There are some things you are not gong to like in this article – so let me say straight off, I know Bernie Madoff is a dirty rotten scoundrel (in fact, for the sake of brevity, let’s just call him “BM”, which has other useful meanings). I know how many people and institutions have been harmed by him. I know some well meaning folks have been irreparably damaged, so there is no need to give me angry feedback on some interesting points I am about to make about this sad event. There are many facets to this outrageous tale as Bernie made-off with the money.
Let’s start with the easy stuff, the actions of the victims. The old rules of investing have been covered already, possibly more frequently than needed:
1) Don’t put your eggs in one basket
2) If it sounds too good to be true, it probably is not true
3) In investing, there is an almost certain correlation between risk and reward
4) Make sure those you invest with provide you with regular and reliable reports
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The point of these rules is not to teach them anew, the point is tens of thousands (including dozens of Minnesotans) of supposedly sophisticated investors broke virtually each and every one of them. To that end, they share some culpability with BM, the perpetrator. Without a victim, the schemer could not operate, and these folks put themselves in harms way.
Which brings us to the second element of victim participation: greed. Yes, greed can be a hypnotic attraction (see rule #2 above) – so if you want rewards that are out of the ordinary, that are consistently above “normal” returns, and you seek wads of income from money invested, you will sooner or later get burned. BM, and others who defraud, know how to play the greed card with skill; but again, they cannot win that hand without another player: the victim.
And that raises another issue in the terrible event; the role of “friends” in expanding the scam. BM created a massive network of “friends and associates” to help him grow (Ponzi’s obviously need a fresh supply of money to sustain themselves). I cannot think of a worse source of financial advice than “friends”! They not only have little or usually no expertise, but they generally get financial information second, third or fourth hand, which renders it feeble or useless. Did these so-called sophisticated investors not understand this? Let’s make that rule #5.
There may be one set of advisors who do know less than “friends”: financial advisors. I confess, this reflects a personal bias. Many (not all) have suspect qualifications and experience, but charge unwarranted fees for underperforming the market. You can do that yourself, or even match the market at modest cost, with some good index funds. My complaint in regard to the BM situation is that many were complicit in the scheme. Many investors gave their funds to these “experts” with instructions to invest conservatively and/or with diversification. Yet, turning all the money over to BM was an easier way to invest, grab a fee for a single transaction, and presumably show their clients ongoing returns…till it all ended with a thud! But, the very worst part of these financial advisors’ and investment managers’ actions that really is unforgivable, was the trust placed in them to manage charities and pension funds, whose principal now is probably lost. Many, including some major hedge fund managers, had too tight a relationship with BM, which clouded their judgment to the detriment of their clients.
I repeat, there is sympathy for the victims, no one should have their life savings diminished or worse; however mitigating the victims’situation are these facts. First, many were with BM for years – even decades. They garnered returns of 10-11% annually, so the early-on investors actually had their money returned, and then some. The regularity of these returns was in themselves a warning shot because of their consistency alone. In studies of the stock market, returns such as these, which never go down even in poor markets, are called “serial correlation” returns, which are statistically impossible. Did the victims actually think there was a money fairy somewhere protecting them from the realities of the market? Don’t ask…don’t tell. Just take the money. An even darker fallout of this situation is that the victims’ actions damaged us all – and the system – by loss of credibility and trust.
Then, there are the facts that many more savvy investors actually did not place all their eggs in one basket (rule #1); and these folks who are clearly people of means (BM required a minimum investment of $1 million) still have plenty of assets left. That does not mitigate, excuse or make the pain any less for BM’s actions, but it may not change lifestyles drastically. With 48,000 “victims” probably most will get by quite nicely as upper income citizens, despite the pathetic tales about those few who really did get wiped out. There are ongoing discussions about SIPC insurance (up to $500,000), which if repaid to investors, would alone still place the recipients in the top few percent of net worth and wealth.
Regarding the SIPC, and government’s role in the whole mess, they clearly share a huge portion of blame. The SEC had been concisely cautioned about the BM method of delivery of returns a decade ago. What bugs me most about this factor is the same people who rail against big government, high taxes, and government intrusion are the same ones who are now critical about this regulatory failure. They create a self-fulfilling prophesy, which continues to this day. You want regulated markets to protect investors? Well then adequately fund and staff the proper agencies.
Finally, as egregious as this entire incident is, consider the non-BM investors (like myself) who in the past year or so have seen their investments and retirement savings disappear at the rate of about 50%. So, should the victims not have invested with BM…their savings would likely have been eroded by a massive margin anyway…just like the rest of us! No solace…just a fact. Welcome to our world.
So what are these “other” sides of the BM scandal all about? Well, first, try to remember rules 1-4+5 above so the next BM will have trouble finding victims. Next, there is plenty of blame to go around: the “friends” and financial advisors who pushed this fraud forward…the government who failed in its most mandated role to protect the public…and the victims themselves who put themselves in harms way and let greed rule their decision-making. Sad as it may be, there is no escaping this conclusion. Oh… and of course we cannot forget BM himself as he rests on the top bunk of his spartan 8×10 room preparing to enjoy his morning bowl of gruel for breakfast.