Last night I was with a friend just back from Boca Raton, Florida – essentially “ground zero” for the devastation wrought by Bernard Madoff.
Our subject was the uncertain reaction of an average citizen – suffering job uncertainty, equity erosion in the family home, and dissolving prospects of a comfortable retirement – at the plight of a late-arriving Madoff client, who in exchange for eager admission to his inner circle has seen a drop in net worth from, say, $10 million to $2 million.
In this context another friend, the major options trader, intends to be taken seriously, I believe, in his position that Bernard Madoff should really be viewed as a modern hero.
In this view, instead of being vilified as the avatar of rapacity for his alleged $50 billion looting of endowment and retirement funds around the world, and hounded in his every ankle-braceleted step from “house arrest” in his luxury New York flat to the courthouse and back, Madoff should be recognized for his contributions to both the prosperity and the practices of the investment community.
This is according to Paul Bachow, who runs an options-volatility based hedge fund, and who has these four arguments:
First, since the inflows from Madoff’s overly-trusting clients to his apparently fictitious operation are estimated at about $17 billion, the forensic investigators are looking for some $33 billion of reported ordinary gains. Much of that will have accrued to the benefit of universities, museums and other tax-exempt organizations, but the rest will be ordinary taxable income, subject to the highest federal income tax rates.
The stream of payments by wealthy investors to the US Treasury and similar tax collectors elsewhere will have been considerable, conceivably well in excess of $10 billion. That’s assuming of course the appropriate compliance by those affected – which might, come to think of it and depending on the country and the culture, be something of a stretch. At a time when the government’s budget in America has plunged from surplus to record-breaking deficit, this support from citizens at the top of the pyramid of wealth and celebrity represents a real – if perhaps inadvertent – exercise in civic generosity.
Second, money managers using options strategies were challenged for years to achieve Madoff’s apparent results based on his “split strike conversion” strategy. PhD quants and Noble Prize winners for 30 years have focused their attention on options pricing and trading, but the best mathematical minds in the world were unable to replicate Madoff’s performance. Madoff embarrassed and challenged them to improve their fancy models, re-setting the industry’s performance bar for improved options mathematics and trading systems.
Third, Madoff can be seen as a type of upper-end Robin Hood, taking large amounts of capital from the very rich and re-distributing it down to the merely well-to-do. These would include deserving retirees and charities in need of stable income streams -- insomniac over the level of their assumed investment risk, but enabled by Madoff to sleep at night as if invested in US Treasuries.
Although, for those bearing big-dollar investment responsibilities, the notion of “sleeping like a baby” in recent times had meant curling up in a fetal position, clutching a well-worn blanket and sucking a thumb while whimpering off to dreamland.
To be sure, those obtaining late-days admittance to Madoff’s peculiarly exclusive circle of the credulous had the shortest ride before the crash – an inevitability in the world of Ponzi schemes where only the early entrants prosper. But still, the re-distribution process is far from over: days of reckoning await for Madoff’s feeder funds and their auditors and advisors – witness the outstanding settlement offers to ameliorate the pain of customers on behalf of Bank Santander, the National Bank of Kuwait and French asset manager Meeschaert Gestion Privé.
The associated transaction costs will now go not to Madoff himself, but into the pockets of the plaintiffs’ lawyers driving the litigation process, it’s true – but job stimulus packages are now the order of the day – so herewith some more change to believe in.
Last and back where we started, it does ask a lot of most of the population – struggling from one paycheck to the next to pay the mortgage and the credit cards and the tuition and the health premiums – to drum up much sympathy for society’s elites – celebrities and foundations and high-income earners. Those who evidently checked their skepticism at the country club door, in violation of basic tenets ranging from asset diversification to fiduciary due diligence, stand as symbols for the salutary opportunity to learn from large-scale failure.
‘Twas ever thus: If it weren’t for an iceberg, maritime architects would have continued to build ocean liners with the fatal design flaws of the Titanic. Because of the tragedy of 9/11, the structural defects of the Twin Towers will never be replicated.
And maybe – just maybe – at least for the short period that collective investor memory will retain the impact of Madoff’s predations, some lessons will sink in, so to make a recurrence less likely.
At the very least, the academicians – whose after-the-fact scrutiny of the malign effects of herd-like behavior has done nothing to relieve its periodic outbreaks – have a large and flagrant example with which to fill their journals.
For all that, Madoff may deserve a hat-tip of gratitude – a sentiment that, if not popular in Boca Raton, would be shared by the options trader – to whom my thanks for his stimulating views.
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Resource alert: This will encourage those not yet moved over to Francine McKenna’s redesigned site at Re: The Auditors to do so – still in beta version and a bit of shaking down, but it’s a powerhouse upgrade and worthy of all the passion and attention that Francine brings to her patch of turf.
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