Bernie Madoff is going to plead guilty. The government says he's actually defrauded his investors not of $50 billion, as was previously thought, but $64.8 billion. Staggering.
What are the broader lessons of the Madoff scandal? I'll list my own conclusions after I get out of the news meeting I'm about to attend. No reason for y'all to wait to get started listing yours, though.
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Lesson?
The SEC needs qualified employees who understand finance instead of attorneys who focus on the contracts. 60 minutes had a very nice program on this subject and interviewed a finance expert who reported the Madoff scam with evidence of the scam for 5 years! The SEC ignored this competent man's evidence and did not respond.
"If it seems too good to be true it probably is."
One lesson: there's sitcom gold in them thar spills. You watch: viewers of Unhappy Days will make the character of Bernard Madoff, aka "Bernie", and later "Ponzie", iconic. His prime shtick involves seeing friends stuck out of luck at a Coke machine on the blink. "AAAYY!", he exclaims, "just get a few of your friends together, and their friends world without end, and bring me $50 billion, and you'll all get Cokes for life - AND champagne!" They do, as he helps them load the coin slot to bursting. He then gives it a deft and jaunty rap of his fist. Nothing. "Not to worry. There's a tanker with $100 billion of all your favorite drinks just now rounding Panama and due in tomorrow. Promise. And my you're looking awfully lovely today, Mrs. C." Then they all chase him round town in fast-forward, Benny Hill-style.
The character of Madoff/Ponzie will be played by Barry Bostwick, reprising his George Washington hair and makeup as a studio belt-tightener for hard times.
I believe that Madoff represents the power of peer pressure and also the folly of keeping all your eggs in one basket. Many of the people that invested with him did so because their friends told them what a fantastic job he was doing for them. A case in point: a 90 year old man in my part of the world was unhappy with his meager 6% returns on his equity investments. He found out about Madoff from a friend and took out a HELOC, giving Madoff 100 of his retirement money and 350K from his home equity line of credit. (He recently began working as a grocery store clerk since he is wiped out). To his credit he says he is happy to be working again and is not bitter. His kids also send him money.
Lesson: diversification is what makes investing palatable. Put something in the high risk scenarios but only what you can afford to lose. Keep the rest in low risk equities or bonds—especially when you are in your 90s.
Madoff was for a time the president of NASDAQ; he was a pillar of Wall Street. If he wasn't trustworthy, who is? You could go on about diversification all day. The message of Madoff is that the money men are untrustworthy, the SEC is a joke and our financial system is on a very shaky foundation.
Personally I funded my IRA for the year, but parked the money in a money market rather than subject myself to another beating. Antecdotally many of my tax clients are doing the same; better to watch the grass grow slowly than the house burn down in a heartbeat. Suspect that lack of market capital is going to change things, but tough.
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