What should Bernard Madoff's victims have known and when should they have known it? And what about the hidden 2007 George W. Bush administration decision that helped enable Madoff's crimes?
The first question has a simple answer: most of them should have known from the start not to invest with Madoff, because they were buying into hedge funds. Even if the fund manager is honest, it's not prudent to place your life savings -- or in at least one case, your entire charitable endowment -- in a hedge fund, a risky asset class. Perfectly legitimate hedge funds can clobber investors, as Carlyle Capital did last year. The Madoff victims dominating the news -- upper-middle-class men and women who handed much or all of their life's savings to Madoff -- should never have been at the scene of the crime in the first place. Hedge funds are the Wall Street equivalent of baccarat tables. Never gamble with anything you cannot afford to lose!
Commentators are now lamenting that Madoff's funds were unregulated, but that's because they were hedge funds. (Here is their Securities and Exchange Commission listing under the category for high-risk investments.) The logic of the hedge fund is that it does not require close regulation because only sophisticated, wealthy people and institutions buy into these instruments: such persons and institutions are assumed able to bear losses, and also to understand that portfolio theory says to place only a fraction of what you possess in risky ventures. In order to buy into a hedge fund, the SEC asks you become an "accredited investor," attesting your net worth is at least $1 million, or that your income is at least $200,000 annually and you expect your income to remain at that level. That is, you attest that you are well-enough off to take a big loss and still be okay.
Perhaps as part of pretending to be genuine, Madoff required marks to sign waivers acknowledging they had been warned of a possible loss. All legitimate hedge funds require such documentation. Putting retirement money into an investment that warns of losses is the kind of move those approaching retirement are supposed to avoid. Retirement money belongs in Treasury bills, certificates of deposit, blue-chip bonds or S&P mutual funds. Mutual funds can decline -- reputable S&P funds are down around 35 percent since October 2007 -- but also bounce back, and there is no chance of them going broke. (Broad-market mutual funds would zero out only if Western society collapsed, in which case it would make no difference where you invested.) Hedge funds tank on a distressingly regular basis. Just ask investors in the SageCrest hedge funds, which went bankrupt last summer after about $600 million of investors' $650 million was lost on bad bets.
Most hedge funds impose a minimum $1 million initial purchase, in order to ensure that only those who can afford a loss buy in. Madoff's funds had a $2 million buy-in, a reason all Madoff victims interviewed by today's Wall Street Journal lost more than a million dollars. (Those who pooled funds to meet the Madoff minimum were circumventing an SEC rule intended to protect average people from Wall Street vultures.) The high buy-in was part of Madoff's con-man appeal, along with his preposterous claim to possess "algorithmic technology," whatever that means; Madoff made it seem he was guarding the doorway to a super-secret money machine reserved for a select few. Fairfield Sentry, a Madoff feeder, had a $100,000 minimum buy-in, unusually low, so a middle-class person might have entered the Madoff swindle via Fairfield or a similar feeder. But the same basic reasoning applies. Unless you could afford to lose $100,000, what were you doing putting your retirement nest egg into a hedge fund?
Madoff intermediaries told marks that the financial genius they represented had invented an investing formula that eliminated risk. Adults are supposed to know that salespeople will say anything to get a commission! Anyone who said, "I bought Florida swampland sight unseen because the salesman assured me a major shopping center was about to open nearby" would not receive much commiseration. Many people are financially unsophisticated, or don't read warning forms; many want to believe there are incredible super-secret insider wealth formulas. But in the end, adults must be responsible for their voluntary choices. People whose savings were funneled to Madoff without their knowledge or consent are deserving of unlimited sympathy. Those who actively sought out Madoff became crime victims: but the first step to that status was their own "assumption of risk," as the saying goes. Had most Madoff investors simply followed conventional financial theory about retirement, most would still have their money.
What might the Bush Administration have done to lessen the Madoff damage? In 2006, the Securities and Exchange Commission proposed to raise the requirement for individuals to engage in risky investments to a net worth of at least $2.5 million above home equity. That definition would have barred the upper middle class from hedge-fund investing; in 2006, SEC chair Chris Cox said hedge funds "are not for Mom and Pop," and should be made harder to place money in. But the SEC postponed the rule change after a White House panel said in early 2007 that hedge funds should have only nonbinding self-regulation.
