Tuesday, November 23, 2010

Madoff on Wall Street - the Fall of the Damned Greedy

How America Fell for Bernard Madoff’s $65billion Investment Scam
By Adam Lebor. Phoenix.  288pp.

Do you really know where your superannuation and other savings are stashed? Hundreds of wealthy Americans and Europeans, discovered on 10 December 2008 that they had lost billions of dollars to Bernard Madoff, whom they had trusted for years, even decades. They had considered themselves canny investors.

Madoff’s swindle was the greatest Ponzi scheme ever recorded.  New capital coming into the fund was used to pay regular and generous “dividends” to investors, and to pay out promptly any investors who occasionally sought return of their capital. 

Investors received detailed monthly statements setting out which stocks and Treasury bonds had been traded on their behalf.  The problem was, all of those trades were fictional.   Any “dividends” were simply part of the client’s capital, as bait for further investment.

Adam Lebor traces, in often painful detail, Madoff’s talent for exploiting the psychological weaknesses of others, principally by making them feel privy to a rare and special opportunity. 

He had his staff turn down all unsolicited requests to invest.  Investors felt that they were part of a closed group, privileged to benefit from complex and secret investment strategies that Madoff would never divulge.  In hindsight, it had all the features of a classic confidence trick.

Madoff could pull this off because he had another public and legitimate career as a Wall Street stock trader.  He was a founder and chairman of the NASDAQ secondary exchange, a pioneer in developing electronic share trading, and prominent in the industry negotiations with government and regulators.  Far from being an aggressive Gordon Gecko type, he presented himself as modest, personable, and deeply engaged in philanthropy.  Some of New York’s richest philanthropic trusts lost their capital to him.

Lebor, himself Jewish, says Madoff was able to exploit clannishness and love of “beating the system” to defraud his own people more than any outsiders.  Some admitted to believing that Madoff was using insider trading to generate his exceptional “profits”, and this added spice to the investment “opportunity”.

The players were by no means all Jewish.  Many “feeder” funds were set up to tap into wealthy communities such as the WASP wealthy of Connecticut, or fast living South Americans.  Jet-set figureheads for these “fund managers” were rewarded with enviable life-styles to attract investments from their peers and emulators. 

At one level, this tale reads like a Reformation tableaux on the Fall of the Damned.  Investors were sucked in not just by simple greed, but by a belief that they could beat the market odds, by entitlement, privilege, or cunning. 

This grim tale is a reminder that securities markets will never be “self-correcting” because information on the market will never be symmetrical.  One of the Wall Street operators declares, “There are no smart trades on Wall Street, just better informed trades”.  And less informed investors to fleece.

Read full review.. 

Richard Thwaites has modest investments in superannuation and keeps his fingers crossed.