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Bernie Madoff - A Letter Of Explanation?

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The Editors of The Pacific Gate Post received an envelope from persons unknown, containing a letter apparently discarded in an alley behind an Upper East Side, Manhattan apartment building. The letter had been crumpled up into a ball and partially torn, possibly having been thrown out of a penthouse window. Its reconstruction was completed and we publish it hereunder, confident that even though it is a piece of fiction, it may contain shreds of clarification on recent economic events. 



Dear Friends,



As I sit in my Upper East Side apartment living room, with nowhere to go, I watch the news and read as many publications as I can have sent up. It’s almost like I am observing some other person everyone is talking about. That characterization in the news is not the Bernie I know. I feel an urgent need to clear the air because, I’m not the person being portrayed. This whole thing has been completely contorted by the media. I am not so different from the rest of Wall Street. So please bear with me.



I am under house arrest, and the authorities are even searching my mail. I have more than enough time to contemplate the last 48 years. It’s been that long since Ruth and I formed this business of ours, and I feel bad that the downturn in the economy has been so destructive. I was always a very private man, have never liked public affairs and I’ve pretty well stayed to myself. Although my wife, Ruth, who is also my best friend, dragged me out to functions, I like peace and quiet. I’ve been accused by some of being antisocial, but that’s not the case. I just like being by myself. Just ask her. Even when we go out for dinner, it’s just the two of us. That’s it. She’s very patient with my mood swings, and she’s the best thing that’s happened to me. I prize privacy as much as I despise failure.



I also can’t stand blowhards and the investment business is full of them. Since in the past I did not wish to cast insult on anyone by excluding him or her, Ruth and I mostly stay by ourselves, or with our family. These people running hedge funds and investment banking companies have overinflated perceptions of themselves. Everyone worships them. Hard working Americans think these money managers know what they’re doing, because CNBC, or Barron’s, or the Wall Street Journal tells them they do. I’ve spent my life with these people. I’ll tell you what. They don’t know anything extraordinary, but they’re good at pretending. They don’t produce much, but they get paid more than anyone who actually works for a living. 



Let me explain something here. For years I ran a successful business. I was a trader and my goal was to become the most successful fund manager on Wall Street and build the biggest fund on the planet. We did it all. Hedge fund, broker-dealer, trader. We had the latest and best technology, which gave us an edge. Technology was critical. Our software made it possible for me to manage the reports and payouts on the enormous amount of money that were thrown at me. I developed a reputation, a really outstanding reputation. No one could touch me. I had the Midas touch and from Miami to London every money manager running anything bigger than a bingo scurried energetically to attract my attention. I understood the big money boys, and I delivered exactly what they wanted, reasonable and steady returns.



I’ve noticed that some people, who invested with us, now appear indignant and are claiming losses. Such hypocritical behavior is downright pathetic. Ask them how much they made with me, year after year. If they were fund managers or fund aggregators, here’s a hint, check their overseas travel schedules from past years. Check the files of travel agents. They’re full of good news for any investigator worth his salt. When you think of Geneva, what do you see? You probably envision an idyllic, very European city overlooking beautiful Lake Geneva surrounded by the Swiss Alps. For years when I saw Geneva, and a few other cities like it, they were deep wellsprings of cash exchanged for a piece of the action. I am using Geneva as a metaphor here. A metaphor suggesting mountains of cash sitting discreetly in banks and safety deposit boxes around the world from kickbacks or commissions. 



Private bankers are guys who manage pools of capital. No one can check how much he or she gets in “kick backs” because there is usually no conspiracy. By that I mean, … there are only two people in the room. That’s not a conspiracy. Just check some of the feeder funds, or the funds of funds, and their deal-maker managers. Not all of them of course, but some. That’s where I started the game for crying out loud. I arranged for others to set up funds, and they fed that capital into my companies. Initially it was just small investment groups, but those snowballs grew, and grew and grew. I became bored with repeating the refrain about my split conversion strategy using both put and call options, but before you knew it, we were raising more money than anyone could invest intelligently.



So many money managers would come with their exasperating questions, and the pretence of due diligence. Some of the idiots who really took themselves seriously even came with forms, asking about trading strategies, governance, compensation and using terms like fiduciary standards or benchmark performance. Like these barnstormers had a shred of any moral standards. These were the same crackbrains who charged their clients millions for “reinvesting” the money elsewhere because they couldn’t run a fund themselves. They are the modern version of snake oil salesmen. Getting them out of my hair was easy. I just made myself unavailable. You want in, give me a check. If not, get out. It worked. They couldn’t wait to hand over money.