Had the 2006 rule change gone through, many who invested in Madoff Securities in 2007 and 2008 would have been prevented from doing so -- such Madoff victims have every right to be furious at Bush's financial bozos. The rule still needs to be changed, to prevent other average people from investing retirement savings in other risky funds. Let's make sure what happened to the Madoff victims does not happen to anyone else.
Those are the most capable financial people in the nation, yet they put the entire nation in jeopardy due to their greed and foolishness, and not only putting all of their eggs into one basket, but 40 TIMES all of their eggs.
Yet you still say these poor people were especially foolish for investing with a guy who was vetted by the SEC many times, even when the SEC were routinely given hard evidence about the guilt of this charlatan over the course of a decade.
Just following these simple rules, no one would lose any meaningful money with Madoff.
People lost money not due to greed, or lack of government regulations as many voices claim; I read all comments. They lost their money due to their own stupidity.
The right remedy is more education not more regulations.
Nonbinding self-regulation? That's a euphemism for no regulation whatsoever.
Actually, it isn't even a euphemism. It is saying, outright, no regulation whatsoever. A euphemism could actually mean something different, but is understood to mean what it really means. 'Nonbinding self-regulation' can't mean anything BUT 'no regulation', since one cannot regulate one's self and 'nonbinding' guidelines are not 'regulation.'
I'm not trying to be harsh with you, I'm simply trying to illustrate how BROADLY and CLEARLY disdainful of the idea that financial brokers should follow rules of any kind the Bush administration (and many other Republicans, Blue Dogs, and 'New Democrats') really were.
The above comes from the story. Good luck. Just today, on the radio, some guys are hawking a product, an annuity, no doubt, with the inference that the investor either gets 10% per year as the return or the return from the S&P500, whichever is better. How can someone lose? It's a no brainer. But like the Maddoff scheme, it can't work. It makes no sense. You can't be guaranteed that kind of a return. But this stuff will always be out there to those who seek it or are "sold" it. It is a real pity to have folks lose life savings, but the "sharks" will always be there to eat their prey. I'm all for stopping this, but I'm skeptical that it can ALL be stopped.
What the hell is "nonbinding self-regulation"? You get to regulate yourself, but not even your own rules have to apply if you don't want them to?
People have to divorce themselves from the Disneyfication of the human mind that is taking place, and grow up and actually think, and not believe they're cushioned in some big hand, by "God's grace". Never believe anyone who says you can confidently invest with them, even if they have apparent proof--do your own research. Until you have REAL proof that an investment is sound, keep your money in something simple that returns little or nothing, and doesn't reinvest it. Follow the entire chain of methods used by any investment vehicle--follow your money--to see where they're putting it. Don't put any money you can't afford to lose, into anything that puts it into risky investments.
Even yesterday, on CNBC, after everything the economy has gone through, a couple of their "reporters"/paid actors were spouting "Money is made by taking risks, big risks--the bigger the risk, the more money you make." I kid you not--they literally said this. Yesterday, March 13 2009. They weren't referring to why people lost money in the collapse--they said this is how things are, and this is still how you should invest your money.
As I say, the Disneyfication of the human mind.
Nothing is being done to change this.
So they were willing to buy into the myth that Madoff had found the formula because it supported the myth that they were themselves trying to live off of. Of course it is possible to beat the market consistently with large sums of money over an extended period of time...just look at Madoff!
But the super-stock picker is a myth. It is possible to get lucky for a short while, and ride that early luck into nice looking compounded growth. But the real fact is that ever if you are so smart at to find the stock that you KNOW should be trading at 35 but everbody else thinks should be trading at 30 it means nothing. Why? Because the price is going to be set by everybody else together. You may in fact be right that it should be trading at 35 but it is going to trade at 30 anyhow.
shorting then insuring the bets with bogus
investment insurance(AIG Swaps),
Is causing this crash.
Ban derivatives.
Go to Vegas if you want to gamble.
Get Bankers focused back on
Main Street.
Hedge funds are, and always have been, a scam.
I see the point you're making, but I actually got a notice to this effect when I deposited money into my bank's money fund, as opposed to a savings account. Do you think those in retirement should avoid money funds too?