Some Madoff Musings

Let me begin this little post by saying that I could not possibly come up with enough epithets to describe how I feel about Mr. Madoff. He is slime, sleaze, scum, etc. I am thrilled beyond words to see him go to jail and it does not bother me in the least to ponder him spending the rest of his life going to the dance with his new roomie Bubba.

I also feel deep empathy for the many victims of his crimes, especially for the older ones who thought they were entering into their golden years but now face the need to go back to work because they are destitute. The suffering of these poor people is something we should all feel the deepest regret over.

Finally, I am incredibly upset at the utter failure of our regulatory agencies in failing to discover this scheme for more than twenty years especially when they were warned by some of the investors that something seemed to be off or questionable in this Ponzi scheme.

Having said all that I do have a bit of a problem with the portrayal of the investors as being completely innocent dupes who hold no responsibility for what happened. I realize that these people were no sophisticated investors but at the same time they were not entirely ignorant. The mere fact that they had fairly large sums of money to invest indicates that they had at least a basic level of education and intelligence.

Taking that into account I would think that they would have wondered about some of the warning signs. Here they have a plan that is providing 10-20% returns every single year for decades on end. Over 90% of the quarters were profitable and in most cases they made far more money than any other investment plans.

So consider that for a moment. No matter what the stock market or economy is doing, you are making money. Every other plan in the country is losing money during bad times but you don’t. Other plans are making modest single digit returns but you are making steady double digit returns while being promised there is no risk.

I would think that this would set off alarm bells in the minds of most people. Ponzi schemes have been around for over 100 years and yet none (or few) of these investors seemed to think anything was wrong.

This does not, of course, excuse Madoff for his crimes. As I said above, I think he deserves to spend several lifetimes in a very small cell and should give up every penny he’s got. It does not mean that I do not feel badly for those who have suffered. But I do think we need to accept that a portion of the blame does lie with those investors who wanted to believe that the free lunch really was real.

         

Author: PATRICK EDABURN, Assistant Editor

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7 Comments

  1. There is a theory that Madoff's investors were the victim of an affinity scam where Jews invested with a Jewish insider who those investors believes was using insider information and stock manipulation schemes to defraud others (read non-Jews).

    Many investors believe that they were benefiting from one form of investment fraud but were really the victims of another kid of investor fraud.

  2. Finally, I am incredibly upset at the utter failure of our regulatory agencies in failing to discover this scheme for more than twenty years especially when they were warned by some of the investors that something seemed to be off or questionable in this Ponzi scheme.

    Why are you upset? People got what they voted for, a “free market” with little or no regulations. After we all know that “The nine most terrifying words in the English language are, “I'm from the government and I'm here to help.” Ronald Reagan.

    Madoff Chasers Dug for Years, to No Avail

    I sincerely hope that all the loser's are good Republicans who voted for Shrub twice, it's about time they suffered the consequences of their stupidity.

  3. Past Returns Not Necessarily Indicative of Future Performance

    Everyone knows it, everyone understands it- yet few can resist ignoring it when they see spectacular past returns.

  4. Don Quijote,

    Most of the people scammed are upper class Jews who are undoubtedly Democrats. Of course, if you want to stereotype, it fits with the culture of elite Democrats: The rules are for other people. They are the ones who talk about a green future but own vacation homes. They are the ones who talk about diversity but send their children to elite private schools and private universities. They are the ones who call every Republican a racist but but the life is filled with Jewish only organizations.

  5. Actually, most of the money (through huge funds and funds of funds) DID come from seasoned investors who should have known better. Some at least have admitted to being a little suspicious, but that as long as the 'money' get going up, didn't want to jump off the gravy train.

  6. I agree with you on Madoff…. As far as I'm concerned he deserves whatever punishment he receives, and then some. My only disappointment is that we can't extend aging so he can spend more time behind bars.

    But I disagree with you concerning the investors (or more accurately, many of those investors). Investors search for people who have a proven track record and who have connections with well-known people who can act as references. Madoff had both. Investors also rely upon the regulatory agencies to do their part.

    Unfortunately it was the regulatory agencies who failed.

    Going back to the point of investors being sophisticated enough to know better… a sohisticated investor should know (generally) what types of strategies there are, the risks associated with those strategies and, in consultation with their advisors, tax experts, etc. should determine what sorts of investments are most appropriate for them.

    I think anyone who invested with Madoff would not fail the “sophisticated” investor definition just because Madoff might have raised a few eyebrows…. Any sophisticated investor knows that one can make money in bull markets and bear markets. So it's not unreasonable to see returns in any market. Particularly if half the world (including the regulatory agencies) vouched for Madoff.

    Investors generally take a hands-off approach and let other people do the investing (that's why poeple like Madoff exists). Advisors meet regulary to give updates on the portfolio performance and pass along ideas for a final decision to invest or not. Though other people may have other arrangements…. So if Madoff's employees did the same with the people whose money they managed, then those people had some input (however minimal) and would have been happy to know that they made some good decisions in consultation with their advisors.

    Now having said that, I do have to say that yes, there might be some warning signs that some people would have picked up on… Some investors are more “hands-on” than others and know their way around the markets more than others.

    I think Eli Wiesel was probably smart…. his charitable foundation was taken along on the Madoff ride, but I don't believe that Eli had all of his eggs in one basket….. Of course, he probably put the charitiable foundation money with Madoff because there was a mutual benefit. But nonetheless I don't believe he had any other money with Madoff, though I haven't seen a full listing of Madoff's investors so I can't say for sure.

  7. AR, “Some at least have admitted to being a little suspicious, but that as long as the 'money' get going up, didn't want to jump off the gravy train.”

    That's right…. as a general rule if something positive is happening few people question it closely.

    It's like if someone makes a mistake but it's beneficial then no questions are asked. But if someone makes a harmful mistake then they get in trouble. It doesn't matter whether it's a business decision or a decision about your family or personal life. The good is always “good” and the bad is always “bad”, regardless of the circumstances behind it.

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