Bernie Madoff's $50 Billion Fraud thru country clubs

[Craig Sweet]

Shivas...I never argued one way or another...I said fairly compensated...for their labor...

"After all, the vast majority of Americans work for somebody else, and if they're not in a union, they just decided whether the wage was acceptable to them, isn't that true?  And you're telling them that their decision was wrong...that they're worth more."

You see....I never said anyone was wrong....you did. Another example of you putting words in my mouth...good lawyer trick...

It's too bad that there's so many reasons why people settle for a wage that is less than they are worth....but even worse, in my opinion, is the "boss" that has little respect for labor...and pays a lousy wage because they think all employees are a burden...

[mike_malone]

 I have been picking up a potentially seismic shift in investor attitudes since the Madoff scam has been unmasked. I see investors using it as their excuse , in some cases unconsciously, to give up on investing. They are losing faith and trust!

   This could have a significant negative impact on the markets. We are also losing faith in our government's ability to stop this destruction of credit. The new administration is being seen as some sort of Messiah for a short time which will lead to a pendulum effect to the downside when, of course, they won't be able to stop this deleveraging. (BTW I voted for Obama and think he will be a good president. but he's not God!)

   John Bogle has spoken of the damage that has been done to capitalism in all of this. He says that capitalism depends on faith and trust. It is a big deal that investment banks have virtually disappeared; they are important to capitalism.

   Over the last year the Fed has lost its confidence building ability as well. Can you believe the market is down since they threw the kitchen sink at the economy?



     I have been driven to using an Irish expression to describe the situation--

                          "we're    FOOKED !"

[Steve_ Shaffer]

Mike,

When people are fearful of losing their jobs,as so many have so far , and have seen their 401Ks and IRAs shrink, and are afraid to spend money on consumer goods, cars and housing notwithstanding big sales and low interest rates, how do you and other investment people, let alone the Fed, expect the economy or the stock market to turn around so soon?

[mike_malone]

 Steve,

    I am finding an amazing dichotomy emerging in the markets and it proves why the majority always gets it wrong. People are STUCK in stocks while corporate credit is at levels that represent a centennial buying opportunity. They seem to see their only choices as stocks, real estate, or cd's.

   I don't see the economy recovering for a long time because we came to depend on debt rather than income to sustain growth. This will take a long time and much pain before it ends.

  But, existing corporate loans are likely to become valuable assets during the down time for stocks and the economy.


  As I am sure you know, the word "credit" means "faith" and we abused the concept. I have faith we will get through this difficult time but it will be tough.


      I was speaking with a Jewish friend of mine who brought up the Madoff thing to me. I said "You tell me why it happened? It seems to be something in the Jewish investing psyche that started all of this." He said " Don't go there!". But, I do think there is a cultural part to this that needs to be dispassionately evaluated. I didn't intend to offend him; I thought he might have some insight.

[Steve_ Shaffer]

I think the prevailing view in the Jewish community, from what I've read, is a sense of betrayal and hurt that he could do something like this to his "own" people and the charities who depended on his investors.

www.nytimes.com/2008/12/24/us/24jews.html?hp

As far as the market is concerned, I think it has been exposed as nothing more than  greed personified. Why do the GM execs, who have lost 72Billion in the last 4 years, still have jobs and have even collected bonuses during this time?

Naked options are not an investment. Why are they even allowed? Just go to a casino or a track. The more one reads about those "mortgage packages" the more one gets sick. See the recent article on WaMu in the NY Times:

www.nytimes.com/2008/12/28/business/28wamu.html?em

[mike_malone]

 I agree with you. What happened was that plain vanilla investments like stocks and bonds got so expensive that the creative investment companies dreamt up all kinds of other investments to draw in the money.

   Now, at least one of those plain vanilla investments is very cheap.

[Doug Siebert]

Joe...I never said anything about 'equality" in matters of compensation....I merely stated labor adds value to the finished product and should be compensated accordingly...

How do you determine appropriate compensation?

If I start a business making chairs and I'm paying $10 for the wood, glue, etc. per chair, it takes an hour of labor to make a chair and they sell for $100 each, how much should the guys making them be paid?  Theoretically the labor is adding $90 of value, but obviously if the guys are paid $90/hr that doesn't leave anything for overhead for the factory, management, sales, etc.

Let's think about two potential scenarios.  In one, I've got a big mortgage on the factory, do a lot of TV ads, and have a showroom for customers to come and buy them.  In the other case the factory has been paid off years ago and the reputation of the company is so good that no advertising or sales staff is needed because the customers just show up at the factory to buy the chairs (don't laugh, it works just like that for the Amish who sell furniture about 20 minutes from here)

Let's say in the first case the breakeven occurs when paying the workers $15/hr, any more than that and I'm losing money.  In the other case the breakeven is $75/hr due to the almost nonexistent overhead.

