The Madoff Chronicles - Part II

Follow the Money

The person we haven’t heard from in the Madoff affair, the one I am most interested in, is the auditor.  News stories have said that Madoff used an obscure auditor that no one else was familiar with to produce his reports.  Obviously, this shadow figure is complicit in the crime - reports of annual fund growth accompanied the annual dividend payments.  Somebody knew that there wasn’t a fund growing anything but a longer list of new investors.

And the reason that I want to hear from this guy is because that is the person who actually made the whole thing work.  The auditor provided that only window into the Madoff vault.  This little cockroach needs to be brought, blinkingly, into the light of day because it is he, and not Madoff, that we need to hold on to as the symbol of everything that has been wrong with the go-go Nineties and Aughts.

If we look back to the tech bubble, the problem was that people invested tons of money on the belief that the industry had nowhere to go but up.  Sure it was the triumph of hope over experience, but it was brand-new economic model.

Where were the gloomy guys with the green eye-shades?  The accountants whose job was to point out that the company with the five billion in new investment capital had a business plan that was guaranteed to lose money for the next twenty-four months and then after that it was anybody’s guess if they could ever turn a profit.  Nowhere to be found, because no one wanted to know, we all wanted to hope.  Kinda like Madoff’s customers, ain’t it?

Remember Enron?  All the off-book accounting, all the debt magically transferred on the balance sheet to off-shore wealth?  The auditors who blessed Enron’s financial statements, giving them the Good Housekeeping Seal of Approval, had a hand in convincing investors to put billions of dollars into the shredder.  Pretty much the institutional version of the obscure auditor cranking out Madoff’s bogus balance sheets.

The auditors starring in the housing bubble, more than tangentially responsible for the recession of 07-08, were the credit rating agencies.  Their role was to fairly examine the value of the credit-worthiness of the debt being packaged and sold as collateralized obligations.  It is apparent that their examination never contemplated either the value of the collateral or the credit-worthiness of the obligors - as they wrapped pretty red ribbons called “AAA-rated” around millions of packages of debt that should have been labeled “toxic waste.” 

When there are billions involved instead of thousands, who is watching the watchers.  Nobody apparently.

Collectively, we all need to sit down and watch "All the President's Men" again.  To hear Hal Holbrook croak "Follow the Money!"