The guy who used to run the NASDAQ was also running a pyramid scheme disguised as a hedge fund. The resulting losses are upward of US$75b.
Madoff, arrested last week in the US on charges of presiding over possibly the biggest fraud in Wall Street history, had for decades been above suspicion.
Even now, as investigators try to understand how the 70-year-old Madoff lost as much as $US50 billion ($75 billion) of international investors' money, his firm's website remains bizarrely serene.
"The Owner's Name is on the Door'', reads the site, praising Madoff's personal touch, a philosophy of accountability that "harks back to an earlier era in the financial world.''
"Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark,'' the site proclaims.
That is the sales pitch that helped make the man friends called Bernie a modern American success story, rising from his job as a Long Island beach lifeguard to chairman of the Nasdaq stock market and pillar of the ultra-wealthy country club set.
People trusted Madoff and he kept them happy with astonishingly consistent returns on the money they trusted him to invest - about 1% a month, without a hitch.
Indeed, Madoff was a genuinely talented money man. He is credited with helping to revolutionise the shift in trading from telephones to computers, making deals within seconds rather than minutes, and ushering an era of ever greater stakes and profits.
But Madoff's scam in the end was not about creating wealth as much as creating the impression of wealth.
Clients didn't realise that the returns they liked so much were in fact cannibalised from other clients' principal.
And as long as no one asked for their principal back, the secret remained unexposed.
Over the decades, Madoff managed to dupe everyone from giant foreign banks to private clients in the United States, many of them stemming from the tight-knit Jewish community in the Long Island suburbs and Florida.
A columnist for The Wall Street Journal says Madoff lured his victims with a "mysterious allure and sense of exclusivity''.
Oy Vey. :)
The Australian Financial Review had more on this article. It seems any time an investigator went to talk about his fund, he'd tell them he couldn't elaborate on the model because it was proprietary. The stock markets are taking huge hits as the list of his victims grows, including Fred Wilpon, owner of the NY Mets.
Madoff and Wilpon have had a close personal and financial relationship for more than two decades, and Wilpon entrusted Madoff with hundreds of millions of dollars to invest, according to several people with knowledge of their relationship. But Madoff’s investment firm has collapsed in what federal authorities are describing as a $50 billion Ponzi scheme, and questions are being raised about whether the fraud could harm the Mets’ status as a big-payroll franchise.
Bob DuPuy, the president and chief operating officer of Major League Baseball, said Saturday that he and Commissioner Bud Selig had spoken with Wilpon on Friday. DuPuy said that all three believed that the fraud case would have no effect on the Mets’ operation.
But interviews Saturday with several people with knowledge of Wilpon’s business dealings revealed concern about significant problems that Wilpon and the Mets could encounter because of the reported fraud. Although it is unclear how much money Wilpon may recoup, any significant financial loss by a team owner raises questions about how those losses may affect the franchise.
“Any fraud that has been committed against Fred is something of deep distress to all of us and we feel very badly about the entire matter, but we all believe that this will not affect the team,” DuPuy said in a telephone interview.
Wilpon invested his own money and that of his investments firm, Sterling Equities, with Bernard L. Madoff Investment Securities. That company had a long track record of strong and steady returns, but Madoff was arrested Thursday morning by federal agents at his apartment in Manhattan and later charged with securities fraud for operating what the authorities were portraying as the biggest Ponzi scheme in financial history.
DuPuy said that the Mets were a separate entity from Sterling Equities and Wilpon’s other investments.
“The Mets are completely self-sufficient, and we have confidence that none of the other investments will affect the team,” DuPuy said. “They have been one of our most successful franchises on and off the field, and they are going into a magnificent ballpark next spring, and we expect it to be business as usual.”
Wilpon bought the Mets in 1980 in a partnership with Nelson Doubleday and became the team’s principal owner in 2002, when he bought Doubleday’s share of the team. The losses that Wilpon has sustained as a result of the Madoff fraud case could hamper his ability to pay back debt related to that buyout.