If $15/hr was considered fair wages for this work in this area (because that's what all the other chair makers paid) then it would be hard to argue that I should pay anything other than $15/hr in the first case.  But in the second case, do you think I owe it to the workers to pay them more, because if I paid them only $15/hr I'd be making $60 on every chair they made?  Do I deserve all of that $60, only part of it, or none of it?

Think about it a bit, because the reason I have no overhead is because I paid off the factory building long ago -- I could take a mortgage out on it and use that money for something else that might be profitable to me.  The reason I don't have any selling expenses is because of years in business doing right by the customer have given my company such a great reputation that the chairs sell themselves.  Put another way, how much of that profit do I deserve for my terrific business skills versus how much the workers deserve for doing such a great job producing quality product that everyone wants to buy?

[cary lichtenstein]

I wonder if Bernie Madoff could be indicted for homicide for the death of the French Investor who committed suicide.

Wasn't one of the foreseeable consequences of the unraveling of this Ponzi scheme that some investors would lose everything and commit suicide?

On a thread full of ridiculous posts, this is the most ridiculious by a wide margin

(quote)

Actually, if criminal law were to follow tort law, and the doctrine of "forseeability" were to be applied, while probably very unlikely, it is possible to see some aggressive prosecutor attempt to try to make a name for himself with an indictment like this. Surely, Madoff would be the perfect case to try something like this.

Any criminal prosecutors here on this board want to chime in?

[Dave_Miller]

Sadly, many extremely well compensated individuals in the financial services industry have forgotten that there is a difference between risk and fraud.

 

Carl:
Excellent point. In this age of entitlement when someone loses money they want to sue and then have the Government bail them out. 
Minimum Investment with Madoff $1,000,000.  So now we should all feel sorry for a bunch of multi-millionaires who were stupid enough to invest without knowing what they were investing in.  There is a principle known as "CAVEAT EMPTOR".
When something looks too good to be true it probably isn't true.
Should Madoff go to jail for felony theft, etc.  Absolutely.
Should the investors sue him to try and recover money. Absolutely
Should the rest of us bail them out.  Absolutely NOT.
Best
Dave

[TEPaul]

"There is a principle known as "CAVEAT EMPTOR".
When something looks too good to be true it probably isn't true."

Dave:

That is why I like Warren Buffett, one of today's most successful long-term businessmen----ie he strips sophisticated terms like CAVEAT EMPTOR down to what everyone can understand. In that vein his remark was; "I don't buy anything I can't understand." 

What I'm about to say is probably pretty touchy and perhaps somewhat off-limits in these days of extreme political correctness but a few decades ago a true best selling book was published entitled "Our Crowd". It was all about the American history of what might be called the Jewish business/aristocracy/elite. I still have it and it's a very interesting read and history.

Those people then considered to be "Our Crowd" were extremely rich, powerful but also seemingly remarkably charitable. Bernard Madoff seemed to be by all accounts perhaps one of the most impressive modern-day extensions of all the best of that world and that society including the fact he was so charitable and seemingly such a nice down-to-earth guy. He seemed to be the best indication of the success of that Jewish term generally known as Diaspora (if the word can be used as the ultimate melding in successfully of the Jewish race and faith all over the world).

What has happened here with this Madoff fiasco is going to set "Our Crowd" and the American and world perception of it back immeasurably. I can almost hear from here the gush of anti-semitic rumor-mongering going on all over the place, and that is going to be one of the true tragedies of this Madoff mess.

I just hate to see it.

[Steve_ Shaffer]

Moreover, without a note or even a dying declaration attributing the suicide to Madoff, it would be difficult to prove. There are any number of reasons, other than Madoff, that could have led to the suicide.  It's pure speculation, even though plausible.. Madoff will have to live with what he has done.

[RJ_Daley]

I wasn't going to post anymore on this thread, for the expression of political perspectives that we have all made ourselves known, but this angle of prosecuting for any aiding and abetting in suicide or stretching that to facilitating may have legs, it seems to me.  We have seen any number of cases of illegal drug suppliers being prosecuted criminally and successfully for the deaths of their client users. 

The thing about Madoff is that he is so old that what ever they charge him with, he may likely get bail and be out for an interminable time while lawyers jerk around the process.  He may not live long enough to actually do time, and if and when he is sent up, it will probably be to a convict nursing home facility.

It seems that all the master mind crooks prey on their own ethnic group first or primarily.  Nothing new there.

[Mike Golden]

      I was speaking with a Jewish friend of mine who brought up the Madoff thing to me. I said "You tell me why it happened? It seems to be something in the Jewish investing psyche that started all of this." He said " Don't go there!". But, I do think there is a cultural part to this that needs to be dispassionately evaluated. I didn't intend to offend him; I thought he might have some insight.

