The Bernie Madoff Degree

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A Little History on ol' Bernie Madoff

Bernard Lawrence Madoff, better known as Bernie Madoff, rose to infamy in December 2008 when he was arrested for allegedly running a $50 billion ponzi scheme.

Madoff was a well-respected member of Wall Street, chairing the NASDAQs board until December 11th, 2008, as well as founding the billion-dollar Bernard L. Madoff Investment Securities LLC. He served on the boards of several nonprofit organizations including the Robert I. Lappin Charitable Foundation and JEHT Foundation.

Madoff in an honorary inductee into the University of Morons, in part because he may have ran the largest case of investor fraud in history, but mostly for the way in which he was caught. In a conference call with his two sons, Madoff admitted that the firms asset management division was one big lie.

Through the years, several people tried to blow the whistle on Madoffs schemes. As far back as 1999, Harry Markopolos raised a complaint with the SEC stating Madoffs firm warranted an investigation. Charles Gradante pointed out in 2001 that Madoffs firm only had five down months since 1996, implying that his 72-month run was just impossible. In 2007, the Aksia hedge fund warned investors to avoid Madoffs firm.

The Wall Street Journal reported the biggest losers in Madoffs schemes were the Fairfield Greenwich Group ($7.5 billion), Tremont Capital Management ($3.3 billion), Banco Santander ($2.87 billion), and Bank Medici ($2.1 billion).

Analyst commentary on Bernie Madoff

What is surprising about the Madoff scandal, or any ponzi scheme for that matter, is that anyone would invest their life savings with one investment manager without thoroughly investigating the source of investment returns. Even with auditor statements it is not hard to understand that returns reported were not attainable with the assets that Madoff said he was investing in. The fact that he was returning reported returns while the market was tanking should have been a red flag for anyone. It just goes to show that people want to believe that there is someone who can consistently beat the market. The reality is that individuals can only beat the market for short periods of time. Over time returns will revert to the mean and like games of chance the house cannot be beaten over the long term.

The most important rule of investing that was broken by many of Madoff's clients was diversification. Diversification can limit investment returns but also limits downside risk. No investor would ever invest with a manager that prescribed investing in only one asset. So why did these people invest in only one asset manager. Anyone who lost their entire life savings did so because they put all their eggs in one basket and that is recipe for disaster no matter how good your money manager is or pretends to be.