50 billion dollar scam: the saga of Bernard Madoff

Regulation failures have just become a punchline of a truly sick joke these days as the global financial system melts down. Yet the exposure of Bernard Madoff’s multi-billion-dollar Ponzi scheme might be one of the worst laughs yet.

Madoff was a former chairman of NASDAQ, and even at one time an adviser to the SEC. Little wonder, then, that he knew so well how to get around rules and create a setup that appeared to consistently make money and pay returns of 10-12% a year, even in a down market. He was arrested on December 12 and charged with fraud leading to perhaps $50 billion in losses.

The charge reads, in part: “Madoff deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

According to a blame-shifting statement by Christopher Cox, chairman of the Securities and Exchange Commission, allegations against Madoff were brought as far back as 1999, yet no one ever followed up on them.

I’m just shocked at this. Truly. I mean, come on, isn’t the SEC supposed to keep an eye on things like this?

Oh, wait. This is what happens when you put people opposed to regulation in charge of regulatory agencies. And I’m not letting Clinton appointees off the hook, either. Especially when it came to finance, the Clinton administration was nearly as deregulation-happy as the current one.

The fact that Madoff brought many people who should know better down with him is not so much surprising as it is yet another indictment of the greed that drives the global financial markets. Because let’s face it, the stock market is just as ephemeral as Madoff’s scam. Like Madoff, stockbrokers make money by shifting money around—mostly other people’s money. And when they lose the money, the people who get hurt are the investors, first. Then the rest of us. The investment banks have been bailed out, don’t you know.

Madoff won’t be as lucky as the heads of Citibank and AIG. He’ll probably end up in jail. And his clients, often wealthy philanthropists, won’t be getting federal bailout dollars to keep the charities they funded afloat, though they may be able to get a tax break.

The Innocence Project, which investigates the cases of death row prisoners, draws much of its funding from the JEHT Foundation, which invested with Madoff. The foundation is closing down now, and other organizations that invested with Madoff have lost millions as well. Yeshiva University lost something on the order of $100 million.

So once again, the greed of Wall Street insiders ends up hurting everyone. And regulators who are supposed to keep an eye on these people act shocked that massive fraud went unnoticed. Madoff will be described as an outlier, a crook among honorable people, instead of the liked and trusted insider that he was. Because the Madoff case isn’t that strange, despite the hyperbole being thrown around.

Our system has been built for too long on the worship of the “invisible hand of the market,” pretending that something that doesn’t exist was going to regulate the behavior of people. Profit was presumed to be the only arbiter of what was good and right, since “the market” would decide. Yet as Madoff has shown, it was quite possible to coast along for quite a while without “the market” taking any action to regulate. And when it finally did, it was not a gentle correction, but a total collapse.

Sound familiar?