The Root of Madoff's Evil
How convenient for the judge and the media to paint Bernard Madoff as Mr. Evil, a uniquely venal blight on an otherwise responsible financial industry in which money is handled honestly and with transparency.
Madoff, sentenced Monday to 150 years in prison for bilking investors of billions, should be exhibit A in why the dark world of totally unregulated private money managers and hedge funds should be opened to the light of systematic government supervision. Instead, he is being treated as an aberrant menace, with the danger removed once the devil incarnate, as his victims describe him, is locked up and the key thrown away.
For goodness' sake this was not some sort of weird outsider who flipped out, but rather a key developer of the modern system of electronic trading and a founder and chairman of Nasdaq. Madoff often was called upon to help write the rules on financial regulation, and therefore became quite expert at subverting them.
As Securities and Exchange Commission Inspector General H. David Kotz testified before Congress, the inspector general's office is looking into "[t]he extent to which the reputation and status of Bernard Madoff, and the fact that he served on SEC Advisory Committees, participated on securities industry boards and panels, and had social and professional relationships with SEC officials, may have affected commission decisions regarding investigations, examinations and inspections of his firm."
Those relationships were close (the personal ties included the marriage of one of Madoff's nieces to an SEC official) and stretched out over the decades during which Madoff was a major player on Wall Street. At the very time back in 1999 when the SEC was being formally warned that a Madoff scam was under way, Madoff was consulting with then-SEC Chairman Arthur Levitt Jr. on regulatory matters. When Levitt retired a year later, Madoff was quoted in the trades as paying tribute to him: "He brought all of us to the negotiating table time and time again, on a whole host of issues, and to a greater extent than any other SEC chairman."
Levitt wrote in a January 2009 opinion article in The Wall Street Journal, "I knew Bernie Madoff and had no reason to believe he was not a legitimate market maker, nor did anyone at that time know he was acting as an adviser to outside investors."
Nor was he required to tell anyone. And even if he had been, it's unlikely that part of Madoff's business would have been looked into. In the deregulatory mania of the preceding two decades, it had been assumed that such managers did not need regulating, and funding for the SEC kept getting cut. As Levitt noted in the article, it would only get worse:
"Since 2002, the number of investment advisers--such as Madoff Securities--has increased by 50%. Yet enforcement resources have been flat or even reduced. ... As a result, only about 10% of investment advisers can expect to be examined every three years, and the goal of inspecting every adviser once every five years--laughably light oversight in its own right--has been abandoned."
Money for proper oversight was not allocated because the prevailing ideology regarding private investment firms -- embraced by President Bill Clinton ever as fervently as President George W. Bush would later -- was the gospel of radical financial deregulation, a practice that has landed us in the larger banking mess. As with the trading in unregulated derivatives, all of the operations of private investor groups, such as hedge funds, were thought not to require government supervision because these were conducted by professional financiers dealing with sophisticated investors who knew what they were doing. If the investment went south, it was on their dime and there would be no innocent victims.
As we saw with the collapse of AIG and now Madoff, that notion is false because private investment contracts can involve the resources of charitable organizations and pension funds and can end up costing the homes, savings and jobs of ordinary citizens who have no idea of which end of this arcane stuff is up.
When Levitt worked for Clinton as head of the SEC, he teamed up with Alan Greenspan, Robert Rubin and Lawrence Summers to destroy what remained of financial service industry regulation imposed by President Franklin Roosevelt in response to the Great Depression. In recent years Levitt, alone among that gang of four, has criticized that action and accepted some personal responsibility for the subsequent financial meltdown.
He was right again when he stated in his January article: "The Madoff scandal should be a wake-up call for more consistent, uniform, and rigorous regulation of investment advising ... the final prod for a fundamental reform of the financial regulatory structure. ..."
He gets it. Let's hope that Congress does too and is not fooled by the argument of Wall Street lobbyists that Madoff was a lone rotten apple now safely discarded.
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There were several, maybe many, people who had some suspicion of Bernie Madoff's transactions and his documentation of those transactions. This wasn't really news to any in the investment business. He was considered some sort of genius for the returns he got on his investments but even so there were many who wondered how he got such very high returns...15% to even 18%, but that was either simply ignored or buried in the understanding of those whose job might have led to a thorough analysis of the records. Madoff is certainly the capitalist hero, doing what really smart capitalists do. The good news is that there should be no simple acceptance of any investor in the plans and the investments of someone trusted with funds. Any downgrading of the sort of capitalist mantra, get all you can from whatever you can with your capital, will help this nation and perhaps others to grow up, to stop believing in some sort of Santa Claus approach to wealth.
We might at least use some fair terms with respect to obtaining possession of money. There is "made money", which is obtained by some semblance of legality, and "taken money", which comes to hand without the necessary industry or accompanying legality to call it made, including all the crimes by which it can be taken. We can exclude inherited money, which is not involved here. Somehow when we call stolen money, "made money", there seems to be a lack of any idea of industry, duty, ethics, honesty, and all the other cements which hold a moneyed society together, making our society seem as a flock of buzzards trying to beat each other to the eyeballs of a dying animal before the eyelids quit blinking. Get it?
On the bright side, the length of the sentence may indicate
the powers that be understand that a completely unbroken
stream of 'let them eat cake' might eventually cause a few
untoward ripples in their lives.
