Monday, December 15, 2008

Back to Madoff

I want to re-address the Bernie Madoff story for a second here, because something is bothering me. Now, on the one hand, I want to chide the investors in the fund for being greedy and blind: refusing to ask questions about how the fund was making money as long as the money was coming in. HOWEVER, Dealbook, today, published some trading statements that Madoff customers received. Looking at these statements, I can't think of any way that a customer could look at them and have any reason to conclude that the business was anything other than legit.
Said differently, I had a 401k account at Scudder in which I owned a variety of mutual funds. Every quarter, they sent me an accounting statement which shows the change in value of the funds. Obviously, I assumed that my money was actually being invested in these funds. I also assumed that the funds were honestly reporting their positions and trading. I have no reason to assume fraud anywhere in the chain - but Scudder could be completely fabricating my statements, just like Madoff did... I think this is highly unlikely, and thus I'm back to sympathizing with Madoff's investors instead of blaming them for being blind and greedy.
So that takes care of the individual investors, but there was also a massive class of institutional investors (managing money for individuals) in Madoff's fund. Do they have a higher fiduciary responsibility than individuals, and the obligation to know exactly what they are investing their clients' money in? Yeah - I think they do, and I think they are to blame big time. Does the argument "hey, how could Nomura know there was fraud - they were receiving the same phony statements" hold water? I don't know... I want to say "no," but I'm not sure I'm being consistent here...
Anyone have a thought on this?


Anonymous said...

Dude, if you look at that "statement" you will notice that there were trades on only 2 days in the month: wed 11/12 and wed 11/19. So, this guy worked 2 days a month!!! Nice!

Is that believable?

Kid Dynamite said...

good point, but yeah - it's entirely plausible that the guy rebalances his fund once a month... lots of quant models do that.

Colin said...

Dare I say it, but all signs point to the need for more regulations. There needs to be greater emphasis on auditing and accountability.

Mind you, I don't have any industry experience, so am unsure how realistic my suggestions could be enforced.

StB said...

It is sad what happened to the investors. The SEC totally dropped the ball on this one, but for them to claim someone (the government) should make up their losses is ridiculous.

Kid Dynamite said...

StB - I agree - but is it any more ridiculous than the government bailing people out of bad mortgages? that's the problem with mortgage bailouts - the people who took out mortgages they couldn't afford are, in my mind, no more deserving (and probably much LESS deserving) of relief than the victims of Madoff's fraud