The Dupes of Madoff: Too Small-Minded to Fail?

Sound investment advisors and the wisdom of the ages give the same counsel. Diversify, or in other words, don't put all your eggs in one basket. Why didn't Bernard Madoff's investors heed this truism? Enough of their crocodile tears; they wanted their crocodile shoes and bags.

Any mentally competent adult who has managed a savings account knows there is an inverse relation between rate of return and risk. Accounts of the scandal inform us that would-be investors clambered to be let into Madoff's charmed circle. Why? Because returns of up 10 - 15% annually were virtually guaranteed. Up to twice the return of a good investment for no risk? Good old-fashioned paper returns instead of those new-fangled electronic statements? All the better. Apologies for singling out the Madoff investor, Allan Goldstein, who testified before Congress yesterday, but do you really expect us to believe that you "had considered Madoff's securities not a get-rich scheme but a buffer against risk." You were merely looking to preserve your nest egg? Never heard of a mutual fund? An S&P 500 Index Fund?

There are only two questions of significance in the Madoff scandal. What does it tell us about our times? What should be done about it?

Historians and journalists, in a kind of Aesop's Fable theory of narrative, are drawn to the vivid anecdote symbolic of an age of corruption. Open almost any history book or news and opinion magazine, and you'll find a human interest lede, chosen in the hopes of grabbing your attention and softening you up for the abstract analysis to follow. Madoff will be it for the Bush years, as was creative accountant Kenneth Lay in the dot.com boom, inside-trader Ivan Boesky in the Reagan Era, and stock swindling Robber Barons Cornelius Vanderbilt and Jay Gould in our first Gilded Age. The other lessons of the scandal -- the workings of Ponzi schemes, the failure of federal regulation, the gullibility of human beings -- are ones available in abundance these last months of economic calamity. The Madoff scandal adds heat, but little light, to what we already know.

What should be done? Should Congress hold hearings, as it is doing? Sure, why not, if the celebrity-appeal of the scandal focuses public interest and thus strengthens Congressional Democrats' hand in the battle to tighten regulation and reform the SEC against the inevitable GOP resistance. Some, however, want more from the government. "I pray that Congress will come to understand our plight," testified investor Goldstein, recommending Congress "establish a restitution fund for the Madoff victims."

Too small to fail? That a bailout of Madoff's marks can even be suggested is a rank byproduct of the lavish coverage of Madoff's investors as innocent victims. As a new era opens, it is instructive to contrast the indulgence accorded these multi-million dollar investors with the all-too-common moral condemnation of the millions of Americans who signed up for subprime mortgages. Tsk, tsk, those poor people -- they should have known a house was beyond their means, we were told by the presidential candidate of the Republican party and a bevy of rightwing pundits. Indeed! I suppose they should have ignored a generation of economic experts who insisted the old laws no longer applied, the nearly unanimous assurances of one of the nation's leading industries that this was the way business was done in the 21st century, and a centuries-old national culture equating home ownership with the American Dream.

As my grandmother, a recreational gambler, taught me over long afternoons of $2 bets at the race track, anyone promising you a sure thing is out to fleece you, and the house, always, ultimately wins. Only a fool would feel sorry for the sucker who ignores these time-proven truths.

Comments

[ndem]

It has all been a rigged game for so long they are all so inside that there was no real trading....Madoff's version was actually more honest...he simplified what is going on elsewhere...the world owned by Goldman Sachs!

[SurrealPumpkin]

Blame the victim. It works everytime.

[JJR60616]

Actually, in this case, it *is* appropriate to have the victims share the blame for their lost investments. At least the ones who ignored the golden rule of investing...NEVER put all your eggs in one basket.
There's a reason warnings rise above cliche to become "golden rules"...and this is one of the oldest and most respected and certainly time proven rules of investing.
I certainly feel for those who lost their investments, and more empathy for those who lost *part* of their life savings.
But those who lost *everything* in their greed to achieve the highest returns pretty much did this to themselves.

[Trittydi]

Madoff has nowhere to go to - nowhere to run. I don't suppose there's a person in the whole world as reviled as he is right now. Even though the problems can't, by any means, all be laid at his feet -- for a lot of people - he might as well.
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[Trittydi]

Egregious, rapacious GREED. One of the Seven Deadly Sins.

I saw a picture of a guy on Wall Street - Marker on cardboard "Jump you F**kers"

Greed, egregious, rapacious GREED. Pure and simple.
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[Name Not In Use]

"What should be done? Should Congress hold hearings, as it is doing? Sure, why not?"

How much time did they waste on baseball steroids?

Maybe no one will notice the war.

War? Which war? Is there a war going on?

How is Anna Nicole's baby?

[sloreader]

AGreed. My papa told me not to put all my eggs in one basket when I was 5 years old and I believed him. I accepted that as a simple truth. He also taught me to drive at the race track ("if you can get out of this parking lot full of losers without a dent you can drive anywhere") and not to be naive about confidence schemes. Guess good parents matter quite a bit?

[bulfinch]

Oh please." Pray for a restitution fund"? Come on.

[saami]

I agree. You must be kidding to even suggest a restitution fund for the rich who were so greedy that they didn't see they were being duped.

[Oonagh]

Not everyone was "rich".... and they got wiped out....

[firedbanker2008]

I had no money invested with Madoff. However, why do I feel abused? Take off the ankle braclet and put it on Chris Cox. "Asleep at the wheel," positions at SEC left open for a year or more, reflect a bigger fraud than Madoff. Madoff should be in jail, now. Let's tally the carnage attributable just to the SEC'z incompetance. This would not have happened under a non-Bush, regulated investment banking scenario. Debt ratios were increased by the SEC so that investment banks could invest in speculative subprime mortgage products.

As bad as all of this is, we could have had Bush heading the SEC.

[REinsider]

IF the SEC cannot do better it should be shut down. This could accomplish three things: 1) save taxpayer dollars on the cost of running the SEC. 2) Allow investors to proceed with at-risk investments knowing they have NO ONE watching out for their interests, 3) possibly, quite possibly, encourage investors (and people in general) to return to an era of "personal responsibility".