A Weak End To Bernie Madoff

Sorry for the horrible pun, but how often do you get a chance to equate massive financial fraud with a classic 80's movie? Also at least I didn't say that Bernie Madoff "made off" with $50 billion. I do have standards for my bad puns.

For those not familiar with the story, Bernie Madoff is the former NASDAQ chairman who was recently charged with fraud for swindling up to $50 billion from wealthy investors in his Bernard L. Madoff Investment Securities LLC. This was a separate business from his huge brokerage, which was one of the largest market makers on NASDAQ. There had been red flags raised in the past as Madoff consistently brought in 1-1.2% every month, even in the current economic recession. Many investors believed that Madoff was using inside information from his market making business to achieve these incredibly steady profits, but were willing to ignore the ethical issues in exchange for a 10-15% yearly return on investment. According to analyst Henry Blodget:

"Many Wall Streeters suspected the wrong rigged game, though: they thought it was insider trading, not a Ponzi scheme," Blodget wrote. "And here's the best part: That's why they invested with him."

It is hard too feel too much sympathy for these people, how many billions in returns did they collect over the years as the fraud spiraled out of control? But many more of his investors could not have known much, if anything, about his "investment strategy". We already have reports of charities being forced to close, family foundations losing half their assets, and small towns pension funds being hit. The greater losses are with hedge funds, banks, and other asset managers, some of whom appear to have lost billions.

I predict that once the shock of the enormity of this theft wears off, we will begin to see the blame placed on the SEC and lack of government regulations. This will inevitably be followed by lawsuits against the government for lack of oversight, and eventually taxpayers will again be forced to foot the bill for greed and stupidity on Wall St. This is why it is always a bad idea to rely on government guarantees of safety and quality, be it the FDA, DHS, or the SEC. Peter Schiff, cutting to heart of the matter as always, had this to say:

"Of course, the fact that the SEC routinely audited Madoff's investment company and found nothing wrong is further proof that government regulation of the securities industry is ineffective and has done more harm than good," he said. "Rather than protecting investors, it merely lulls them into a falls sense of confidence. If government stayed out, private-sector due diligence would do a much better job of ferreting out such massive and poorly conceived scams."

Good luck trying to sell that one in the next few days, Peter. I have a feeling we can expect a lot of talk about "oversight", "better regulation", and "transparency". Perhaps Obama will create a new Cabinet level "Fraud Czar", or merely double the size and budget of the SEC. Either way SOMETHING will have to be done, all the serious people will say.

I can already imagine David Brooks, or Tom Friedman, or Paul Krugman calling for a regulatory Manhattan Project, to finally eliminate fraud and risk from the world of finance. The old Nuclear Option, the last rhetorical resort of intellectuals trying to control the uncontrollable , or otherwise meddle in markets.

The fact is, no amount of oversight or government control could prevent someone with Bernie Madoff's wealth and influence from fleecing his own friends. He used the respect and contacts he gained over half a century as one of the titans of Wall St. to lure in his marks, and steady returns to keep them from questioning his increasingly unbelievable performance. The failures here were ultimately human ones. Bernie Madoff committed an unquestionably evil act, destroying wealth created by generations of thrift, innovation, and sacrifice. Many of his investors were innocent, or guilty only of gullibility, but many were also guilty of greedily ignoring red flags in exchange for easy money.

Evil, ignorance, and greed are not new traits in humanity, they have existed since the dawn of time, and will be around as long as man exists. No religion, philosopher, or king has succeeded in destroying evil, and no government, regulator, or bureaucracy will either. Unfortunately, that will not stop our government from trying just one more time.