Madoff the Unoriginal!
There is a tendency to view corporate financial scandals through the lenses of economic or political times and think that the misdeeds of the perpetrators are part of some current pandemic.
Most often, they are exactly what they seem to be: greed driven theft made possible by greed driven victims. That is harsh in the reading, but axiomatic in practice.
Bernard Madoff is a charming, sophisticated thief who used a common, garden-variety scheme to separate intelligent investors from their money. And the investors should have known better.
Exactly thirty-five years ago from the day the SEC charged Madoff with fraud related to a multi-billion dollar Ponzi scheme, a Federal Grand Jury in Los Angeles indicted Robert S. Trippet and others for thirty-nine counts related to fraud involving a Ponzi scheme. There is some irony in the fact that what was once called the greatest Ponzi scheme in American financial history, was formally taken down December 11, 1974. Madoff was taken down December 12, 2008. At that time, Trippet and his cronies stole $130 million dollars. Today we are only talking about scale.
Trippet and his company, Home-Stake Oil bilked oil investors by promising great returns from an industry known more for wildcat losses. He accomplished this feat by paying his current investors with the cash from prior investors' drilling partnerships. Madoff paid his investors modestly high yields, certainly above the average, at a time when investment returns were substantially lower.
Around the oil patch, amusing stories (were they not sad) of Home-Stake carting potential investors, including foreigners, to one end of producing fields, showing them pumping jacks and telling them they were drilling rigs; running investors around the back end of the field and showing them the same holding tanks from a different angle and telling them they were new; and painting farmers' water pipelines different colors to create the illusion of oil or gas transmission lines; all stories were told by "oilees" who thought that separating dumb investor money was just plain interesting.
Trippet created the illusion of oil. Madoff, with his slick monthly statements, his tricked out offices and his Palm Beach demeanor, created a false demand for his false product. His very own illusory product.
Madoff's clients are for the most part, astute. There are fewer widows and orphans in Madoff's corral than fund-of-funds, hedge funds, investment firms and funds, wealthy retirees, charities and professionals. Most have access to professional financial advisors. Their names will all start leaking out like Trippet's client list did. Trippet and his friends stole from Jack Benny, a prodigious feat, as well as Andy Williams, Bob Dylan, former Sen. Jacob Javits, then Federal Judge Murray Gurfien and others in Hollywood. What was astounding at the time was that he also took in William H. Morton, then President of American Express, Fred J. Borch, former Chairman of General Electric, Donald Kendall, then Chairman of PepsiCo, James R. Shepley, president of Time, Inc and Thomas S. Gates, former Secretary of Defense and then chairman of Morgan Guaranty Trust Co.
During the Trippet's downfall it came out that even someone astute as then Chairman of U. S. Trust Co. Hoyt Ammidon, said that he had asked for advice from his oil and gas investment department and was warned against the investment. Still, he invested.
The most interesting thing about Trippet's operation was that it didn't really pass the "smell test." The operations just looked funny. At one time Trippet was asked how much oil he found. His response: "it's all relative."
Madoff, it will be seen, never could have passed the "smell test," no matter how much glitz, glitter and altruism he wrapped himself in. None of these crooks, the past, and present and future Ponzi schemers can pass that test. Because in the end, if it all seems too good to be true, it is. If, like in Madoff's case, the world's average returns the last year or so had been substantially below what his clients were receiving, they should have investigated, pushed hard against the statements they received and asked hard questions. That is the duty of investors. Otherwise, the old saw, "a fool and his money are soon parted," comes true. Don't lie this completely at the feet of the government. You'd have to go back to 1960 when Madoff started.
There will always be Trippets and Madoffs. Because it is too easy to sell a "Springtime for Hitler," as was done in The Producers. Easier than finding oil or making sound investments. And there will always be someone around to hand over their money, secretly smile to themselves in a self congratulatory manner, knowing that they are making a little bit more than their neighbor who didn't have the insight, perspicacity or even plain foolish luck to invest like they did.
And the postscript to this story. The investors will all complain that they didn't know that they were being fleeced. That the government should have had better oversight. That the government should bail them out. Now, here's the dirty secret: it is estimated that the government covered almost $100 million of the $130 million losses in Trippet's biggest Ponzi scheme of its time. Here we go again.
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Go to the Global Investment Watch blog to read a good article related to the topic of hedge funds...
http://globalinvestmentwatch.com/2008/12/17/its-time-to-outlaw-hedge-funds-once-and-for-all/
And all this was going on as people who had examined his operation were after the SEC for YEARS to investigate it as a Ponzi scheme. For years.
How much of the 50 billion in losses was from the current market meltdown? How much was from just sticking the investment proceeds in his well-heeled pockets?
You can't steal from an honest man; because they know that their is no such thing as a free lunch!!
He ripped off Bob Dylan??!!! Now I'm mad!
When someone like Madoff runs a Ponzi Scheme like this we call it fraud; when the government does the same thing we call Social Security. Makes you think...
What it makes me think is that anyone who can't tell the difference between government and business probably shouldn't be in either.
No comparison with social security.
Social Security isn't a Ponzi scheme, it's a pay-as-you-go pension fund. The dividends for current beneficiaries are paid with investments from current contributors, but the contributors don't become beneficiaries as soon as they invest, as they would in Ponzi or pyramid schemes; they invest without benefits for many years before they are eligible to receive dividends.
The system is sustainable so long as the ratio of contributors to beneficiaries is stable over the long term. As demographics ebb and flow, the fund will follow cycles of surplus and deficit that will cancel each other out. If the ratio does change, for example due to increased life expectancy, then either the eligibility requirements for beneficiaries must be changed to restore the ratio or the terms of contribution and/or benefit must be changed to account for the new ratio.
But these potential adjustments are mild and do not get more and more severe over time as the fund operates. The key is that a pension fund has contributors that don't benefit and beneficiaries than don't contribute, whereas a Ponzi scheme, every contributor is also a beneficiary. This is what makes a pension fund sustainable while Ponzi schemes inevitably blow up.
This is not to say that pay-as-you-go is the best way to fund a pension plan. But it isn't a Ponzi scheme.
There has been for far too long a lack of sound regulation of investment organizations. That meant they could do scams or excessively risky investments that are destroying our economy.
With the Madoff scams, some of those that did business with him were acting as intermediaries for their clinets, placing investments in various places and probably trying to make more money for their clients and doing so with Madoff. I wonder how many of those intermediaries got incentive payments of a percentage of the original investment as a fee to invest with Madoff?
Of course, one should live by the old adage: If it sounds too good to be true, then it probably is.
An NBC reporter covering the story last night quoted Warren Buffet as saying: " You never know who's swimming in the nude till the tide goes out."
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