illusion. Among Wall Street option traders, the conventional wisdom was that Madoff’s strategy could not be replicated by anyone in the marketplace – at least not so it generated the double-digit returns he claimed,” Erin wrote. That red flag derailed Theranos, while Madoff got away with it for years. LESSONS FROM MADOFF “Anyone can be a swindler,” Erin told me. Madoff was a market innovator and enjoyed enormous (honest) success. He had a Rolodex beyond compare... and enjoyed immense credibility among market participants and regulators. If someone like that can be a “financial serial killer,” as Erin describes him... well, couldn’t anyone? Ask questions. No one likes to feel dumb. By shutting down questions about his (nonexistent) investment strategy with the claim that “it’s proprietary,” Madoff was the investment equivalent of the auto mechanic who glances under your car hood, then declares that he’ll need to fix your car’s lower piston’s bipolar tricuspid and replace the dynamic wipe tank’s sparker wrapper. Rather than display your ignorance, you fork over $2,000 and hope he’s not bluffing. One of the ways that Madoff got away with his Ponzi for so long is the people who were supposed to ask questions – and get the answers – simply didn’t. Madoff created a paper trail of trades that were never made... And no one on Wall Street could ever recall doing a trade with the Madoff fund, despite
the fact that, based on its size and its alleged investment strategy, it would have been an enormous player in the options market. Similarly, visitors to Madoff’s offices were shown the buzzing brokerage floor rather than the quiet Ponzi scheme offices. Investors in Madoff’s funds assumed that everyone else had done their homework about Madoff... and the fact that Madoff was a Wall Street star (and that the vendors of his funds were profiting so handsomely from their relationship with him) meant that anyone inclined to ask questions was encouraged to look away. Madoff was the investment equivalent of the auto mechanic who glances under your car hood, then declares that he’ll need to fix your car’s lower piston’s bipolar tricuspid and replace the dynamic wipe tank’s sparker wrapper. Not everyone is driven by money. Feeder funds, bankers, and glad-handing door- openers of every shape and size fell over themselves to market Madoff’s fund because of the unusual fee structure. He didn’t charge a hedge-fund-standard 2% management fee – which allowed distributors of his fund to collect enormous commissions. (In 2008 alone, fund distributor Fairfield Greenwich collected fees of an incredible $1.2 billion.) Every year, Madoff left tens of millions of dollars on the table.
American Consequences
75
Made with FlippingBook - professional solution for displaying marketing and sales documents online