The principal key to success for me was “perception.” Great PR is absolutely everything. That’s something my father never had the privilege of understanding. He tried to get into the money game, but had little success. I somewhat fell into the character of the aloof and insulated investment banker by accident. I didn’t want to answer questions about my trading strategies, and even when I consented to meeting with potential investors directly, I kept all meetings short. My aversion to meet, worked wonders and the more I became “unmeetable,” the more people wanted access. This evolved to the point where people threw hundreds of millions at us, just so that they could get twenty minutes in my office, or so they could be seen having lunch with me. How weird is that? I made sure that I joined the right organizations, which provided me some credibility, but in fact they would end up bragging that I was on their board, or part of their group, or that I was an advisor. Through goodwill, I created a long series of what you might call recursive loops of gullibility that brought me an infinite source of investors. 



The games in the investment business may have a few rules but these are just veneer. The complexities that have evolved are intended to circumvent or confuse oversight. How can anyone, even those intimately familiar with trading, catch a trader who’s front-running, for example? Unless you’re sloppy, you can get around legal restrictions without detection. Investigators know the game, but they have insurmountable difficulties when it comes to getting hard evidence. Today, volume and technology make illicit trading difficult to detect, yet many people on Wall Street do it. You do what you have to do in order to remain ahead of the next guy. If you don’t believe me, do your own research on how many of the major firms have been fined over the last thirty years with timid slaps of the hand. What they were doing was illegal, but who went to jail?


Loyalty was critical to me, and a central part of my strategy was to make sure that all investors understood unambiguously, if they took their money out of my hands, they would never be allowed back in. As a result, most investors never asked for their principal. If someone invested, we also demanded that they not divulge anything about their investment, or our business. That guaranteed that they would spread the word in hushed voices, punctuating our image of exclusivity. No one can keep a secret, least of all an ego with a pressing need to brag of its admittance into the most exclusive investment club in the nation. They can’t now be accused of gullibility when greed was their motivation.



In the past decade or so our total volume under management created momentum. The size of our volume provided us a perceived ability to affect the markets. Investors assumed that we could manipulate market sectors to our financial advantage. They were willing opportunists and ardent participants, knowing full well that such manipulation would have been illegal. This was another critical element in my strategy. These deliberate and enthusiastic partners in my game asked no questions once they were in. Even people with serious money “don’t want to know” although they might suspect. No one is innocent. As I said, good, effective PR is everything. With the right image everything is overlooked, including what you have or have not done.



How do you think all those salaries and bonuses on Wall Street are justified? Their image. They don’t call it Ponzi, but what’s the difference? Money is vanishing. Why do you think no one is getting any accounting of where the bailout money of the banking industry has really gone? Well over a trillion dollars has mysteriously disappeared into a giant black hole. Bailout money is being used to pay hundreds of millions in bonuses? Is anyone accountable? Oh, sure, Congress pretends it is going to ask questions. That will be about as effective as those questions I was asked by those investors who wanted to understand my bookkeeping. Why so much complacency when there is so much anger at me? Am I just a scapegoat, and the object of venting, that is a necessary relief valve absolving all of Wall Street? All cameras are focused on my front door while taxpayer bailout money is siphoned off to distant islands and yachts not registered in the U.S.?



There has been an assumption about my sons, Andy and Mark, and other family members having participated in my schemes. They worked with me but had nothing to do with it. Nothing. I needed them to take care of our private family interests and our charitable work. That was a central component of the family’s communal focus. My kids turned me in. I asked them to. They just pulled the trigger a little early though, I had some plans for a few days before the authorities showed up at the door. Same goes for my brother, Peter, who has been a loyal associate taking his instructions from me, overseeing our trading operation, but leaving all of the senior fund management alone. He is a lawyer by training, confused by investment strategy as most people are, and he knew nothing about trading and money management. 



You will read of endless “trusting” investors having been swindled and you’ll hear their rationalizations. Most of them were just greedy. I also predict that you will read about the closing of hedge funds, and funds of funds over the next couple of years. Their leadership will not be questioned, although their actions were not much different from mine. They will simply slip away into the night. I am proud that I have at least had the decency to step up and take the blame. I decided to plead guilty in order to end the stress on everyone around me. I have taken a giant leap onto my sword, and I have instructed my lawyers to make sure any deal they conclude with the District Attorney is final, and all-inclusive.



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Meanderings through senior executive offices in the corporate worlds of high tech and venture capital, have provided fodder for an inquisitive pen and foraging mind. James Raider writes: http://pacificgatepost.blogspot.com/

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- this is as good evidence as any of why the ... by Flak Stopper on Monday, Jan 26, 2009 at 12:04:05 AM