I finished reading Guy Lawson’s Octopus: Sam Israel, the Secret Market, and Wall Street’s Wildest Con last night. It’s a fascinating and thrilling book. I would definitely recommend checking it out. Lawson follows the career of convicted hedge fund manager/Ponzi scheme operator Sam Israel. The Israel’s are a famously rich family of commodity traders from New Orleans, but Sam Israel III wanted to prove that he could be his own man, so rather than sliding into a nepotistic career as an employee at his family’s business he went to Wall Street. Eventually Israel opened his own hedge fund, called Bayou, using a computer program/algorithm he called Forward Propagation. The program, according to Israel when he was selling investors on his fund, accurately predicted market trends 86% of the time. Unfortunately the program apparently didn’t work and the fund eventually descended into a Ponzi scheme. Israel always seems to have believe that he would make the fund legitimate and solvent, but he never managed to. That story, while somewhat interesting, wouldn’t make me recommend a book to you. That’s the set up, if you will, and the story that follows could be lifted right from a spy novel. Lawson writes with clear, active language that only encourages the comparison, but that’s the beauty of the book. The story is good enough for a novel and is written by a journalist with the skill to translate the narrative to text nearly flawlessly.
Sam Israel found himself in pain and under intense stress while trying to manage his fund. He had suffered serious medical problems that left him on pain killers, his marriage was falling apart, and he had to maintain the image of running an honest fund. Through an odd series of events Sam eventually met a man named Robert Booth Nichols. If you google Robert Booth Nichols, as Sam did, you find his name connected to a variety of conspiracies, murders, and the CIA. According the internet Nichols is, or was, a CIA agent involved in a number of different conspiracies, including the assassination of JFK and Iran-Contra. Nichols proceeds to convince Sam that there is a secret bond market that only lets the wealthiest and most powerful members of society invest in them; all with essentially no risk. Sam, struggling and already predisposed to believing in the tale Nichols spun agrees to invest the $100 million real dollars in his fund in this secret bond market. The rest of the book follows the amazing story of Sam trying to invest his money in the secret bond market. Eventually Nichols convinces Sam to lend him $10 million. The story is great, the writing fitting for the story, and it’s overall an interesting book that’s worth the read.
When I decided to write a review of this book I looked up some reviews online and found an interesting divergence in the reviews. Most reviews seemed to like the book, though they didn’t care the writing as much as I did. The difference is how they processed the story. One side, the New York Times book review (http://www.nytimes.com/2012/07/01/business/octopus-looks-at-bayou-hedge-funds-collapse-review.html?_r=0), wrote, “He paints a picture of rampant criminality all around him — insider trading, front-running, bags of cash — and contends that all of Wall Street was similarly corrupt, a transparent bit of rationalization.” From the perspective of the New York Times writer, Bryan Burrough, Sam Israel was a crazy bastard. “Like I said, Crazy Town. Mr. Nichols, of course, is a con man — and a very capable one at that.” Compare that to Matt Taibbi’s review (http://www.rollingstone.com/politics/blogs/taibblog/octopus-read-this-book-to-understand-wall-street-20120724), posted with the subtitle “Read This Book to Understand Wall Street.” Taibbi explains, “this is also an important book because the reason Israel fell for this extraordinary con was based entirely upon his real experiences on Wall Street. Israel had grown up among some of the biggest movers and shakers on the street, including his first hedge fund boss in the early eighties, Fred Graber. Israel started essentially as a gopher for Graber, who had built a very successful hedge fund that was based, it turns out, almost entirely on front-running, insider trading, and other easy money schemes.” Taibbi’s view is that the ‘shadow market’ that Sam was trying to invest in is the real market. The market is manipulated by the Fed and over-sized banks and corporations.
I think Taibbi has a point, but I think there’s more to it than Sam Israel merely being prepared to be conned because of his experience and understanding of Wall Street. Before Sam Israel met with Nichols he Googled him. Googling Nichols leds you down some crazy holes of the internet. Sam found a book, titled The Last Circle (http://wikispooks.com/wiki/File:The_last_circle.pdf), that explains all the ways Nichols is tied to a wide variety of conspiracies. It even claims that Nichols possesses the original ‘unedited’ Zapruder tape; the famous tape that shows the assassination of JFK. At this point, Sam already believes that the Fed holds up the entire American and world economies on deceit, he also believes that the assassination of JFK was a conspiracy. To my mind, that preconditioning combined with the stress he was under explains why Sam Israel fell for NIchols. Taibbi shows one side of the preconditioning, but the prior belief in conspiracies also played an essential role.
While I think there are a number of reasons Sam Israel fell victim to Robert Nichols’ con, perhaps the most important reason is the predisposition of Sam, along with many other people, to believe there is some greater force running the world. He felt he had multiple strands of evidence for this conviction, from his experience with Wall Street and the Fed, to the documents he found online, to the stories Nichols told. We tend to believe that the amount of evidence correlates to the accuracy of a claim, but in fact there is plenty of bad evidence for a number of beliefs. In the realm of evidence, quality is absolutely more important that quantity.