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BERNIE MADOFF makes you want to laugh or cry - or both. There's Bernie, the pillar of respectability. Grey-haired, sober-suited, he held down numerous positions in the financial community. With his wife, Ruth, the Madoffs were fixtures among the New York wealthy set. So successful was he that his hedge fund was known as the "Jewish bond", more reliable than anything offered by the US government.
All the time, at the Palm Beach Country Club and the other golf clubs where he was a member and amid the canyons of Uptown Manhattan he was ripping everyone off. That's the funny part. While they praised his genius and pleaded to be allowed to invest in his fund, he was stealing their cash. Not only that. He was doing it in the simplest way possible - taking money from client A to hand to client B, except there were thousands of clients and the scale of his fraud, in the end, amounted to £33 billion. Way to go, Bernie!
But any admiration for Madoff's sheer chutzpah quickly gives way to sadness and anger. In banks, private investment offices and even local authority treasury departments on Merseyside, they are also staring at the holes punctured in their balance sheets. Yet again, we gasp at the size of the numbers involved and the household names that have lost. They tell us how sophisticated they are, how we can trust them with our savings - but Madoff took them for a ride.
Not for the first time our fury boils at the sheer wanton carelessness displayed by people towards the money of others. The fact they are paid vast sums to look after that money hardens our mood.
Apparently, HSBC, Santander which owns Abbey, Bradford & Bingley and Alliance & Leicester, and Royal Bank of Scotland didn't bother to examine the books of Madoff as they handed over fortunes to him (HSBC gave him £1 billion and Santander £2.1 billion). Also happy to take him on trust, were luminaries of the financial world, led by the likes of Nicola Horlick and Arki Busson, with their investment funds.
They can say they had no reason to suspect. Yes, Madoff made sure he didn't offer such a huge return one year that would invite questions or lost so much in another that might cause an investor to get shirty. But the steady consistency of his profits, a promised 12-13 per cent, at a period when the markets were experiencing enormous volatility, should have caused alarm bells to ring.
Likewise his decision to have his accounts audited by an obscure practitioner, not one of the big firms. Similarly, his insistence that his clients stay mum and ask no questions of him. However, Madoff was not regarded as a fly-by-night operator - he was the former chairman of the Nasdaq electronic stock exchange and a trustee of Yeshiva University. Because he knew that milieu he was able to play on the rank snobbery that riddles Wall Street and the City, where anyone with a title or an official post is immediately put on a pedestal, regardless of their actual ability.
There were warnings about Madoff. Barron's, the weekly US financial journal, said this in 2001: "Still, some on Wall Street remain sceptical about how Madoff achieves such stunning double-digit returns using options alone. The recent MAR Hedge report, for example, cited more than a dozen hedge fund professionals, including current and former Madoff traders, who questioned why no one had been able to duplicate Madoff's returns using this strategy. Likewise, three option strategists at major investment banks told Barron's they couldn't understand how Madoff churns out such numbers. Adds a former Madoff investor: 'Anybody who's a seasoned hedge fund investor knows the split-strike conversion is not the whole story. To take it at face value is a bit naïve.'"
In their defence, those he duped maintain he was regulated. This is true, although their tendency to hold it up as a blanket excuse is deeply worrying - and revealing. Customers are entitled to assume that banks and investment companies do some inspection and interrogation of those whom they entrust with their cash.
Nevertheless, they are right: Madoff was approved by the Securities and Exchange Commission. But because of who he was, because he was "one of us", they never bothered to turn their spotlight on him. He wasn't paid visits, they didn't take his accounts apart.
The reality, however, is that Madoff was one of thousands of hedge funds in New York, London and across the financial world. It is a free-for-all, anything goes industry that owes more to the Gold Rush than the concerns of the 21st century. Any supervision exacted upon it is at best, cursory, and at worst, non-existent.
In the last few testosterone-fed, borrowing-fuelled years, they grew like mad. The regulators have simply been swamped, unable to keep up, not even bothering to make any serious attempt to monitor them. Any reason for not doing so, such as Madoff's impeccable credentials, is seized upon.
But hedge funds do not encourage policing. Clients, as in the case of Madoff's, are usually told very little. Many funds are registered in secret offshore havens. They don't release details of their investors and they don't divulge their portfolios. Theirs is an ask-no-questions, receive-no-awkward-answers, profession.
