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D I SAMB I GUAT ING BERNI E MADOFF The Background
As the year ends and a new one begins, now it’s time to reflect, yippee. We offer the following article to reassert key principles for any portfolio changes under consideration.
later on. It bought trading volume by paying undisclosed fees from the spread it earned, a controversial practice that became accepted over time (note: not unusual for Wall Street). Bernie was accepted, even welcomed, into theWall Street club, serving as Chairman of Nasdaq in 1990, 1991, and 1993. However, it was not enough. Leveraging his success, he founded a hedge fund allegedly using split-strike conversion option strategies to “collar” risk. The track record was phenomenal, generating consistent returns with little volatility. A gusher of money came from the Jewish community and many others (viz. Steven Spielberg, Kevin Bacon, Kyra Sedgwick, and the owner of the N.Y. Mets, among the notables). Much of the money came from charitable trusts and foundations seeking long-term gains with scant liquidity requirements, Genius Point No. 1. Since Madoff was recognized as a Wall Street “stud muffin,” investors felt lucky indeed to even be accepted into this money-printing machine. There was a total and willing suspension of disbelief in the guise of Aristotle’s Elements of
Theater (Genius Point No. 2). Our charismatic charlatan displayed all of the trappings of great success: private jet, penthouse, yacht, vintage watch collection, and vacation homes around the world. Regulators were blinded by charm and guile (Genius Point No. 3). Madoff embodied the old adage of keeping your enemies close. One scold, Harry Markopolos, was unrelenting but unsuccessful in outing this Wizard of Oz. Charles Ponzi in 1920 set the stage for Madoff, who followed in his footsteps. A Ponzi scheme is a form of fraud where belief in success is fostered by the payment of “returns” to the earlier investors via the capital contributions of later investors. As such, a growing capital base is required to keep the pyramid intact. The sharp and steady equity market decline of 2008-2009 did Bernie in. Capital inflows slowed to a trickle. With fear high, investors tried to withdraw. The jig was up. Some subsequently surmised that no trades were ever actually made, a truly incredible possibility.
Mr. Bernie Madoff
Most of the $64.8 billion in his hedge fund evaporated, which is the largest investor loss on record. Here was a man who was a genius, which may shock some, a chameleon-like psychopath, and sadly for his 16,000 investors, an unprecedented crook. He has been in the press since 1960 to the present and today resides in the steel hotel — jail. Rather than relitigate and rehash, we focus on the lessons to be learned from this mess.
Born on April 29, 1938, Bernie started his firm in 1960 with $5,000 he earned as a lifeguard. The firm’s growth was ferocious, starting with trading penny OTC stocks in its early days as a market maker, then expanding into blue-chip stocks
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