As Bernie Madoff is being sentenced for his part in perpetrating the largest known Ponzi scheme in financial history, his cultural legacy is just beginning to be developed.
In what could only be described as postmodern thinking in its purity, some investors are arguing that their claim for losses should include all of the imaginary, fictitious income Madoff’s false utterances (ie. Those investment account statements his firm kept issuing). In essence, they placed their faith and trust for increased wealth in their preacher, Bernie Madoff, and—by-golly—their faith should become sight, even if it was all a sham. This takes greed and capitalism to a whole new level.
Some of Madoff’s victims are suing Irving H. Picard, the court-appointed trustee overseeing the process by which bilked investors recover their losses. Picard is calculating investor losses as the difference between what was put in minus what was taken out. Despite the fact that their money was never invested by Mr. Madoff, and never earned a rate-of-return, these victims want to be given credit for all of the earnings falsely reported by Madoff’s firm in their statements of account.
A RETURN ON INVESTMENT Let’s illustrate how this false-earnings concept works using an example. Investor A invests $100 million with Madoff, “earns” $35 million, withdraws $125 million and has a calculated balance of $10 million. Investor B contributes $5 million, withdraws nothing and shows earnings of nil.
The claim, as stated in the New York Times, is that the investors “should be reimbursed for the total value of their accounts with Mr. Madoff, even if their withdrawals exceeded their deposits and even though the balances reflected on their statements were based on fake trades.”
Given the above illustration and using this reasoning, Investor A lost twice as much as Investor B ($10 million verses $5 million) and should be entitled to twice as much of a claim for losses. Don’t get me wrong, Investor A had an opportunity to earn a return on his $100 million and may have done better than a return of $35 million investing elsewhere. But somehow, a guy who has already received $1.25 for every $1.00 invested ranking ahead of a guy who lost it all just doesn’t seem right.
Imagine if such an argument prevailed. Bernie Madoff, by way of falsifying investor statements of account, would have actually created wealth for some of his clients after all. By virtue of their faith in Mr. Madoff, his clients could actually receive real wealth. Unbelievable! Bernie Madoff could trump prosperity-gospel preachers by actually facilitating the redistribution of wealth from one investor’s pocket to another on the basis of the fact that some investors placed their trust in him.
WHAT WENT WRONG? Herein lies a perfect object lesson for why worldview matters. We don’t find postmodernists claiming Madoff’s reality was simply different than those of his clients and there is no such thing as absolute good or evil. The Times says, “District Judge Denny Chin condemned his crimes as 'extraordinarily evil' and imposed a sentence that was three times as long as the federal probation office suggested and more than 10 times as long as defense lawyers had requested. . . . In meting out the maximum sentence, Judge Chin pointed out that no friends, family or other supporters had submitted any letters on Mr. Madoff’s behalf that attested to the strength of his character or good deeds he had done.”
What went wrong? And how does society prevent such a terrible thing from happening in the future?
One of Madoff’s victims was glad that his sentence was 150 years so that it would act as a deterrent against others who might perpetrate such a heinous crime. Unfortunately, both research and Mr. Madoff himself would refute such a claim. It seems no one who commits a crime like this makes such a rational decision—comparing the upside of potential ill-gotten wealth with the downside of getting caught and imprisoned and going ahead with the fraud because the upside outweighs the downside. The presence of the law and the sanctions at the time Mr. Madoff initiated his scheme had no effect. While Hollywood was making the first “Weekend at Bernie’s” in the late 1980’s, Mr. Madoff wasn’t at all concerned about the fact that “Weekend at Bernie’s III” in 2010 would be about him serving a 150-year sentence.
In a profound statement of irony, the Times says that “the Madoff case seemed to put an entire era on trial—a heady time of competitive deregulation and globalized finance that climaxed last fall in a frenzy of fear, panic and loss.” It is ironic because Madoff’s fraud likely would have not been detected had the financial meltdown of 2008 not occurred.
Furthermore, competitive deregulation and globalized finance had nothing to do with Madoff perpetrating his fraud. The regulatory framework governing capital markets are based on a Judeo-Christian worldview. Trust, and not greed, is the reason for the efficiencies for the capital markets that created the unprecedented standard of living enjoyed by Western civilization in the 20th century.
GREED IS NOT GOOD Gordon Gekko’s address to the shareholders in the movie Wall Street—where he famously says “Greed is good”—has been taken out of context. The point was that you shouldn’t trust those bureaucrats who have no money of their own at risk to make decisions that are good for shareholders whose money is at risk.
The SEC’s regulations governing investment firms were initiated during a time in history when truth, virtue, and honesty characterized capital markets. Long before online trading and computers, trades were done on trading floors and via telephone. A trader’s word was trustworthy. Members of the New York Stock Exchange traded 100 million shares a day based on trust and every trade was confirmed without any discrepancy. Although publicly traded companies must be audited the members of the exchange weren’t required to be audited because the industry was so honorable no one thought to require it.
Had Madoff’s investment portfolio been subject to an audit, the fraud likely would have been uncovered in its early stages. No doubt this hole will be filled now, but one must still trust someone or something in order to invest. The evidence of the culture of trust is supported by the fact that as early as 1999, the SEC was informed by a competitor of Madoff that his firm couldn’t possibly achieve the rates of return he supposedly claimed.
Mr. Madoff exploited the culture of trust that, in spite of numerous scandals in recent years, had not yet been addressed by regulators. Improvements in regulation of the financial industry may lessen the potential for another Madoff-like fraud, but regulation will never eliminate it. Bailouts only make the problem worse. Investing is ultimately an act of faith by trusting someone. Who do you trust?
I wonder if preachers have cause to be concerned that those who place their faith and trust in their message that God will make them wealthy may someday have claims against them from people who “lost” money that they never received.
Stuart McKelvie is a commissioned BreakPoint Centurion. He is a cultural missionary living in Winnipeg, Canada. Stuart and his wife, Susan, work together at McKelvie Consulting Ltd., a management consultancy specializing the areas of strategic, financial and information technology management.
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