There was a long investigative reporting piece on Bloomberg today about Bernie Madoff’s enablers. The article makes the point that many of Bernie’s investors and feeders suspected Bernie was a cheat, but they didn’t mind as long as they benefited. For example, it quotes a fund of fund’s executive as responding to an accusation that Madoff was front-running his brokerage clients by saying, “Yeah, so what? That’s his edge.”
The article mentions a book, by James Walsh, titled You Can’t Cheat an Honest Man. I like the title, which he borrowed from a 1939 W.C. Fields movie. Although I feel badly for the people whom Madoff victimized, I think that the phrase rings true. For years people had been claiming that Madoff’s returns weren’t feasible, but investors piled on anyway. Some feeders, such as Fairfield Greenwich, “put 53 percent of its assets into Madoff’s hands and charged clients 20 percent of profits; it added a 1 percent management fee in October 2004. For the $7.3 billion funneled to Madoff, they reaped $102 million per year, assuming Madoff returned a phantom 10%.
Not all people went along for the ride though. The article reports that Oswald Gruebel, who was head of private banking at Credit Suisse, suspected something was wrong and “urged customers to withdraw from Madoff’s funds.” Apparently only about half of the money was taken out.
Incidentally, a google search for the phrase, “you can’t cheat an honest man” turned up this prescient editorial from November, 2005 by Christopher Laird. He wrote:
The US right now is in the same economic boat. A 5 year housing bubble has caused real estate to rise in most cites by over 100%, and because real estate is easy to leverage, people using historically low interest rates have basically succeeded in mortgaging their houses well past levels that would be sustainable.
Now people have been enticed into an endless cycle of buying on credit cards and sold the lie of using a home mortgage to pay those off, only to begin the cycle again. And now we have these new bankruptcy laws that are waiting to lower the boom on the many people who were enticed and unwisely accumulated lots of debts, having been seduced by a chimera of rising housing values that are only going to fall off a cliff once the people realize the jig is up. 90% of them will lose their shirts… sadly….
