by John M. Curtis
(310) 204-8700

Copyright March 13, 2009
All Rights Reserved.

                When 70-year-old former Nasdaq Stock Market Chairman Bernard Madoff was arrested and charged in Manhattan Dec. 11 with running a giant Ponzi scheme, the investment world was in shock and disbelief.  Madoff Investment Securities LLC was a household word among sophisticated investors and money mangers, boasting celebrity clients a mile long, including form Hall of Fame pitcher Sandy Koufax and Academy Award winning director Steven Spielberg, not to mention some of the nation’s biggest Jewish charities, including the Jewish Federation.  Madoff promised and delivered 10-12% returns, averaging double the national average for the most elite mutual and hedge funds.  “We are alleging a massive fraud, both in terms of scope and duration,” said SEC Enforcement Bureau director Linda Thomsen, promising to safeguard what’s left of investors' $50 billion.

            Madoff had been operating his firm as a penny stock trader since 1960, eventually offering clients high returns in the early ‘90s, describing his arcane system as “split strike conversion strategy,” baffling investment experts, puzzled how he offered his investors double average returns.  Ten years ago, Wall Street analyst Henry Markopolos warned the Securities and Exchange Commission about Madoff’s fraud.  Despite audited by a Mickey Mouse three-person firm with only one active accountant, the SEC did nothing until Madoff was turned in by his two sons, Mark and Andrew Dec. 10, 2008.  “We are moving quickly and decisively to stop the fraud and protect r remaining assets for investors, and we are working closely with the criminal authorities [i.e., U.S. Attorney] to hold Mr. Madoff accountable,” said SEC’s Thomsen, 10 years after Markopolos tipped them off.

            SEC officials have only identified and frozen about $1 billion in Madoff’s assets, less than one-50th the total losses estimated at $65 billion.  Thomsen worked so quickly that she has no clue where’s the missing cash.  When financial markets melted down last December, Madoff’s cash-flow ground to a halt, together with Bear Stearns, Lehman Bros., Merrill Lynch, Fannie Mae and Freddie Mac, AIG Insurance and a host of bankrupt financial institutions around the country.  U.S. Treasury and the Federal Reserve Board cherry picked institutions for bailouts, letting some companies, like Bear Stearns and Lehman Bros. fail.  Shareholder at Fannie Mae and Freddie Mac met the same fate as Madoff, wiped out with no recourse.  While Madoff’s scandal is especially egregious, how different is it from what happened at the nation’s most respected financial institutions?    

            While everyone’s got their eye on Madoff, they’ve taken it off the trillions lost by other institutions, now accounting for a $13 trillion drop in household wealth since June 2007.  None of the CEOs or corporate boards on defunct or nationalized financial institutions have been charged or sit in prison for gambling with investors’ and depositors’ money.  AIG has already taken $200 billion from Uncle Sam, with more expected to keep the insurance giant afloat because of its speculative investments in collateralized mortgage obligations, also known as “credit default swaps” or “derivatives.”  When the White House and Congress abandoned the 1933 post-crash Glass-Steagall Act in 1999—prohibiting depository institutions from stock market investing—banks, investment houses and insurance companies began to speculate anew with investors’ hard-earned cash.

            When the dust settled in late December, some of the nation’s most respected financial institutions had bit the dust.  Others like Citibank and Bank of America hung—and continue to hang—by threads, devastating the world’s opinion of Wall Street.  Even today, China questions its $2 trillion investment in U.S. treasuries, historically the safest, most secure investment on the planet.  Madoff’s fraud case—while only a fraction of Wall Street’s total losses—symbolizes all that’s wrong with Wall Street, built mostly on spin and hype than anything legitimate.  If Wall Street were really legit, the government or insurance industry would protect at least some of the more credible investments, like respected mutual funds.  Madoff’s investors have every right to be outraged but so do ordinary investors who lost their shirts in respectable investment offering far lower returns.

            Pointing fingers is an important part of figuring out how to fix a broken system.  Foreign governments shouldn’t question the full faith and credit of the U.S. government, especially the Chinese.  When the dot-com bubble popped in 2000, no one blamed the SEC for failing to perform proper oversight over clearly unprofitable businesses taken public by zealous investment houses like Goldman Sachs.  Hundreds of publicly traded dot-coms should never have gone public, duping hapless investors into losing hard-earned money.  Now that Madoff’s fraud demonstrates the utter negligence of the SEC, investors have a real action against the U.S. government.  When the SEC found Madoff in 1999 to have a bogus audit, they should have closed him down.  Now that his scam crashed-and-burned, the government bears the responsibility—like they did with AIG—to reimburse investors.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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