Recently, I have discussed the roles that regulatory and ratings agencies have played in our current economic dilemma. Everyone was looking the other way when it came to making a buck and this has truly made things worse for the United States economy. We have seen what Congress did (or did not do) in degregulating some of the financial markets and what they are doing now to fix things, aka bailout packages. And just when you think that you have seen enough, along comes Bernie Madoff.
I am sure many of you that either read the news or watch TV have heard of Bernie by now. Madoff was a prominent hedge fund manager. His fund, Ascot Partners was widely considered one of the most consistently high returning hedge funds out there. Bernie Madoff, now 70, was a man with a magic touch when it came to investing. Regularly, regardless of how the overall markets were doing, Bernie managed to return 1 percent per month or 12 percent per year. While 12 percent does not sound like a big number, it is virtually impossible to be this consistent year after year. Again, like all of the warning signals in the subprime loan markets that were ignored, Madoff's 12 percent was ignored as well. If Bernie had not been faced with $7 billion in redemptions in December from Ascots investors, this $50 billion Ponzi scheme (paying off old investors with deposits from new investors) may not have been uncovered.
Running a Ponzi scheme of this size is amazing enough, but how did he get away with it for so long? Did his family members know what was going on? What about the people that worked for him at Ascot Partners? With all of the shenanigans that have been uncovered in the credit markets recently, did the regulators (like the SEC) just not notice a guy like Bernie Madoff? It truly defies reason since apparently there had been reports that Madoff had been running a Ponzi scheme as far back as 1998.
When news broke of the Madoff scheme back in December, Christopher Cox, chairman of the Securities and Exchange Commission admitted that the SEC failed to act for almost a decade on "credible and specific allegations" against Madoff and announced a probe. Again, just like the better later than never actions by the SEC in the naked short selling scandal, the agency was out of touch. Researching this article I discovered that the SEC only has 430 people regulating over 11,300 advisors and 16,000 mutual funds (Bloomberg), so how could they manage to adequately regulate so many with so few? I have a suspicion that Bernie Madoff was aware of this skeleton crew as well. At this point, you have to ask not just how Bernie did it for so long, but how many other Bernies are out there and just have not been caught yet?
The Madoff scheme bankrupted many investors, including several charities that had all of their money invested with Bernie. There were many other investors who did not even know that their money was with Madoff until it was too late. These people were placed with Bernie via fund of fund transactions with their advisers. All of these investors were not greedy people looking for a quick buck. Bernie Madoff had been in business for over 40 years and had a clean compliance record with the SEC. He did not promise outrageous returns, just a steady 12 percent, about the average of the Standard and Poors 500 over time. He seemed beyond reproach and was respected by many.
Currently, there is over $7 trillion in cash (money markets and CD's) sitting on the sidelines right now, not being invested. Market bulls are wondering what everyone is waiting for? Huge selloffs have created many amazing buying opportunities on both stock and bond markets, but no one in buying. I am not wondering at all. Confidence is everything and no matter how good a bargain looks, investors must be sure that the returns are real. Investors need to know where their money is and who is investing it. The days of blindly handing over your assets to someone who you "think" is honest are gone. Be a smart, informed and educated investor. That will improve the odds that you will never get "Madoffed."
The opinion expressed is that of Carol Perry and may not reflect that of AWA Wealth Management or LPL.
- Carol Perry has been a Nevada resident since 1983. She has worked in financial services since 1980.