm going to have to beat you up on that view." You would have thought I stuck a pen in his eye.  His faced turned flush, he started moving around in place like a bull trying to find his bearings and said, just steaming,, "Well you just go ahead beat me up." And then he huffed and rushed away, probably to hustle people for his special bank accounts.

(Thanks to Kalim Kassam for the tip on Taleb's piece)


  1. This is CDARS which is actually offered at many banks across the nation...many community banks. There is really no news here.

    My own bank has a link on their website. I am surprised that Taleb didn't know about this. I am also surprised that he is so willing to make a fool of is an easy way to open accounts at many banks. That is not a scam and not unethical.

    If you doubt me, click the link, find your state and see the banks. No cabal.

  2. Wow, as a person who is ready pounce on any unethical behaviors, I am shocked that this is even being written about. CDARS is not unethical. It allows you to conveninetly buy CDs from many banks across the country from one account. The author of the article as well as Taleb should be embarrassed from their stupidity.

  3. I use all the time for large escrow accounts. Seems like the smart thing to do given its availability.