Jan 18 2009

The Curious Case of Bernard Madoff

Published by at 11:39 pm under Investing

“In any country where talent and virtue produce no advancement, money will be the national god.  Its inhabitants will either have to possess money or make others believe that they do.  Wealth will be the highest value, poverty the greatest vice.  Those who have money will display it in every imaginable way.  If their ostentation does not exceed their fortune, all will be well.  But if their ostentation does exceed their fortune they will ruin themselves.  In such a country, the greatest fortunes will vanish in the twinkling of an eye.” – Denis Diderot, 1774

 

I realize the whole Madoff scandal is old news by now, but even considering the startling stream of financial news of disappearing investment banks, gargantuan bailouts and record layoffs, I can’t quite get past what Madoff did and how he was able to get away with it for so long.

 

For me, the more I learn about Madoff’s reported tactics, the more terrified I am.  Not because I could lose money directly, but because someone who was respected and trusted by some of the most prominent people and organizations in the world would could pull off such a shocking crime.  He duped them all and now they must pick up the pieces.  So how many other Madoffs are out there taking advantage of people and institutions right now?  Hopefully not many more but I wouldn’t bet on it.

 

There are at least five questions I hope to learn the answers to as I continue to follow the unfolding story.  First, why would such an accomplished and respected man engage in such despicable tactics to begin with?  At least on the surface it would appear that Madoff started out on the right track.  He formed his own trading firm in 1960 and after struggling to compete with the big NYSE firms, he helped develop an electronic system to disseminate quotes and set his firm apart from competitors.  Eventually the technology he helped develop led to the formation of the NASDAQ electronic stock exchange.  Madoff went on to serve as the NASDAQ chairman of the board of directors.  Impressive if you ask me.

 

Second, did he really believe he would get away with it all when he started?  If he did, he clearly wasn’t terribly bright after all or he was delusional.  Third, how many other people were knowingly involved in this mass deception?  There is no way anyone can convince me that one man fooled and deceived hundreds and maybe thousands of people out of billions of dollars for over twenty years without help from others.  I expect quite a list of accomplices by the time this goes to trial.  Fourth, how in the world did the SEC fail to recognize what was actually going on?  It is common knowledge that outside analysts have been throwing flags for years – and yet nothing was uncovered (apparently).  And finally, was bribery and/or coercion involved in keeping the deception under wraps so the scheme could continue much longer than it would have otherwise?  It is certainly possible and maybe even likely considering what we now know.

 

If you can shed some light on this bizarre mystery then I certainly look forward to your comments and one more thing…think twice or maybe ten times before you invest your money anywhere these days.

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