All that concerns the investors, as is graphically evident from the Madoff collapse, is the level of the return. What they do with the money, how they produce the yield - that, pretty much, is up to them. So this year, hedge funds were accused of short-selling, of taking bets that shares would fall not rise. In some cases, they were said to have deliberately driven down the share price so that speculation became certainty.
The hedge funds, the big, established ones at least (and Madoff's would count as one of those), crave respectability. Increasingly, they are turning to local government, to pension funds and public institutions for their cash. They can't have it both ways. In the past, they've made approving noises about the need for greater transparency but Madoff means the authorities must go further. The SEC and here the FSA must subject them to the same probing as they do other financial companies.
The possibility that Madoff raises is that there are lots like him. If the hedge funds can't put up with adequate scrutiny that must be the end of them. Investment managers, though, can no longer also shirk their responsibilities - if they want our cash, pointing to a licence to operate is not acceptable.
We've had a hell of a year, in which the inadequacies of our financial system and those who make rich livings from it have been laid bare. Now this. We've had enough.
Reader views (6)
Thank your John Problem for explaining this to me, now I understand why police officers don't get convicted of speeding---they're self regulated!
- Jeremiah, London, 16/12/2008 19:36
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Collective greed and the bonus culture is to blame. We are all guilty of asking for more, but for some, the world is not enough. The main reason why speculation got out of hand is simply that the people at the gaming tables played with other people's chips,in a no limits game. They took no personal risk. They were paid to sit at the table and the more they had to play with, the more fees they raked in, win or lose.
Apart from totally regulating the financial services industry, make the players personally liable for losses made from taking excessive risks and increase taxation so that excessive speculative gains are not worth the effort. This would mean cracking down on the world's offfshore banking centers, known as tax havens.
We have been brainwashed for years through 24hour stock market reports and financial press and TV coverage into believing that the world would collapse without Wall Street and the City of London in spite of repeated scandals. Well the world will come through again but as well as money, the financial sector has lost something far more important, trust. Who will ever again allow their savings and pensions to be managed by so called financial "experts" without full Government guarantees.
The US President elect ran his campaign on bringing change. 2009 will see whether he will be able to carry out his promises, which will have a bearing on the rest of the world.
- Peterfieldman, paris france, 16/12/2008 18:57
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As a minimum precaution all local government funds, including pension schemes, should be withdrawn immediately from every hedge fund. If money is allowed to remain deposited in such risky ventures then the trustees should explain why they are willing to chance the security of pensioners for no good reason.
- Bethany, London, 16/12/2008 17:03
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Self-regulation is the only way forward for us all. My mate Joe who's a bank robber says next time he does a job he's going to claim he's self-regulated so he can't be arrested. When my other mate Fred who's a racing driver does a ton on our back street he's going to say he's self-regulated too and cannot have any points deducted. My little nephew Johnnie who nicks apples off greengrocers' stalls is going to say 'I'm self-regulated, Guv,' so he won't get his collar felt. And my uncle Fred who looks after people's deposits for their holidays has just disappeared. He left a note saying he's self-regulated so don't bother to go looking for him.....
- John Problem, Hackney Wick, London, UK, 16/12/2008 16:00
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Babies and bathwater come to mind. There are several old saying here that come to mind but most pertinent, is that recessions uncover things that auditors never do. Anderson was one of the most prestigious audit firms in the world and only took in the cream of the graduate crop but still they missed Enron, itself a vast Ponzi scheme in a different industry [energy futures]. The real issue facing Hedge Funds is quite simply that when they started out they accounted for 5% of market trading volumes but now can account for 50-90% of daily volumes in certain areas of trading. The whole premise of Hedge Funds was that they could exploit market inefficiencies stealthily and therefore achieve returns in excess of the market. Investors wanted a piece of the action and were prepared to pay higher fees for super performance.
Hedge Funds are going to go out of business irrespective of regulation for simple Darwinian reasons.Regulation and scandals like Madoff will simply accelerate the flight to quality already underway. The dilemma faced by investors quite simply is where do I put my money so that I get a fair return without taking excess risk or get fleeced by the taxman. A good start would be for the UK government to actually encourage savings in an orderly and fair way. Wind the clock back to pre-Nu Labor. Look at the successful PEPs scheme and bring back dividend tax credits {Advance Corporation Tax credits]. Government backed high yielding bank pref shares for private investors.
- James Ritchie, new malden, surrey, 16/12/2008 15:01
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With a bit of Luck the UK Government will also close down all of the Offshore Tax Havens it currently has under its jurisdiction.
- D Davis, York England, 16/12/2008 14:19
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