We’ve all recently learned that Wall Street financier Bernie Madoff’s surreal investment returns was just that – surreal – built on a Ponzi scheme that collapsed amid FBI and SEC investigations. Initial reports indicate that investors were bilked out of at least $50 billion.
While Madoff may not have been well known here in Southwest Florida, he has been a legend in New York, Massachusetts and in South Florida, particularly in Jewish circles as many of his investors shared his faith. A joke used to circulate that no large divorce happened in Palm Beach without a fight over a Madoff account.
Madoff built a reputation as a “miracle worker” never having a down year, regardless of the markets. His clients experienced almost three decades of extraordinary returns. His investment firm had an air of exclusivity and privilege, as only a select few were even allowed to place their money at Madoff Securities.
While his Ponzi scheme using new investor money to pay off old worked for so long, the current economic tsunami was too much. When investors sought to withdraw approximately $7 billion, his firm could not satisfy the withdrawal requests, and the scheme was revealed.
Some of my colleagues on the East Coast of Florida describe to me clients who lost their entire net worth outside of their homes and checking accounts. Some put all of their retirement investments with Madoff. Many of these retirees, who once considered themselves millionaires, are on the precipice of poverty. Estate planning attorneys from South Florida declare that the impact of this confessed Ponzi scheme will be widespread.
What marks this differently from all of the other beatings that so many of us have experienced with the stock market is the totality of the devastation. Those of us holding market equities may have experienced thirty, forty or even fifty percent losses on the value of those holdings, while clients of Madoff have apparently lost everything.
There is some hope that the Securities Investor Protection Corporation (SIPC) will provide insurance coverage for investors. Several articles n the Wall Street Journal have indicated while SIPC covers some losses up to $500,000 per account in limited cases, it remains unclear whether and to the extent to which SIPC will cover these investment-adviser accounts. Some journalists question whether the SIPC has sufficient funds to even pay for the claims, as there is apparently only $1.5 billion in the fund itself.
The Wall Street Journal reported in its December 16th edition that various charities, including The Gift of Life Bone Marrow Foundation (to which I feel personally close given my mother’s recovery from leukemia via a bone marrow transplant four years ago), private foundations that sponsored Jewish youth trips to Israel and others have lost significant fortunes leading to some closing their doors.
Various hedge funds will feel the pain as well. Maxam Capital Management LLC reported a $280 million loss on funds held at Madoff’s firm. Ascot Partners LLC has apparently lost significantly more (perhaps in excess of $1.5 billion) of money held with Madoff. Fairfield Greenwich Group said in a statement that it had $7.5 billion connected with the firm.
Of course, there are lessons to be learned. Growing up we all heard “if it seems too good to be true, it probably is.” Human nature somehow allows us to disregard warning signs before it’s too late. Clearly, the lack of regulatory oversight on modern complex financial instruments leads to these types of problems as well.
Let’s hope that Madoff’s story isn’t repeated by others in the coming months.
©2008 Craig R. Hersch