Saturday, December 13, 2008

Another Massive Scam on Wall Street


I was once moving from one apartment to another with the help of an individual whose criminal record I would not vouch for under oath. I was both moving and coordinating, overseeing the handling of fragile items. The subject of trustworthiness , concerning which my assistant was a bit defensive came up. He defended himself with words that were both candid and profound.

” You don’t have to worry about me stealing. he said. “It’s not because I’m honest. I really am not. But if I’m going to go to the trouble of stealing, I’m not going to waste my skills on chump change. If I steal, it’s got to be big money.”

Today’s news about Bernard Madoff, a money manager who allegedly admitted that he made off with up to fifty billion dollars evokes memories of my friend the mover. The New York Post reports on the stunning news as follows.

“A Wall Street legend was busted yesterday on charges of running a scam investment business for the super rich after telling his sons it was just “a big lie” - losing a whopping $50 billion.

Bernard L. Madoff, 70, a former Nasdaq chairman, was arrested a day after his sons Andrew and Mark, both senior employees, turned him in for running a business that had been insolvent for years, prosecutors said.”

The impact of the shocking crime is being assessed by investigators. In plain terms, it means that hundreds of individuals , charities and corporations who had thought themselves to be wealthy are now finding themselves to be facing possibly dire financial difficulties. If the ponzi scheme involved bank loans, then it could reverberate even further.

In another articleon the Post’s financial page, the reverberating impact of the spectacular ripoff is described in detail.

“….it is known that Madoff managed money for a wide range of investors, including prominent New Yorkers, university endowments and charities.

But Madoff’s scam - which Madoff himself estimates is as large as $50 billion - could extend beyond those directly affected, as the ripples of his ruse spread.

“There are a number of ramifications,” said Doug Kass, founder of hedge fund Seabreeze Partners. “For one, it will serve to cripple an already-skeptical community of individual and institutional investors that have held our money managers in high regard only to be disappointed time and again.”

Added a Wall Street trader, “It’s yet another big straw on the camel’s back at a time when everyone’s screaming for liquidity.” He predicted redemptions, or requests to pull out money from hedge funds, could surge as a result of Madoff’s misdeeds.”

I am accustomed to the consolation of seeing “the perp walk”, in which a malefactor is lead through a sea of flashes from news photographers, hands cuffed behind the back. It was odd to see Madoff with his hands not cuffed but in his (own!) pockets.

What is even more amazing is Madoff’s request to his sons to distribute residual money to colleagues and friends as a parting gift. The New York Post describes it as follows.

“Madoff allegedly told his sons he planned to surrender to authorities in a week but first wanted to distribute the $200 million to $300 million he had left to selected employees, relatives and friends.”


The sons informed their lawyer of the plan. The lawyer in turn alerted authorities, who circumvented the operation.

We are accustomed to silent alarms in banks and stores . We are accustomed to security guards and other precautionary measures to prevent theft. It is obvious that the guardians of our money must themselves be watched. Just like buildings need to be designed to discourage theft, so too must corporate hierarchies. I simply can not believe that this is the only scam being hatched in corporate America.

Whenever I read a street crime report, I try to extract a useful idea of how to avoid becoming a victim. This investment scam should be studied with an eye towards designing policing tactics that are suited to the world of finance. The biggest holdup weapon is not a nine millimeter or a 45. It is a computer. And the attire of choice for today’s biggest thieves is not a hoodie and baggy jeans. It is tailored suit and four hundred dollar shoes.

I think it was John Dillinger who answered the question of why he robbed banks with a snappy reply. “Because that’s where the money is.”

When securing a building, one must watch not only the walls but the transom and skylights as well. It is clear that America needs police not only on the street but in boardrooms as well. Even in our troubled times, it is an expenditure that will pay itself back.

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