Tuesday, December 16, 2008

Bernie Madoff: Who Could (Should) Have Known?

Question: How do you make a small fortune?
Answer: Start with a large fortune and give it to Bernie Madoff to invest!

"When the truth is found to be lies, and all the joy within you dies": Jefferson Airplane,1967

"I would not join any club that would have someone like me for a member." - Groucho Marx

If something seems to good to be true, it probably is.

Don't ask, don't tell

Bernie Madoff: The Man, The Myth, The Thief?

I had heard about Bernie Madoff when I was at a Wall Street firm, working with guys that happened to know him personally. Whether they invested with him is something I don't know, but if you look at the three phrases above, each is very appropriate to this case. The man was something of an investing superstar.

The Ticket For Admission

In order to invest with Bernie Madoff, you had to be invited in. The exact rules for admission I do not know, but they were in place. Maybe you belonged to the right country club, knew the right people or belonged to the same organizations. Whatever got you in, you were happy to be there. His results were steady, year after year, up market or down. It was a good place to be. Until now. People now thank their lucky stars that for whatever reason they were denied admission to this club. Sometimes it is definitely better to be lucky than good.

How he generated these returns was a mystery, particularly because you apparently could not understand your statement and because you were not allowed to ask questions. But that was OK, because your checks kept coming. Like in all Ponzi schemes you are lulled into a false sense of security and don't know until the hammer comes down. Don't ask, don't tell until it is to late. We have seen it before and we will see it again. Greed trumping common sense and good business practices.

Greed vs. Common Sense

Greed will tend to trump all aspects of common sense. He fooled some very smart and very rich people, some of whom may have lost a large part of their fortunes. Success breeds success and comfort, so over the years I am sure that investors got comfortable and put more and more of their money there These stories will only come out over time. The fact of the matter is that investing is a very tough game and not a smooth process. We have had some incredibly turbulent years in the markets where returns resembled the EKG I recently had done. But not for Bernie, he merely plodded along with the same performance year after year with very few aberrations. Unbelievable and incredible, but if you kept getting your checks you were happy. Until now.

Not Just A Great Investor, But A Great Dad As Well

The story goes that the sons knew nothing about the fraud, the schemes or anything else that was going on, and turned in their dad when they found out about it. As remarkable and unbelievable as this seems, maybe, just maybe, this is a dad trying to give his sons the ultimate gift of freedom. Maybe Bernie knew that the walls were crumbling down, that the game was at the end, that the piper had to be paid. Maybe, just maybe, he set all of this up to spare them and will take the fall himself. Or try to. I kinda have a gut feeling that they knew something at the very least, and everything at the very most. Maybe they did know nothing, or maybe Bernie is just a good dad. In a case like this, SEC ineptitude not withstanding, the truth will ultimately be told.

For the rest of us that did not get into the club for one of a hundred different reasons, let's count our lucky stars. Maybe I will apply to join the Rotary Club.

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