A $50 Billion Con Job Rocks Wall Street

By Danny Schechter, AlterNet. Posted December 24, 2008.

Madoff was in until he was out!

Soon he was wearing an electronic bracelet and under house arrest, a further sign of privileged treatment by the way. Imagine what secrets he could spill. Already the New York Times is reporting that this theft problem went much deeper, with all the Wall Street firms posting phony profit reports and then giving themselves juicy bonuses. A financial blogger wrote that the Times was still obscuring the story because the practice constitutes nothing less than looting, a word they never use.

Unfortunately, Madoff was not unique, not alone and shrewder than the people who trusted him to earn a good return. One financial analyst said that some of his investors assumed he was doing something illegal -- perhaps insider trading -- which is why they wanted him to manage their money. They thought they would make more money that way without taking normal risks.

Funds of Funds

Subprime speculators targeted low- and middle-income people. Madoff marketed to the wealthy. Editor Steven Pearlstein of the Washington Post explained that he specialized in "funds of funds" hedge funds:

These are hedge funds that raise money from pension funds, university endowments and wealthy individuals, and, for a fee of 1.5 percent a year, invest it in other hedge funds, which charge even higher fees. In return for paying double fees, these middlemen claim to offer investors access to the best hedge funds, which can be choosy about whose money they accept. They also offer the peace of mind that goes with knowing that the funds have been thoroughly checked out.

Now it turns out that some of these funds of funds had parked billions of dollars of their clients' money with Madoff without asking how he could so consistently produce returns in up market or down, or demanding to know why his books were audited by a three-person firm that nobody ever heard of operating out of a broom closet on Long Island.

It doesn't take a Ph.D. in finance to see the pattern here: Accounting firms and rating agencies are too easily compromised by the fact that they are chosen and paid by the management of the companies whose books they are auditing and securities they are rating. There are simply too many built-in conflicts of interest.

And Madoff took advantage of them. As a result, he had a license to steal, and steal he did.

"Disintermediated" Investors

James Hedges IV of LJH Global Investments, says those that went with Madoff chose faith over evidence.

"You've got people who were disintermediated [i.e., didn't have a professional representative], or unsophisticated, or went in through a personal relationship. That's what a con man is -- a confidence man is somebody that engenders a relationship and then subsequently lures somebody into doing something that they shouldn't do."

In the aftermath, the small gesture speaks volumes. A friend was staking out Madoff's former offices for a major news organization. No one would talk to her, including investors who could be seen through the window on their cell phones moaning about losses. They looked grim. Some were wiped out. When they left the building, some hid their faces, perhaps in shame, like criminals photographed on "perp walks."  A philanthropy expert said the consequences will be "catastrophic." An Israeli newspaper said many Jewish organizations will be hurt, some irreparably.

The anthropologist Lionel Tiger writes in Forbes about how incidents like this undermine all respect for the business world: "The invisible hand lurches between clenched fist and begging palm, and the new Greenwich Mean Time is in Connecticut. Suddenly, the only thing taken for granted is a government grant."

You could never make this up, even though Wall Street history is replete with earlier versions of this Sultan of Sleaze. Around the world, it is not just the supercrook Bernie Madoff who is seen as the guilty party, but the whole American system of free-market finance. There will be a reckoning.

See more stories tagged with: wall street, madoff, scam, ponzi scheme

News Dissector Danny Schechter is making a film based on his book Plunder: Investigating Our Economic Calamity and the Subprime Scandal. Send comments to dissector@mediachannel.org. Watch the trailer.

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