Learning from Bernard Madoff

Ok, so first this is a cool piece of technology.  If you click onto the title of this blog (Learning from Bernard Madoff) it will link you to a New York Times article about this issue.  Pretty darn cool.

Yesterday I heard a discussion of L'Affair d' Madoff on NPR.  The interviewer was talking with a due diligence officer for some Swiss bank that was curious about investing in Madoff's funds.  

For those who have been truly snowed in, a brief update on the news of the past week.  Bernard Madoff ran an investment firm in New York City (in fact his office was in what New Yorkers refer to as the Lipstick Building, which I used to walk by on my way to work, named because, yes, it looks like a tube of lipstick).  Madoff was famous among the truly rich for bringing in a fairly consistent 10% return on investments, year in and year out.  This is a better rate than the Yale and Harvard Endowments, which are legendary in their investment prowess.  As it turns out, Madoff was running an amazingly lengthy Ponzi scheme.  You know, a Ponzi scheme is where the last in with their money pay the first who want out.  Generally Ponzi schemes can not be sustained for very long, but it appears that Madoff was able to do it for at least two decades and as far as the federal investigators can tell, over 50 billion has vanished.  Yes, I said 50 billion.  So, this due diligence officer was talking about his 2 hour meeting with Madoff in 2000.  And how he went back and told the bank not to invest several billion with Madoff.  He said: I told the bank there were too many warning flags.  

Of course, as it is with these things, now everyone is saying they saw the warning signs.  

However, the Securities and Exchange Commission (SEC) who were notified of the warning signs did some sort of investigation but apparently found nothing.  

There are many lessons in this unfolding story about the failure of regulators, both governmental and the national associations for brokers, dealers, and financial advisors, which license stockbrokers and financial advisors.  As we have witnessed in the past 12 months, clearly those regulatory systems are either non-existent or completely broken.  

But to me the more interesting story is what we can learn about our culture.  Just as with the mortgage/lending/credit debacle, the fact there were warning signs and those who continued to invest ignored them, is something as a society we may want to address.

As I said, Madoff's investment returns exceeded even the large endowments at Harvard and Yale, that hover, I think, around a modest 5% or less.  Now, when you're investing 100s of billions of dollars, 5% is a lot of money.

But here we have people, and let's be frank here, people and companies that invested with Madoff were wealthy, who wanted more than 3 or 5 percent on their returns.  They wanted 10%.  And many people, instead of diversifying their investments, essentially handed Madoff their whole savings accounts.  These people were sophisticated.  Many had financial advisors, accountants, managers (famous Hollywood directors and sports figures).  In today's paper it turns out New York real estate barons also invested heavily with Madoff.

I think what this scandal as well as the mortgage/credit/banking debacle says to me is that we also need to look at ourselves in the mirror.  Why is it we ignore all the signs and proceed to want to make even one more dollar?  Who and what are we putting in jeopardy by our own, well, greed?  From the news accounts it sounds like people were bragging to their friends on Palm Beach, Florida golf courses that they were making these astronomical returns, as if they were better than all the other folks who were sitting on CDs bringing in 3% at best.  It reminds me of the testimony in Martha Stewart's case (the line I am convinced that led to the jury to convict her) when she was telling a friend about the advice she received from her stockbroker to sell before the information became public.  It's nice that we have someone who takes care of our money like that, she said as she was sipping wine at a swanky Mexican resort.  

Being honest, we all aspire to make that extra buck.  And there is nothing wrong with that.  But in another sense, by ignoring the signs that said this high return was an anomaly, the investors are enabling Madoff's theft.  I am not trying to blame the victim, but it's how Ponzi schemes work: they play off of people's greed.

I think it's time to learn from Bernie Madoff.  If the sign says: Warning, slick road ahead, we as a society need to take another route.