True, this is all merely a little calculated red meat reflected in a mirror through
clouds of thick smoke, and perhaps in one or three years some contorted
procedural 'rescue' for our talented Mr. Madoff may still quietly materialize out of thin air.
But even so, this present public concession to plebe legality was evidently considered
important enough that Madoff's colleagues in rape felt sufficient behind-the-curtain
pressure to turn their back on a swell club member in perfectly good standing.
As Bernie would be the first to assure you,
under normal circumstances,
that sort of thing just simply isn't done-
The impossibility of a man that old being punished for 150 years sort of goes with the impossibility of finding any justice for a crime that big. Society just doesn't know what to do with something like this, so it does something ridiculous. Why not 10,000 years hard labor? Why not make him count out a billion dollars one penny at a time for twelve hours a day, with 30 minutes for lunch? "Bernie, you can't do fives or tens at a time with those pennies. You have to pick each one up with your fingers from one side of the table and place it heads up on the other side of the table, one at a time, and say the number in sequence. If you miss a number, then you have to start all over, until you count out the billion. Then, you can relax in your cell for the rest of the sentence".
And Bernie, we'll let you keep business ledgers on the number that you have counted so that you don't lose track. But, we'll examine the books each day so be careful. We let you get buy without checking your ledgers once, but never again.
I adsolutely agree. Unfortunately the number of comments on your post (12 so far) and what...around ten thousands or more on Madoff's sentencing, most of them gloating, makes me think that nobody is listening...
I think I agree with you. Madoff is just an Uber-Capitalist who got caught doing what the whole society is taught to do; make as much $ as you can - screw anyoneone who doesn't like it.
Madoff's Mistake
Bernie Madoff with billions
And got a hundred and fifty years.
All those bankers who lost trillions?
Getting on with their careeers.
Blankfein and Thane and Pandit
The boys at AIG and Countrywide
Though every one a bandit
Each of them has a free ride.
Bernie's mistake was to break the laws
While Blankfein and his bretheren
Paid Congress to pass legislative flaws
Ensuring the law cannot break THEM.
Madoff is evil and the laws that protect investors from ponzi schemes were in place. The SEC failed to act. The laws that protect investors in the hedge funds and other investments were all watered down by the SEC during Bush/Cheney and because they followed Alan Greenspan's fanatical embrace of the philosophy of a brilliant but nutty woman named Ayn Rand. He believed absolutely that the free market would solve and cleanse all evils and problems on its won and left to its own devices and that regulation would stifle the beauty and natural purity of the greed driven world. PS, he now realizes he was wrong.
I would also like to place blame on the dupes that saw a reoccurring 10% annual return and did not question the likelihood of that occurring.
There is another side to the Madoff story that has received no attention as far as I can see: There has long been a myth that the U.S. government (treasury, federal reserve) secretly sponsors and, to a certain extent, regulates extremely high yield investment programs. The minimum investment is generally stated at ten million dollars. There are allegedly "federal compliance officers" who review the elaborate paperwork. It is often stated that some of the profits must be allocated to charities approved by the government. Investment principal is allegedly held in "blocked accounts" and "traded against." When pressed, the promoters explain that the astronomical profits come from "forfaiting" and trading in Medium Term Notes (MTNs). They explain that "the fed" smiles on these "programs" because they provide money that the banks need. They tell you that people from the highest levels of government make money in these programs. There is an underground subculture built up around this myth. Attorneys and investment bankers of some reputation buy into it, and participate in it. Until the Madoff scandal broke, it was very much in the air.
Against this background, one can understand how someone approached by Madoff or his feeder funds with the prospect of a 10% annual return would think that this was conservative in comparison with the "high yield" programs everybody was talking about. Maybe some even thought that this was how Bernie was making his money.
Madoff is just a scapegoat. The industry needs someone to do the perp walk and Madoff was elected.
The real question is what is the future of American financial leadership. Its a global world now - if the American financial market is not transparently well-run and accountable, then the money will go elsewhere.
Obama can bail these guys out of their derivatives black hole, but whose gonna trust them with serious capital anymore?
A scapegoat is by definition someone who did nothing wrong yet winds up taking the rap for the crime. You imply that poor Bernie did nothing to deserve his punishment. Tell the people he stole from. He is not Robin Hood! He stole from rich and poor alike to further enrich himself and apparently a few of his friends!
You also assume that there are honest people running the finanacial sytem in other parts of the world and it will be self correcting. You must not be aware of what is going on which is just more of the same! These people believe that they cannot be caught or punished!
A "otherwise responsible industry" has to mean that no one else has pulled a Madoff trick. A really hopeful idea. Will the watchdogs go out there and check everybody in the industry after we reinstitute regulation to smoke out the others?
Alec Baldwin needs to read your blog. He seems to think Maddoff should have been given a deal in order to extract answers from him as to how this could happen.
You clearly outline how it happenned and name names. It would appear we don't need to deal with Madoff. And he was not a lone looney. Most of the financially criminal are still at large and doing business as usual.
This can't be true! Madoff was the ONLY one. Everybody else was clean!
LALALALAL!!!! I can't hear you!!!
There's too much money to be made, legally or illegally, for the reasonableness of your argument to prevail.
Ain't that the sad truth.
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