Let me see if I can provide some insight into this kind of thinking, having been around many of the types of people that would have invested with Madoff for a good part of my life.

There has always been a prevailing thought in the Jewish community, particularly amongst the generation who are now in their late 60's to 80's (and older) that you invest in the reputation of the person rather than the actual investment.  A typical comment would be, 'just call _______, he'll take care of you, don't worry about it.'   That could related to almost anything from a repair to a service to an investment.  I think much of this came out of the people raised during the Depression and who lived through WWII and the unveiling of the tragedies of the Holocaust.  So it becomes easy to 'give your money to Bernie' because he's one of us and won't do anything to hurt you, you can trust him.  What Madoff did is so much in opposition to the Jewish heritage it's completely off the charts of possible events, that's what made it so easy to get sucked in.  Plus, of course, he had a 30 year history of 'success' in paying these predictable, excellent yields on the money invested with him.

I've always found that it's relatively easy to figure out who to trust and who not to trust except when the person in question acts in a way that is so far outside the bounds of predictable behavior that there is no way (at least for me) to see it coming.  I think that's one of the root causes for so many knowledgeable people getting ruined by this mess.

[JESII]

Mike G,

Well stated. I think this mentality is inherent in every community...might even be part of the definition of community.

It's obviously horrible for this to happen to the individuals and foundations within the Jewish community that demonstrated this blind faith you discuss, what amazes me is the amount of professionally invested dollars apparently lost in this deal.

Maybe those investment decisions tie back to the Jewish connection, but probably not, and those decisions baffle me.

[Steve Lapper]

Tom, Mike, and Jim


   You guys deserve recognition for the wisdom and balance in your most recent posts. Handily the best of the year!! 

    Unfortunately, greed frequently and corrosively replaces religion, and common sense gets buried beneath avarice. Investigation was subverted by by a (false) premise of exclusivity. Those were the sins of investing in Madoff.

    Comfort superseded intellect for the likes of  J. Ezra Merkin. His failure may be the ultimate embarrassment for Jews. He directly solicited and guided most of the largest and most prominent Jewish charities into the Madoff morass. Merkin, once the partner of one of Wall Street's better long-term and greed-less investors, Joel Greenblatt, was 100% guilty of the sin of laziness and comfort.

    Bernie had supreme guile. Others sheer negligence and ignorance. Ultimately, I'm sure this could and would likely happen to any cultural or religious community.



   Btw... As a Jew, I'm not sure who has embarrassed me more in 2008, Bernie Madoff, Alan Greenspan or Bob Rubin???

   

   
   

   

[Chris Kane]

Actually, if criminal law were to follow tort law, and the doctrine of "forseeability" were to be applied, while probably very unlikely, it is possible to see some aggressive prosecutor attempt to try to make a name for himself with an indictment like this. Surely, Madoff would be the perfect case to try something like this.

Any criminal prosecutors here on this board want to chime in?

As to foreseeability of suicide in the Madoff case, I'd consider that a big time stretch.  It'd be hard to get around the intervening, superseding act (the guy pulling the trigger) that breaks the foreseeability chain.

Cary, I am not a criminal prosecutor, rather a Law graduand.

While we regularly hear about outrageous things that happen in the United States legal system, your idea really is a bridge too far.

If "foreseeability" were the requirement, lets consider other situations where it might be applied:

If a man kills himself after his wife leaves him, she could be indicted.
If a kid kills himself following a rejection letter from Harvard, the admissions director could be indicted.
A losing Presidential candidate kills himself; the voters of America are indicted 
An architect builds a course that is poorly received on GCA.com

These are all examples where a life-changing event for the worse has occurred, and a person kills himself as a result.  It doesn't mean others can be liable for it.

I will stick with it being the most ridiculous post.  The French investor is dead because of a unilateral decision and action which ended his life.  Madoff might be partially responsible in a moral sense, but not in the eyes of the law.

[Chris Kane]

Double post.

[Bill_McBride]

I think Mike Golden is right on.  It certainly wasn't the returns that enticed all those investment dollars, there were many hedge funds and even everyday mutual funds returning lots more than 10%.  Madoff was pretty smart to keep his "returns" in that 10% area, it didn't attract much attention, just the millions of dollars from those willing to invest for cultural reasons.

[Mike Golden]

Let me see if I can provide some insight into this kind of thinking, having been around many of the types of people that would have invested with Madoff for a good part of my life.

There has always been a prevailing thought in the Jewish community, particularly amongst the generation who are now in their late 60's to 80's (and older) that you invest in the reputation of the person rather than the actual investment.  A typical comment would be, 'just call _______, he'll take care of you, don't worry about it.'   That could related to almost anything from a repair to a service to an investment.  I think much of this came out of the people raised during the Depression and who lived through WWII and the unveiling of the tragedies of the Holocaust. 

