Tuesday, June 30, 2009

Forget Responsibility- Let's Just Blame Bernie Madoff

I've written eight other posts concerning the Bernard Madoff investment fraud, all of which may be found by clicking on the 'Madoff' label, in the list along the right side of this page. Of all of them, I think this one, from late December of last year, best captures my feelings on the entire affair.

Of course, since Madoff was sentenced yesterday to 150 years in prison, the topic of his epic fraud was headline news again yesterday.

CNBC and Fox News made much of the wailing of various 'victims' of Madoff's fraud. Once again, the media helped shift responsibility from the so-called sophisticated investors who ignored the many warning signs concerning the fraudulent scheme, and place the entire blame on Madoff.

In contrast, I wrote in that prior post,

"To me, the key observation, which I read in the Journal last week, was that an outside analyst had done a sort of 'back of the envelope' calculation to determine that Madoff's portfolios, according to estimates of the assets he ran being in the tens of billions of dollars, must have had trading activity exceeding the entire market for various index puts or calls. Additionally, experienced clients seemed to think nothing of the fact that blue chip equities showed no decline in prices earlier this year, although they were key to the alleged strategy.

This smacks of convenient denial of reality by so many clients. The suspension of disbelief, and a desire to simply believe that unbelievably good, and not just consistently, but uniformly constantly good results, were real.

As I reviewed the mechanics of Madoff's scheme of undisclosed numbers of individual accounts, rather than a single, explicitly-spotlighted fund, with my partner, my belief that Madoff had long ago discovered loopholes that I, too, observed earlier this decade grew significantly.

The most important element of his fraud, without question, was the lack of independent custodial inventory reports of financial assets held in accounts for clients. I can't emphasize enough that this alone left every one of Madoff's clients vulnerable.

Coupling this with a curious lack of diversification, a/k/a greed or stupidity, and you have the recipe for disaster among so-called 'sophisticated' investors.

How many once-wealthy Americans having millions of dollars of accumulated financial assets are now simply bankrupt? Or nearly so, with almost nothing to show for decades of successful careers?

And all of this....all of it...would have been minimized, if not totally avoided, had each and every investor insisted on receiving a regular asset inventory report from an independent custodian. This would have prohibited false claims of asset ownership, or required an entire custodian's business to be in league with Madoff.

I don't believe any more regulations will prevent a repeat of this type of periodic investment fraud. There are plenty of safeguards required by current regulations. But nobody can prevent a person from simply throwing caution to the winds, trusting in a manager, and his 'special' inner client circle, without any objective, confirming evidence."

Rather than the sort of statements no doubt made by various clients of Madoff's in court, which I'm sure portrayed themselves as victims who bear absolutely no responsibility for what happened to them and their money, I would love to read in this morning's newspapers, and see video on cable news, statements like these:

"I was greedy and failed to diversify my millions of dollars of assets as I have been advised and taught for decades.

I foolishly asked no questions as to how Mr. Madoff could achieve such uniformly-constant, positive returns for decades, when no other manager ever demonstrated such performance perfection.

I took the advice of my friends at face value and asked no questions.

I felt so fortunate to be allowed to give Mr. Madoff all of my assets to manage that I never bothered to ask questions about how he achieved his performance.

Learning that my money would be refused for management by Mr. Madoff if I asked a single probing question, I kept my mouth shut and just wrote the checks.

Despite the fact that Mr. Madoff did not have a publicly-listed mutual fund with an independent accounting firm auditing the accounts, and a custodian of assets, I gave him all of my assets.

I never bothered to demand a quarterly custody report from an independent custodian verifying that Mr. Madoff's firm held the assets claimed in a separate account for my benefit.

I suspended disbelief that anyone could achieve such uniformly perfect investment returns, because I didn't want to discover that this was all a fraudulent scheme.

It never occurred to me to do a rough estimate of whether the options markets were sufficiently large to accommodate Madoff's claimed strategies.

I violated almost every precept of intelligent money management- diversification of instruments and managers, validation of assets held- in my greedy and reckless pursuit of constantly-positive returns from Mr. Madoff."

Alas, I know I won't be reading or seeing those statements from people who lost money in Madoff's scheme. No, they are being portrayed only as victims. Nobody seems to be forcing them to admit to their own greed, bad judgment and denial while they were receiving custom-created reports falsely reporting such amazingly constant gains in the worst equity market in generations.

In fact, I continue to find some humor in ongoing 'searches' for the 'missing billions.'

Haven't people gotten "it" yet? There weren't any 'missing billions.' The totals of those numbers on all those fraudulent, typed-up account statements are themselves fictitious. Madoff never made those profits. He spent them.

People, it's a Ponzi scheme. The gains were illusory. The money people gave Madoff was spent and is either gone, or cleverly hidden in several or many blind accounts, to be eventually accessed by his family after enough time has passed for them to safely recover and launder the money.

So, sure, there's probably a lot of money hidden somewhere. But it's unlikely to be on the scale of what people believe. The false gains which pumped up expectations of Madoff's phantom horde have probably created an equally-false expectation of the size of his remaining illicit plunder.

It's sad that the major lesson of the Madoff fraud is going largely untaught and unreported. By making Madoff the only villain, and excusing the greed and stupidity of his pigeons, the media are fostering the sense that what happened to Madoff's clients could not have been avoided, and involved no amount of naive and inept investing behavior.


susan said...

Sadly this absolving yourself of responsibility permeates all facets of America nowdays.

C Neul said...


Thanks for your comment. Of course, I thoroughly agree.

But, in time, this will have to change, or we'll see a generally plunging per capita GDP, don't you think?