The Bernie Madoff Scam is breathtaking in terms of the size of the scam which is anywhere between 17 and 50 billion dollars. This kind of money only can come from some of the most sophisticated investors or people who should be a lot more sophisticated. The stats printed in the Wall street journal showing some of the major investors in the scam , printed on 12-17-2008, is the best illustration of main lesson to be learned : that a lot of bankers and investment advisers do not have a clue about what they are doing with other people’s money. Here are some of the names and the sums invested with Madoff and associates:
Fairfied Greenwich Advisors……………….$7.50 billion
Tremont Capital Management …………..$3.3 billion
Banco Santander, SA (spain)……………..$2.87 billion
Asccot Partners ……………………………………$1.8 billion
Fortis Bank, (dutch)—————————-$1.35 billion
HBSC (British bank)……………………………..$1 billion
…and these are just some of the big investors with over 1 billion dollars in the scam. Blaming the con artist’s victims does not seem very fair but these major financial players should have been able to get reasonable returns on the money they run without seeking out a specialty shop like Madoff. It looks like the blind leading the blind into a welcoming wolf den. The Wall street Journal lists more than 35 separate victims many of them banks and advisory companies. It is one thing to see flake Hollywood actors taken by con artists but these were in many cases major banks and insurance companies . The lesson for people and institutions with money for investment purposes might be to spend more time doing more of the work themselves instead of entrusting that work to others. Looking at the thousands of investment choices one can see why people’s eyes glaze over. It really looks more complicated than it is. The sorry facts are that out of thousands of companies only a few are going to prove to be worthwhile long term investments. It is possible to screen away most of the suspect poor choices the problem with that for most inspiring investors is that it immediately lowers yield. High yield seems to justify greater risk. Much better than average yields tends to justify being stupid with one’s money. But why were banks falling for the scam? Once again I am ready to blame the MBA crowd. I met too many in MBA majors in College who were in graduate school and all told me that they were there in school to get their ticket to success and not much more. As a fool trying to actually learn something in college , I never understood the fast ticket degrees until now.
It is true that Bernie Madoff is a rather exceptional con artist. His scam would be alive and well for another hundred years or more had the stock market not taken the dive it did in the international stock crash. The reason why he could continue getting away with it is his institutional investors only want to take out the interest and leave in the principal to continue compounding higher yields. Bernie may be one of the smarter ponzi scheme operators who ever lived so it is possible to give some of the big banks involved a little more sympathy but not much. The question is why did Bernie finally go and tell his sons he was running a complete confabulation fantasy investment house? Apparently he did when his investors started asking to get principle back because of the economic crash. Banks might have been calling their money back because their own clients were asking to cash out. Sophisticated investors might have been cashing out to take money from assets that have not declined in value to put into investments selling at absurd panic driven discounts. One example of how this works is a portfolio manager having walmart shares in the portfolio and seeing that those shares are more than they were before the crash they select those to sell to buy up other quality assets selling at less than half price when those prices are still available. Had the call for principle never come and had underlying assets in Bernie’s fund not declined with the rest of the market he might have been able to make good and continue the scam running up a much larger number of clients over time to make it a trillion dollar ponzi scheme. The collapse of Madoff Associates probably saved a lot more innocent investors of the future as a result of collapsing now and not later.
The same day the Wall Street Journal published the stats cited above they showed their sense of humor in an opinion piece called “Put Madoff in Charge of Social Security.” This is insightful because of the way our government is runs the social security program there is no principle to back up dividend/ interest payments. The Bush administration was right to try to back up some social security accounts with private asset/ equity holdings as an alternative but all knowing political forces like the AARP were completely against the Bush Plan and now look at the collapsed stock market as proof positive they were right- but actually had the social security accounts bought up more securities with an end of the year requirement to buy more for 2008 it is uncertain that it would necessarily have been a disaster or even a long term disaster since the average participant would just be younger and putting more of their current taxes into those funds and not the older already vested ones. So AARP is more of Madoff than they realize or at least an adviser telling people to trust the government.
The author of this noted that Bernie Madoff , himself, advised the FBI agents that he was running a ponzi scheme and was proud to tell them he grew it into a 50 billion dollar pyramid in a bragging tone. Anyone who thinks that Bernie just got in above his head is fooling themselves. When a sociopath is caught doing one thing wrong you can bet there is a lot more bad stuff that is not yet discovered yet.
Another Wall Street Journal article , the same day, is “Pyramid Schemes are as American as Apple Pie.” This is a ponzi country. If you don’t like it move somewhere else but leave your tax liability here because congress wants the people who stay here to have a bigger government to take care of them.
The moral of the story maybe that when a bank is collecting fees on your money steering those funds special boutique investment shop that get better than market rates, be a little concerned and if you want someone you don’t know to take care of you move to a place like Cuba where there is no competition in advertising for those services.