The losses could also hurt Wilpon’s ability to help the Mets weather the current economic downturn. Many sports leagues, including Major League Baseball, are bracing for lower revenue next season as consumers cut back on discretionary spending.
Perhaps most troubling is the possibility that losses incurred by Sterling Equities could put pressure on Wilpon to raise money by selling other assets. Because Sterling invested money directly with Madoff, Wilpon may have to come up with money to reimburse some of his own investors for losses. That may cause him to sell valuable assets, including a portion of his ownership in the Mets.
That's not good at all. Instead of offering any insight as to how these things work, I'd like to share with you an article that shares my disbelief at the people who put their money in with this man.
I keep reading that many people, mostly insiders from enclaves of extreme wealth and privilege, are calling Bernard Madoff's implosion a "tragedy." This actually sickens me because it exposes just how serious the crisis of morality is among America's elites.
It is not a "tragedy" to me that so many people with so much money and privilege were suckered by someone like Madoff. I think it is just a combination of laziness, stupidity and greed. That is not tragic to me. It is pathetic.
Madoff was making 1% per month, year after year with no losses and nobody else on Wall Street or anywhere could explain his returns. Even Madoff didn't explain it.
Plenty of people openly told the SEC and the media that he had to be either running a Ponzi scheme or doing something else illegally. Nevertheless, so many of these "sophisticated" investors piled their money into his fund. Many of them invested a huge percentage of their personal net worth, charitable trust, inheritance or future bequests to their heirs. What were they thinking?
Many were just following their friends. Many were lazy. Many were stupid. Many were greedy. None of them stopped to think that Madoff's returns were literally impossible unless he was doing something illegal.
Tale of the tape says, throw the guy in prison and throw away the keys!
UPDATE: The Economist has this article, also worth a read.
Even so, the affair has—like the subprime-mortgage debacle—exposed a stunning lack of due diligence. Droves of investors who should have known better tossed in billions, preferring to keep their fingers crossed rather than ask awkward questions of a firm whose investment strategy was vague and opaque. Even within his own group, Mr Madoff’s money-management business was a black box: no one but he had full access to the accounts. As a broker-dealer, it was able to clear its own trades, a privilege that should give pause for thought. Worse, questions had been hanging over the operation since the mid-1990s. Some institutional investors have long steered clear of Mr Madoff, unable to understand how he spun his gold, or uneasy that his books were audited by a tiny, three-person accounting firm.
The SEC, which seems to have been taken aback by the scale of the malfeasance, can hardly hold its head up high either. It did not get round to examining the books of Mr Madoff’s money-management business, even though he registered it with the commission in September 2006—though it did probe the market-making arm and found that it had violated some technical rules.
For an agency that is fighting for its life, that is unfortunate. Even before this scandal the SEC was on the back foot, having stood by as the big Wall Street investment banks it was charged with policing ran amok. In its defence, the commission argued that its primary role was investor protection, not prudential regulation. Now it has been shown wanting in its core competence—though, with 11,000 fund managers to oversee, not to mention the boom in mortgage-related cases, some may think it inevitable. Congress is next year expected to revamp America’s dysfunctional system of financial regulation. One option, already proposed by Hank Paulson, the outgoing treasury secretary, is to fold the SEC’s responsibilities into a new set of agencies.
The sloppy regulators and credulous investors whom Mr Madoff duped must now hope that he has pulled off one last deceit: exaggerating the scale of the losses. Even in these accident-prone times $50 billion sounds like an awful lot for one man to lose. But it is just about possible if he levered up his bets with borrowed money or supercharged them with derivatives (which he is known to have used to reduce volatility). But even if the fraud extends no further than the $17 billion under management, it will go down as a humdinger. Indeed, it makes Charles Ponzi’s promise in 1920 to double investors’ money in three months—which caused losses equivalent to around $160m in today’s money—look like a trifle. Perhaps from now on it should be known as the “Madoff scheme”.
What can one say but Spinche!
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