Friday, March 13, 2009

Madoff: How I Did It

Talking Points Memo does us the service of reproducing Madoff's statement to the court after pleading guilty to investment fraud. It's worth reading in full. But here is one key paragraph:

To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in the securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients' expectations, at any cost. I therefore claimed that I employed an investment strategy I had developed, called a "split strike conversion strategy," to falsely give the appearance to clients that I had achieved the results I believed they expected.

Madoff is right that "all professional investors" expect to see their investments "out-perform" the stocks and bonds markets, and in fact investors of all stripes have this same desire. (As if the market had not already done very well over the past two decades!) I hate to have to keep dragging Karl Marx into this, but just how do investors think it is possible to take a certain amount of capital and transform it into a greater amount of capital, without the investor actually doing any work him or herself to make it happen? In the "legitimate" stock market, it happens when corporations keep wages and benefits low enough to make profits off of the labor of their workers. In the fantasy investment market run by people like Madoff, and indulged in by his large coterie of suckers, this kind of normal, everyday exploitation is not good enough. No, returns have to be even higher. Mutual fund managers, for example, have been able to outperform the market in some cases by "smart" investing--ie, picking winners and avoiding losers--but they, too, are not looking all that smart these days.

As I said in my previous post on Madoff, it all comes down to wanting something for nothing. And now Americans are losing all that "wealth" they thought they had, but really didn't, at a staggering rate. Or, I should say, many Americans are losing it. Many others never had it in the first place, despite working harder all their lives than "professional investors" could ever imagine doing. Might there be a connection?

Uncle Bernie and the Jews. If you have not already, be sure to read this piece by Joseph Epstein that appeared in Newsweek last January. Many wealthy and prominent Jews were victims of Madoff's Ponzi scheme, but in a way they were also co-conspirators in the kind of mentality that Madoff preyed upon--the idea that some people are special, and deserve special treatment, special favors, and special rewards. As Epstein implies, Jewish tribalism cuts both ways: It plays a protective role for a group that has historically been persecuted, but it also makes Jews vulnerable to dangerous illusions. Here is my favorite paragraph from Epstein's article:

Madoff's handiwork might also not have been altogether without purpose if it eliminates a number of the trust funds wealthy Jewish parents, usually acting on the advice of savvy lawyers looking for tax loopholes, have conferred upon their children. The few young Jewish men I have known who have trust funds, making life all too easy, have somehow along the way lost both their Jewishness and, by not working for a living, their edge. It is one thing to live on your investments; it is quite another to live on the investments of money you yourself never earned.

Madoff had accomplices: His victims. So says Joe Nocera in a perceptive piece in Saturday's New York Times. A key paragraph:

At a panel a month ago, put together by Portfolio magazine, Mr. Wiesel expressed, better than I’ve ever heard it, why people gave Mr. Madoff their money. “I remember that it was a myth that he created around him,” Mr. Wiesel said, “that everything was so special, so unique, that it had to be secret. It was like a mystical mythology that nobody could understand.” Mr. Wiesel added: “He gave the impression that maybe 100 people belonged to the club. Now we know thousands of them were cheated by him.”

Bonus video


Richard said...

'Bernie' Madoff had the perfect approach. You had to be seriously rich to be invited to join his very private money-making cabal. And a greedy sucker.

No con man does well unless he can identify his ´marks'. Madoff did very well with his relocated 'shtetl' propositions.

But I don't think it ended there. Obviously, his early investors got money from later ones.

But $65 billion?

This was a huge money-laundering scam as well, and I and many others, suspect that much of the money has ended up in Israeli banks.

Michael Balter said...

Is there any evidence that it ended up in Israeli banks? What are the suspicions based on?