Pyramid Sized Government Incompetence
I'm sure some heard the story about Bernard Madoff's $50 billion Ponzi scheme a couple weeks ago. I've been reading many articles about this theft and I'm just stunned that someone could get away with such a gigantic fraud for so many years, especially when the SEC was constantly warned about so many red flags in Madoff's money management business.
Two questions stand out to me:
1) What prompted Madoff to design this scheme?
It's clear Madoff is a sociopath. He probably feels no remorse. The man ripped off so many great causes, and completely plundered the Elie Wiesel Foundation. It's human nature to ask this question, but I think I might vomit if I had to listen to Madoff try and answer this question. It's not like I'd believe whatever he says anyway.
2) How can we avoid other con artists out there if we can't trust our government to look out for us?
One individual, Harry Markopolos, was on the scent of this scam in the late 1990s. Initially, he worked for a competing money management firm and was getting hammered by his boss for his inability to produce the returns that Madoff achieved. After further investigation, he alerted the SEC of a potential Ponzi Scheme. The SEC did nothing. Markopolos didn't give up for the next ten years, but the SEC continued to do little to investigate potential crimes (they accepted Madoff's explanation). Markopolos sent the SEC a memo in 2005 outlining nearly 30 red flags of Madoff's firm. It's incredible and prophetic.
I guess the moral of the story is not only to diversify where I invest my money (large cap vs. small cap, domestic vs. international, etc), but also to diversify assets across multiple brokerage firms in case one of them is corrupt. I'm not smart enough to spot these red flags on my own, so I may as well just play it safe.
I am not going anywhere near hedge funds until they are properly regulated. In fact, given the incompetence of the SEC, I doubt I'll ever chase the attractive returns that hedge funds have historically delivered. Hedge funds are an incredibly shady and unregulated industry. I've always had an uneasy feeling about these funds, but it didn't really matter since I don't have enough money to even consider such an investment.
I suspect that this is not the last scam we'll learn about as the recent economic boom comes to an end (and I'm not referring to the Ponzi scheme that is Social Security).
It's a shame that many people and charitable foundations will be ruined. Fiscal conservatives (like myself) will argue that these people share some of the blame for not performing any due diligence that turned many other people away from Madoff. However, many people that lost their money never even realized that they were giving their money to Madoff. The stock market is too complex and the importance to the public too great to allow a $2 trillion hedge fund industry to operate almost completely free of regulation. The hedge fund managers that funneled their clients' money to Madoff without the knowledge of their clients should be sued for professional malpractice and looking for a new career.
Two questions stand out to me:
1) What prompted Madoff to design this scheme?
It's clear Madoff is a sociopath. He probably feels no remorse. The man ripped off so many great causes, and completely plundered the Elie Wiesel Foundation. It's human nature to ask this question, but I think I might vomit if I had to listen to Madoff try and answer this question. It's not like I'd believe whatever he says anyway.
2) How can we avoid other con artists out there if we can't trust our government to look out for us?
One individual, Harry Markopolos, was on the scent of this scam in the late 1990s. Initially, he worked for a competing money management firm and was getting hammered by his boss for his inability to produce the returns that Madoff achieved. After further investigation, he alerted the SEC of a potential Ponzi Scheme. The SEC did nothing. Markopolos didn't give up for the next ten years, but the SEC continued to do little to investigate potential crimes (they accepted Madoff's explanation). Markopolos sent the SEC a memo in 2005 outlining nearly 30 red flags of Madoff's firm. It's incredible and prophetic.
I guess the moral of the story is not only to diversify where I invest my money (large cap vs. small cap, domestic vs. international, etc), but also to diversify assets across multiple brokerage firms in case one of them is corrupt. I'm not smart enough to spot these red flags on my own, so I may as well just play it safe.
I am not going anywhere near hedge funds until they are properly regulated. In fact, given the incompetence of the SEC, I doubt I'll ever chase the attractive returns that hedge funds have historically delivered. Hedge funds are an incredibly shady and unregulated industry. I've always had an uneasy feeling about these funds, but it didn't really matter since I don't have enough money to even consider such an investment.
I suspect that this is not the last scam we'll learn about as the recent economic boom comes to an end (and I'm not referring to the Ponzi scheme that is Social Security).
It's a shame that many people and charitable foundations will be ruined. Fiscal conservatives (like myself) will argue that these people share some of the blame for not performing any due diligence that turned many other people away from Madoff. However, many people that lost their money never even realized that they were giving their money to Madoff. The stock market is too complex and the importance to the public too great to allow a $2 trillion hedge fund industry to operate almost completely free of regulation. The hedge fund managers that funneled their clients' money to Madoff without the knowledge of their clients should be sued for professional malpractice and looking for a new career.
posted by GaryGinew at 9:38 PM
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