Bernie Madoff is like an elderly relative who brought shame and notoriety to his family and to his profession. The community at large can not get enough news about him.
There is a point to these incessant conversations about Bernie on the web, on the front pages of most newspapers, and in our personal ruminations. We want to understand what kind of environment would allow his decades long financial fraud to thrive. We want to understand why sophisticated investors chose to believe that any money manager could have a multi-year string of returns which is a near statistical impossibility. (See pictures of Bernard Madoff's demise.)
Once Madoff is imprisoned or dies, the circus of press coverage will die down. We will be left with only our memories of him and several dozen biographies that will come on and off the best seller list in a matter of months. (See a brief history of Ponzi schemes.)
Madoff has remained fascinating because of the astonishing audacity of his actions, the government's incompetence which allowed him to take in billions of dollars and hide the actual returns on the investments, and the web of institutions, relatives, and people who worked in close proximity to him and may have been part of his fraud.
Madoff may be the most unsettling memory during this time when investors chose to believe blindly that nothing could go wrong with the economy or capital markets. The money-making machine had become perfect. The global expansion which stretched from China to India to Europe, the Middle East,and the U.S. had become so broad that if one element or another failed, the foundation of the system would still be unshakable.
The system did fail and the resulting cascade has been breathtaking. Until Madoff admitted to his family that his entire career as one of the most successful money managers in the world was a fraud, the global economic collapse did not have a face. Men like Chuck Prince and Stan O'Neal were too bland and their sins were based on greed and stupidity not genius and deception.
James Madison said in a speech before the Constitutional Convention "All men having power ought to be distrusted to a certain degree." While almost every person involved in the frenzied financial expansion knew that, it was conveniently forgotten when almost everyone was making money. What the financial community learned from the Madoff scandal is that some people were not making money at all during the great capital bonanza of the last half decade. Prosperity was in tremendous supply because people wanted it to be. Madoff was "making" billions of dollars while actually losing billions. His fund was a pool of toxic assets in a box.
One of the things that made Madoff an attractive figure was that charities benefited from his investment management nearly as much as his wealthy clients did. This was not unlike the unwritten rule at Bear Stearns that partners were to give a large portion of their bonuses to charity. The collapse of Madoff's funds and Bear destroyed what the heads of non-profits had believed for years, which is that the wealthy in society would always be generous enough to help the less fortunate.
As Madoff's colossal fraud moves from the headlines into memory, his name will remain as a caution to all future investors. No one in this generation at least will ever believe that every dollar invested in the market will turn into two.
Douglas A. McIntyre
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