There’s a rich new context for the aphorism forever linked to Warren Buffett, that “when the tide goes out, you learn who’s been swimming naked.” And it’s not a pretty sight.
In the social cliques of the Hamptons and around the pools of Palm Beach, there’s agony aplenty among those pink-cheeked with embarrassment at being fleeced by Bernard Madoff. It’s not just that he was one of their own, but that the credulous actually paid for the chance to be invited into the privileged circle of his victims.
As with so many of this decade’s scandals, the Madoff scheme differs only in scale from predecessors dating to time immemorial. The accounting shenanigans at Enron and Parmalat hark back decades to those of Penn Square and Equity Funding, and the subprime mortgage meltdown echoes the savings and loan debacle of the 1980’s. The methods of the schemers don’t change – only the number of zeroes.
Scam artists have forever used the same four techniques to skin their constituents, starting with the suppression of intelligence that goes with membership in a shared and exclusive community. The investment advisers who work over a church roster or an Elks lodge or a society of county dentists are no different from Madoff – and more’s fool the over-eager who suspend belief in favor of the comfortable but dangerously irrelevant rituals of insider familiarity.
The second tool is the “admission threshold” – the bogus entry ticket by which the victim is lulled into feeling special. As proved lately by the hedge fund stampede of the medium-rich, the enticement of “I’ll take your $5 million, although my usual minimum is $10” can be remarkably seductive.
Third, recall the 1989 tax evasion trial of the late Leona Helmsley, hotel queen and über-bitch that she was – an event defined by her pronouncement that “Only the little people pay taxes” – her cluelessly insulated attitude now revealed as extending to disregard and disrespect for the basics of skepticism and due diligence as well.
Fourth and most pernicious, accountability and transparency are quashed by the enticement of secrecy: Returns may seem inexplicable, and strategies opaque –- but ask too many questions, or break the code of silence, and risk expulsion from the circle of initiates.
That model has ugly antecedents – the same coercive rules have enabled pedophile clergy, corrupt police rings and gangster clans.
If this late-arriving exposé of another “story too good to be true” does not exactly elicit outcries of sympathy for the lambs willingly prepared to be sheared by Madoff, some hostile reaction might well be directed at the banks and hedge funds who ran “feeder” funds, taking a fee rake-off with a compliant lack of curiosity at Madoff’s apparent lack of technology infrastructure, oversight or a comprehensible investment strategy.
The very concept of “funds of funds” has always suggested a structure designed primarily for the enrichment of the fee-collectors, especially for those with memories extending to the Geneva-based wheeler-dealer Bernard Cornfeld, whose 1960’s Fund of Funds had a Ponzi-like flame-out that differed from Madoff’s only in the size of his elaborate sales force.
Lastly, as for the notion of regulatory alertness or prevention of Madoff’s eye-popping piracy, it’s been clear for two years now that Washington’s bureaucrats would not recognize a crisis unless a Black Swan flew up and kissed SEC Chairman Christopher Cox on the ear. And in any event, with the Congress on the eve of adjournment and the Bush administration in its final exhausted weeks, its place-holders will be able to slink out of town before the forces of blame can assemble.
If past is prelude, there are two safe predictions as the Madoff story brings a sorry year to its welcome close.
The first is the safe but unfortunate bet, at this still-early writing, that at least one remorse-driven suicide will further color an already tawdry tale.
The second is that before the books are closed on the reporting of dismal corporate results for 2008, an entirely new multi-billion dollar operational and accounting scandal will erupt somewhere in the world – outside the investment scams and the already battered financial services sector.
That’s because with the tide already fallen so far, and still receding, the exposure means that the gauzy swimsuits peddled by the Emperor’s clothier are still in the process of dissolving.
A third prediction: the Obama administration and the new Congress will investigate more vigorously. As scandals are exposed, the demand for more regulation will increase. (Like the Pecora Commission in the 1930's and the Enron hearings that led to Sarbox.) It's a familiar headline: "Horse stolen! Barn door to be locked in future."
Posted by: Bob Daniels | December 17, 2008 at 08:59 PM