The Madoff Chronicles - Part I

Madoff Isn't The Only One

It is easy for everyone here on the outside to ask how hundreds of purportedly smart business people could be suckered by Bernie Madoff’s patently bogus “investment fund.”  All of us here in the tradesman class, without the money or social cachet necessary to get into Madoff’s Ponzi scheme, are having our little moment of schadenfreude at the expense of the landed gentry.  But to be honest, none of us knew any better - we just didn’t have the money to lose there.

Before going any further on the actual topic of the day, I would like to take a moment to marvel at the sheer scope of Madoff’s crime.  Fifty billion dollars!  Does Madoff revel more in the mountain of cash or in the impressive list of marks who willingly handed over money like the little old widows in Mel Brooks’ “The Producers”?  Madoff made the simple calculation that the penalty for robbing the corner liquor store would be the same as stealing all the gold in Fort Knox, and went for the Gold.  That’s the kind of initiative that usually makes me proud to be an American.

But we came today not to praise Madoff, nor to bury him. 

I hope that we are nearly at the bottom of the financial spiral, so that Madoff can serve as the final, best room in this house of horrors, the one we remember when we drive home.  Because beyond the bemusement, we can actually profit from the lesson, if we quit acting like Bernie Madoff was a one of a kind criminal and instead see that his asset-less investment fund was not too far removed from the rest of the financial institutions we are busy bailing out, so that we can return to the days of giving them our money in expectation of high returns.

What part of Madoff’s crime is unique?  He took billions from investors based upon assurances that his fund would generate solid returns on investments.  Which major Wall Street player didn’t?  He used phony accounting.  Every major “write-down” in the past six quarters has an acknowledgment that the previous accounting was not particularly accurate.  He didn’t actually put the money into assets that would yield returns.  Neither did Lehman, AIG or any of the others.  

The real difference is that Madoff didn’t pretend that he was being a prudent financial investor; he told his clients point-blank that he would make them money and they weren’t allowed to know how.  Our major investment houses instead said they would make money and if you could figure out how, good for you.  They created exquisitely complicated debt instruments, whose actual value could not be traced.  Madoff knew he wasn’t going to pay people back.  Wall Street just didn’t care.