Bernie Madoff made off with $50 billion. From the rich and famous to charities and widows, Madoff (pronounced Made-off) took money from believers and gave it to himself. It is likely that he never made a single trade under his scheme that was supposed to provide better than average returns without ever losing money. It seems our desire to believe someone has a magical formula that will get risk premium returns without taking the risk even influenced the SEC. Harry Markopolos, an analysis, started researching Madoff’s performance a decade ago. His conclusion: “It doesn’t make any damn sense. This has to be a Ponzi scheme.” Repeated efforts to get the SEC to investigate finally were answered in 2006. But the SEC only required Madoff to become a Registered Investment Adviser. Remember J. David Dominelli?
As the world’s financial system unraveled in October, the federal government brokered a marriage between Bank of America and Merrill Lynch. BofA got $25 billion of taxpayers’ dollars from the Troubled Assets Relief Program (TARP); $10 billion was for Merrill. In December, BofA CEO Kenneth Lewis returned to Washington for an additional $20 billion as the losses from Merrill were higher than expected and BofA was not going to be able to close the deal on Jan. 1. Merrill lost $15 billion in the fourth quarter and $27 billion for the year. We the people have also guaranteed $97 billion in losses that BofA may incur mostly from Merrill. So in the closing days of Merrill, John Thain, Merrill’s CEO, escalated $3 to $4 billion of bonuses to executives as the BofA was making plans to slash 35,000 jobs. Thain has now resigned and criminal investigations are being considered.
Regrettably, for far too many, it is about the money. Madoff’s investors, Dominelli’s, and in thousands of other schemes, large and small, investors have pushed aside reason in the belief that this time it would be different. This promoter really does know something that nobody else knows. This firm is big, spends a lot of money on advertising, and therefore will serve my best interest. Corporate cultures have fostered corporate profits and big bonuses. The massive adjustments we are now experiencing are a culmination of years of bad management. But, it is not just Wall Street. We the people have shared the mistaken belief that fundamentals don’t matter. How else could we explain the housing bubble following so closely on the dotcom bubble?
In a recent client survey, we asked our clients to tell us what they thought of us. Here are some words they used: honest, integrity, thoughtful, caring, keeps their word, thorough, forward thinking, helpful. They did not focus on investment returns. They spoke to what matters most to them — having someone they can trust. There will always be Madoffs and Dominellis promising what they can’t deliver as they take your money. Will you be the next victim? Or, will you focus on what is really important? It is not about the money.
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