Barbara Karen Dweck had dipped her hands in red dye specially for the occasion. She had smeared it over the collage of press cuttings she carried, so that the headlines dripped blood. Her message was No Mercy For Bernie, although she hadn’t actually lost money herself.
Of all the protesters outside Manhattan’s Federal District Court on the morning Bernard Madoff was sent to jail, Dweck was the loudest. “I’m just trying to express myself,” she told anyone who would listen. “The man is causing suffering. He’s harming people.”
Madoff is the villain America needs. He was much more use in his penthouse apartment, stepping out in a bullet-proof vest, than he can ever be in handcuffs. There he embodied Wall Street’s arrogance and dishonesty. In prison he is inmate number 61727054.
His apology offered little in the way of catharsis. There was a dram of satisfaction for the few thousand investors whose life savings turned out to be so much paper and ink, but the national thirst for vengeance remains intense. Madoff stole from the wealthy and got what he deserved. The senior bankers, traders and hedge fund managers who made fortunes leveraging risk still have their mansions in Connecticut.
As James Surowiecki wrote in the New Yorker: “Discovering what the crooks have been up to is disillusioning, but not as disillusioning as coming to terms with what the so-called honest people did.”
Because Ponzi schemes only function for as long as new marks pay in, they are collapsing all over the country. There will be more prosecutions, but these will be swindlers exposed by the vanishing market, not brokers who sliced and re-packaged derivatives they suspected to be worthless.
Texan billionaire Allen Stanford asserted his Fifth Amendment rights on Wednesday, declining to testify or release any documents to the Securities and Exchange Commission, which has accused him of cheating clients out of $8 billion.
The SEC has been busy closing the stable door. In Florida, it busted George Theodule, claiming his Creative Capital Consortium had robbed Haitian immigrant communities. To avoid arrest, Indiana financier Marcus Schrenker faked a distress call from his private plane, bailed out into the woods and sped off on a motorcycle he had stashed earlier. When the police caught up with him, he slit his wrists. He failed at that, too.
When they come to court, these trials will reveal how easy it was to deceive people while house prices and shares continued to rise, but Warren Buffett’s observation that “you only learn who’s been swimming naked when the tide goes out” is half a truth. These scams are drops in a receding ocean which has exposed all of us.
Madoff’s arrest showed how lax regulation had become. When whistleblower Henry Markopolos brought anomalies to the SEC’s attention, they were passed on to Financial Industry Regulatory Authority, which passed them straight back without investigating further.
If watchdogs were incapable of spotting a thief who employed staff with minimal experience, sent out statements produced on an old-fashioned inkjet printer and delivered fantastic returns, outperforming the market year after year, what hope do they have of finding people who consciously broke the law by gaming the vast, interconnected web of Collateralised Debt Obligations and Credit Default Swaps? How can they separate criminals from traders who simply behaved the way their annual bonus taught them to?
In June, two Bear Stearns managers were charged with wire fraud, for boasting about the performance of their hedge fund in public while worrying that it was losing money in private emails. But high-profile casualties like former Enron CEO Jeff Skilling, currently serving a 24-year sentence for securities fraud, are rare.
The House Financial Services Committee will ask the SEC about its enforcement plans next week, at a meeting called by chairman Barney Frank, who recently observed that “rules don’t work if people have no fear of them.” Madoff’s wife and sons are high on the list of targets, along with the principals of hedge funds who enabled him by funnelling customers in his direction. But it will take more than a few obvious scapegoats to begin a new era of responsibility.
Madoff is said to have stolen $65 billion. This is calculated from his wildly imaginative statements to clients, so the true amount is much less. As the losers scrabble for whatever scraps they can, even investors who pulled out in time are at risk.
There is a clear precedent for this. Four years ago, a fund called Bayou imploded and was shown to be a $450 million fraud. Anyone who had profited from the illusory wealth it had created, by cashing in while the going was good, was forced to give back the money. The chain of liabilities stretching back at least a decade, deep into funds with any kind of exposure to Madoff, is a mess only a lawyer could love.
This article originally appeared in the Siunday Herald, in March 2008.