So you're saying that this was all Hitler's fault?

I don't look at this in such a complex or psycological way.  I simply see a criminal.  Maybe a criminal who started clean and turned dirty.  But a criminal nonetheless.  That's the reason they the path to hell is paved with good intentions. 

Dave, that is the single most idiotic comment I have ever read on GCA, where the f**k could you come to that conclusion?  I was providing some insight into the kind of thinking that permeates the older Jewish community, where you 'invest' in the person and his/her reputation rather than do any serious due diligence.  I have nothing but contempt for Madoff, he has done incredible harm to the very people that trusted him.  Maybe you need to read more and argue less in 2009.

[Mike Golden]

Mike, you said that his clients trust was the result of WWII and the Holocost.

So who else was responsible for WWII and the Holocost other than Hitler?

And, BTW, watch your language when you get bent out of shape.  You're the one who said it, not me.  The idiotic thing was thinking this had anything to do with Judiasm or the Holocost in the first place.  This was about trust and criminality, neither of which knows any creed.

I'm not going to argue about this, you have no clue what you are talking about.  I've listened to the kinds of people who invested with Madoff most of my life and know there was an inherent lack of trust in financial institutions because of events such as the Depression, WWII and the Holocaust so investing with someone 'who can be trusted' made them an easy mark.  You will of course disagree and argue this point forever but this will be my last response.

[Mike Sweeney]

Dave,

As an Irish catholic guy that has had a number of Jewish business partners and a Jewish father-in-law from the era that Mike Golden speaks of, I think he is right on the money with many of Madoff's early investors. Madoff then involved into other things as it got bigger, but I don't think Mike was focused on XYZ hedge fund guy.

Stepping out now,,,,,,,,,,

[Mike Sweeney]

And that goes for Irish Catholics, too, unless all of our March 18th hangovers are all St. Patrick's fault.

I really do hate St Patty's Day. The NYC parade ends on 86th Street near my place and people basically throw-up all night long in our neighborhood.

I blame my wife for keeping me in this golf starved city!!

[Rich Goodale]

   Btw... As a Jew, I'm not sure who has embarrassed me more in 2008, Bernie Madoff, Alan Greenspan or Bob Rubin???

Steve

You forgot Madonna....

Rich

[Adam Clayman]

Dave, Since Mike likely wont respond again, I  can tell you my impression of what he wrote... It's a cultural thang, resulting in world of mouth recommendations. Implying that people are more likely to trust the word of someone who they know and consider more savvy than they are, opposed to the advertisements or marketing campaigns heaped upon us all.

I don't believe he was saying that these outside factors were at fault, but were instrumental in the development of that cultural thang.(a mindset if you will?)

   

[Steve_ Shaffer]

Adam,

You are right. From today's WSJ:

While social feedback loops are an obvious contributor to understanding the success of Ponzi and other mass financial manias, one also needs to look at factors located in the dupes themselves. There are four factors in my explanatory model, which can be used to understand acts of gullibility, but also other forms of what I term "foolish action." A foolish (or stupid) act is one in which someone goes ahead with a socially or physically risky behavior in spite of danger signs or unresolved questions. Gullibility is a sub-type of foolish action, which might be termed "induced-social." It is induced because it always occurs in the presence of pressure or deception by other people.

The four factors are situation, cognition, personality and emotion. Obviously, individuals differ in the weights affecting any given gullible act. While I believe that all four factors contributed to most decisions to invest in the Madoff scheme, in some cases personality should be given more weight while in other cases emotion should be given more weight, and so on. As mentioned, I was a participant -- and victim -- of the Madoff scam, and have a pretty good understanding of the factors that caused me to behave foolishly. So I shall use myself as a case study to illustrate how even a well-educated (I'm a college professor) and relatively intelligent person, and an expert on gullibility and financial scams to boot, could fall prey to a hustler such as Mr. Madoff.

Situations. Every gullible act occurs when an individual is presented with a social challenge that he has to solve. In the case of a financial decision, the challenge is typically whether to agree to an investment decision that is being presented to you as benign but may pose severe risks or otherwise not be in one's best interest. Assuming (as with the Madoff scam) that the decision to proceed would be a very risky and thus foolish act, a gullible behavior is more likely to occur if the social and other situational pressures are strong.

The Madoff scam had social feedback pressures that were very strong, almost rising to the level of the "Donators" cult around the Drake inheritance fraud. Newspaper reports described how wealthy retirees in Florida joined Mr. Madoff's country club for the sole reason of having an opportunity to meet him socially and be invited to invest directly with him. Most of these investors, as well as Mr. Madoff's sales representatives, were Jewish. The fact that Mr. Madoff was a prominent Jewish philanthropist was undoubtedly another situational contributor.

http://online.wsj.com/article/SB123093987596650197.html