Tuesday, June 30, 2009

Madoff's Lessons

Source: http://www.ibdeditorials.com/IBDArticles.aspx?id=331169244560164

By INVESTOR'S BUSINESS DAILY | Posted Monday, June 29, 2009 4:20 PM PT

Crime: Yes, 150 years is a long sentence for a 71-year-old criminal. But few will shed tears for Bernie Madoff as he goes to jail. And yet, the man who financially ruined hundreds of people holds lessons for the rest of us.

Read More: Judges & Courts

Madoff's trail is littered with bankruptcy, broken dreams and bounced checks. Most, if not all, his victims will spend the rest of their lives — no exaggeration there — trying to recover from the financial devastation he wrought.

The magnitude of Madoff's crime boggles. He took $17 billion from investors in his fund — which boasted of beating Wall Street's major averages with double-digit returns year after year. Such consistent, outsized returns should have been a red flag.

This, of course, is reminiscent of the infamous Charles Ponzi, who in the 1920s vowed to double people's money in just three months. Things went well — as long as those willing to join his scheme outnumbered those cashing in. Once the arithmetic reversed, however, it crashed — spectacularly.

But compared with Madoff, Ponzi was a piker. Ponzi's fraud, even in today's dollars, would be just over $150 million. By comparison, Madoff was a pro: He sheared his sheep clean.

"He stole from the rich. He stole from the poor. He stole from the in between. He had no values," said victim Tom Fitzmaurice.

In short, Madoff was a consummate con man, fleecing many intelligent, accomplished people. These included the managers of dozens of hedge funds and celebrities as diverse as Hall of Fame pitcher Sandy Koufax and actor Kevin Bacon, who is now a lot closer than six degrees to thousands of broke investors.

But there's a lesson in this for the rest of us too. We routinely and blindly place our money and faith in financial operators — in both the private sector and government — knowing little about who they are, what they do, how they do it and how they're doing.

Worse, too many know little if anything about investing or the economy or government finances. Such basic financial ignorance makes us all vulnerable. We'll find out only when we go bust.

Few people, for example, seem aware that our government, Madoff-like, will spend close to $10 trillion in the next decade on various bailouts, pork projects, stimulus plans and other failed notions.

Worse still, Social Security and Medicare in the long run are actuarially short by $47 trillion — a stunning level of insolvency. And as the Congressional Budget Office reported last week, public debt as a share of GDP is set to explode from 41% in 2008 to 181% by 2035.

These, too, are frauds, perpetrated by government on taxpayers. Yet they have, inexplicably, failed to raise Americans' ire to Bernie Madoff levels. For Madoff's investors, it's too late. What about the rest of us? Will we wake up before this bigger Ponzi collapses?

No comments: