Hsu’s Heroin

As I read about the travails of Norman Hsu I find some of it very familiar. To start at the end, the accounts of Mr. Hsu walking around on the train without his shirt and shoes feels to me like someone having a breakdown, not a fugitive trying to avoid notice. Another thing that is very familiar is his touting an opportunity to invest in ‘bridging loans’ to businesses. It sounds like a clever variant of an old scam called ‘prime bank frauds.’ They are presented as insider opportunities to invest in high profit loans to obscure banks that supposedly make short term loans to ordinary banks. I once investigated these schemes when an organization I was connected to became interested in them. The SEC (Securities and Exchange Commission) has a detailed web site on how to spot them here. They list the key characteristics:

  • Excessive guaranteed returns
  • Fictitious financial instrument
  • Extreme secrecy
  • Exclusive opportunity
  • Claims of inordinate complexity

The prime bank fraud works off the old populist conspiracy theory that the ‘big bankers’ are behind everything and offer the sucker a chance to get in on the gravy train. In today’s climate it is much more credible to sell the same kind of high return short term ‘opportunity’ as bridging finance to businesses. That is evidently what Mr. Hsu did – including the exclusivity, secrecy and impressive paperwork. He then added his own wrinkle by making it clear that the ‘opportunity’ would be withdrawn if the victims didn’t make the political contributions he wanted. Investor’s Business Daily reports:

The Los Angeles Times interviewed one investor who said she “can’t stand” Hillary, but made donations “solely to stay in Hsu’s good graces” and knew others who did the same. “They knew they had to do it or they were out,” she said.

At first it seemed logical to suspect that the mysterious source of Hsu’s money might be China, but I think when investigators get to the bottom of it they will find some variation of a Ponzi scheme like the prime bank fraud. From the information available so far it is clear he kept money circulating in a way suggesting that he was the only businessman involved using one loan to pay off another. What is still unclear is the extent to which he mixed up the loan money with the political contribution money. The New York Times managed to get a look at a single month of Hsu bank records from 2003 and reports that there is some very real, even bewildering, complexity involved in Hsu’s dealings.

The records make clear that the group was more than just a loose collection of friends, family and co-workers that bundlers typically rely on when raising money for a candidate. Rather, each person had a direct financial relationship with Mr. Hsu, either receiving money from his company or paying into it, even though many of them appear to have other jobs or businesses independent of him. The purpose of the payments, and whether they related to business costs, fees or expenses, is unclear.

An article in the Wall Street Journal asks What Made Norman Hsu Run? Part of the answer lies in the context of the kind of people and motivations that orbit around political campaigns.

Much about Mr. Hsu remains a mystery, most notably the source of the money for the donations that made him a favorite in Democratic circles. For years Mr. Hsu tapped a vein of fellow Asian-Americans, first to help seed startup businesses and lately to help feed his sudden passion for politics.

His tale also shows the foibles of the U.S. political fund-raising system, which attracts a crazy-quilt of donors — including ordinary citizens, the powerful trying to expand their fame, the ambitious seeking favors and social outsiders seeking a ticket into the American elite. Campaigns say they try to screen this mélange of donors, but the task is difficult and the hunger for cash means they sometimes don’t look too closely.

In my experience there is sometimes a peculiar confluence of these known human foibles and the particular pathology of an individual. If you have never encountered one of these people it is hard to believe that someone would operate in such a crazy way. But it is possible. I once knew a business con man who wanted to be seen as the archetype of success – throwing money around – buying everyone drinks – the finest fellow you ever met. I finally saw he was crazy when he had an opportunity on a Friday to make a bundle by not closing a deal until the following Tuesday. But his obsession demanded he have the cash on Friday so he gave up a real profit to be the phony big cheese on Friday. It had nothing to do with succeeding in his primary business and everything to do with feeding his crazy concept of himself. He, like Hsu, kept going until he crashed.

If you didn’t look at the Wall Street Journal article linked above there is a larger version here of a photo by Steven A Schwartz of a modest looking Hsu with a broadly smiling Hillary. That was the kind of moment I believe he perpetrated endless fraud for. Hsu’s heroin, if you will. I will refrain from purloining the work of the photographer but will quote this description of what the authors believe ultimately drove Norman Hsu:

At a New York restaurant overlooking Central Park in April 2006, the governor of Pennsylvania sat down to dinner with about a dozen Democratic supporters. The 10-course meal in a private room at Per Se, including dishes like Nova Scotia Lobster Tail “Cuite Sous Vide,” cost about $18,000, says a diner who was there. The host, Norman Hsu, was a businessman that the crowd admired but knew little about.


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