As if the negative news of the past month was not enough to rattle the constitutions of the hardiest bank accounts, a new face has appeared to erase Paulson’s from principal and front-page news coverage.The new face of Wall Street’s meltdown is Bernard Madoff, a well-respected, elusive, disarming, egocentric, and now arrested, financial service executive. Is he really such an anomaly?
Individuals, banks and fund managers of brokerage, hedge, trust, private, non-profit or other capital pools, who made sumptuous donations to Madoff’s coffers are making the headlines for having invested in the genius of 1% to 1.5% monthly returns. Over the coming days and months names will continue to emerge. It is inevitable that some of the nastiness permeating the penumbral netherworlds of investment banking will force the hands of authorities that have ignored many of the egregious abuses of fiduciary responsibilities entrusted in positions of influence and power over money. Wealth destruction of such magnitude required servility and assent from a synchronous multitude.
In the Madoff fiasco the range of investors already finding light of day includes for example Banco Santander based in Spain with a reported $3.1 billion exposure, and Britain’s Man Group with only $360 million in potential losses. Individual fund managers and financial advisors to the wealthy will also be exposed. For some individuals the nature of the exposure may be more than simply having lost staggering amounts due to their inappropriate allocation of capital to an alleged ponzi scheme.
We may be bestowed the first significant opening to a flood of exposure into the imposture and pilferage that has been too pervasive in the investment and banking industries for a century. It is an industry that has been protected with almost ecumenical solemnity by regulatory agencies and media. Regulators might not be up for it and MSM may be too distant from privacies of collusion. Nevertheless, the doors of the cloisters shrouding indefensible vulnerabilities may open a crack. Perhaps we will be granted insight to a whole range of shamelessly aberrant possibilities that the financial world and its regulators would rather leave undisturbed like a stagnant toxic reservoir.
At the less pernicious end of the seductive a cappella temptations of nascent or ripened greed are those who suspected that Madoff was doing something off the main line to deliver such absurdly consistent returns. As is often the case on schemes too good to be true, these investors didn’t really want to know. They invested anyway. Smaller fish begged Madoff to accept their capital for investment, but many were likely directed there by their own financial consultants who received some form of compensation from the virulent fund. This is not to suggest that the whole system is corrupt, however, a considerable portion in the financial consulting and capital management business, have forever acceded to beguilement and dipped their buckets into both sides of investment transactions.
Nearer the apex of the pecking order are market savvy managers of large capital pools who accost both sides of financial transactions in monastic secrecy and with ascetic prudence. The nature of their game can get complex, and presents a kaleidoscope of diversity. While overseeing funds or pools owned by others worth tens, even hundreds of billions, they manage their own private smaller but nevertheless sizable funds. One can scale down numbers applied to the graft, however the same ceremonial congruity applies. Regardless what long, short or other more eclectic “bet” is made from the large fund under “management,” the smaller private fund can be insinuated into the safe side of the transaction between the bid and ask, for example. The smaller private million-dollar insertion will be guaranteed warmth by the bigger trades on behalf of the larger managed funds. Execution can avert prying eyes with or without broker or market maker accommodation, utilizing Byzantine devices such as well nested off shore accounts, although many operate subtly but in full view.
The investment game is prodigally encumbered with inducement for manipulation or corruption, imploring the weak of fortitude, morals and principals to abide to discrepant customs. When managing “someone else’s money” it is too easy to take a piece over and above the agreed to fees. Rationalizations abound sanitizing the egos of corrupt investment bankers convinced they are the requisite Eustachian tubes of the investment world. Attempt to calculate odds of graft in this industry would accelerate the most complex algorithms into catharsis. We are treated to many great lies, such as “the market never lies,” or “insider trading is illegal,” meant to administer salve to the flock, or anaesthetize the unsuspecting.
What self-respecting investor, broker, market maker, fund manager or general purveyor of financial clout would make an investment without “inside” information? Martha Stewart was jailed for a minor incarnation of that infraction. Occasional immolations are inevitably imposed for the industry’s aesthetics to maintain consecration.
Madoff is no proselyte to the game, having founded his firm in 1960 and having served as Chairman of NASDAQ, his breadth of experience should deliver unusual enlightenment into the darker corners of his industry during these times of bailouts and deficits. It will then be up to Congress to act on reducing the odds of seduction.
James Raider writes The Pacific Gate Post