Madoff, and How He Can Benefit American Culture

From the Financial Times:

Large Wall Street firms privately harboured suspicions about Bernard Madoff’s investment business, in some cases steering clients away from dealing with him, but were reluctant to share their concerns with regulators, according to US bankers.

Banks were sceptical that Mr Madoff could deliver the consistently high returns that he reported, and they were also put off by a lack of transparency at his investment firm. For these reasons, big Wall Street firms are notably absent from the long list of victims of Mr Madoff’s alleged Ponzi scheme.

Two years ago, an internal Merrill report drawn up in connection with Merrill’s European fund of funds group, concluded the group should not deal with Mr Madoff, the financial adviser said. “We had a red light on doing business with him. There was no transparency.”

However, a fear of alienating clients who had invested with Mr Madoff prevented many Merrill executives from voicing their concerns too loudly. “You sell your product but you don’t bad-mouth others. You don’t say bad things about Bernie Madoff. That is where you cross the line,” one former Merrill staffer recalled being told by a senior executive.

You’d think that Merrill exec was a button man for John Gotti. Nothing of the sort…he was merely perpetuating the hush-hush culture that played no small role in Wall Street’s sinking ship. Think about what that one statement–You sell your product but you don’t bad-mouth others. You don’t say bad things about Bernie Madoff. That is where you cross the line–means to different people:

The staffer: If I don’t do what the boss says, I lose my own shirt.
The Merrill Lynch exec: Madoff’s an institution. If we badmouth him, we risk losing precious clients. We’d rather keep clients than risk being honest with them.
The client: My Madoff investment will fund my retirement. It sure is strange that his returns are so steady…(plugs ears and sings LALALALALALA to drown out additional thoughts)

We Accept When We Believe

The deception worked out for everyone, while it lasted. People had interest in maintaining their stake in Madoff’s scheme, even if their guts told them it was hollow. The scandal says as much about our culture as it does about the financial system. We’re willing to assume something is ethical when it offers a decent return and social stamp of approval.

An Alternate Scenario–Or Not

What if someone had rocked the boat? What if said Merrill functionary had told a prominent client to avoid Madoff, and someone alerted the SEC? Taking it a step further, what if the SEC had found something–before the Great Crash of ’08? Would the world have been ready for it? Or would it have been swept under the rug in order to prop up the sense of exuberance which, in turn, had been propping up the economy?

If investments are a bubble, then the tight-lipped behavior mentioned above makes up the bubble’s walls. There is a truth at the core of the bubble–emptiness, or temporariness–and an enticing, attractive, or otherwise deceptive story around the truth. That story allows the bubble to expand. The people willing to perpetuate the story might not be the guilty ones, but they sure keep the bubble afloat. In that sense, everyone was complicit: Investors, financial-world functionaries, executives, the media.

The Lesson

2008 alerted people of the risks of being complicit. The story that’s trying to solidify a new bubble right now has this script at its back-end: “They’ll take care of it. They’ll take care of us. Wait and see.” Who will take care of it, and us? Obama? Federal investigators? The powers that be?

People have become far more cynical, and with good reason. Indeed, while that cynicism flies in the face of the optimism Americans have practically branded as their own, I believe it is also part of a healthy adjustment. The ideal outcome? Our faith in institutions won’t be as blind. Our faith in the benefit of own powers of discernment, whether they emerge through social networking, media, or personal commitment, will be solidified. The system will strike a balance.

I would like to say that only time will tell, but I’m fed up with the passive approach. Instead, I will say: I have a new approach to business and government. It is one in which my eyes and ears are open.

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  • You’re right. This scenario played out over and over, nothing but “you don’t rat out someone in the gang” on steroids. Greed was at the heart of it. Media clips over the weekend cited Hadassah and other organizations attempting to minimize losses by citing gains were primarily bogus in nature to begin with. It would be interesting to see how much additional credit/activity occurred due to leveraging those suddenly fake gains.

  • Alan McRae

    You’re right, but you’re still being too easy on The Street. Our financial sector, like Enron’s internal analysts & sales minions, knew quite well that ever riskier investment instruments were being marketed as sound portfolio components, and that “lack of transparency” has been the hallmark of insider power brokers for some time now. Every time a courageous whistleblower comes forward in the financial, political, scientific and business sectors we get a glimpse at how things actually work at the top, and how they flow down to the frightened, compliant minions who actually facilitate the dirty work to the victims. Obviously keeping well-heeled clients comfortable while one shears them of a little of their riches is how the game is played, and saving them from the follies of their own boundless greed is not in the job description. Still, one learns that some CPA’s were advising their clients to place all of their retirement funds with Madoff, a violation of very basic investment strategy guidelines and a colossal breach of fiduciary trust. At the root of all of this is a single cause: the erosion of regulations & ethical boundaries that were originally created to protect us all from EXACTLY these kinds of abuses of power. Having forgotton, or simply conveniently set aside, the lessons of the Robber Baron Era, American society has created a black hole that threatens to swallow up the national & global economies. Better hope that Barack Obama, who had the wisdom to shun the soulless, amoral greed of The Street in favor of meaningful community service, can lead us back to more sustaining values and “the angels of our better nature”. Know that our collective failure to restrain our business leaders has propelled us to the brink of global socioeconomic chaos, so there is no way back onto solid ground other than doing the right thing. The Founding Fathers understood the necessity for checks & balances on all forms of power, and now we know first hand what happens when power slips its reigns and operates without transparency. Prudent regulations are not undue restraints on our “top producers” – they are the only thing between us and the catastrophic excesses of power. Re-read your history books if you’ve forgotten this painful lesson.