The empire of fraud

Tonight I saw a Frontline episode from mid 2009 called “The Madoff Affair.” It is most interesting and I learned a lot I didn’t know before. It focuses, not on the individuals who invested with Bernard Madoff, and whose sad stories have been covered extensively in the media, but on the professional investment advisors who became Madoff’s “feeders,” investing all their respective clients’ portfolios in Madoff’s company. It began with two small-time investment advisors named Michael Bienes and Frank Avellino in the 1970s and ’80s, then expanded to higher-profile, big-money investment advisors in the 1990s, such as the Fairfield company in Connecticut, headed by a man named Noel, who soon brought his entire large extended family into the operation. It was very simple. At each step, these investment advisors saw that Madoff was making more money than any one else in the field, even when the market was declining, so they decided to turn ALL of their investors’ money over to him. Madoff didn’t have to do anything. Such was the power of his name that everyone came knocking at his door.

In short, Bernie Madoff did not have a Ponzi scheme; he had a Ponzi empire, extending over several continents, with entire “countries” (i.e. other investment advisors) under his power and paying him tribute, in return for which they became fabulously wealthy.

But the analogy goes further. Madoff was like the Roman empire. With a couple of important exceptions, the Romans did not go out and conquer their empire; it more or less fell into their hands, country by country, province by province. There was even a king in the Near East who literally handed over his kingdom to the Romans. The upshot was that Madoff had all these “proconsults” handing him en masse the “tribute money” that their respective subjects had given them, in return for which they made so much money from Madoff that they never asked questions. Since all their profits came from his black box, he simply owned them, and it was not up to them to inquire what was in that black box.

There was a big French investment advisor, first name Thierry (I didn’t get his last name), who became a Madoff “feeder.” Thierry had connections with various European royalty, and he persuaded all his royal acquaintances to invest their money with Madoff. As the economy got worse and worse in 2007-08, and Madoff was the only investor making money, Thierry invested all his personal wealth with Madoff as well. When the Madoff fraud was exposed, Thierry flew to New York and, in a building a few blocks from Madoff’s East Side offices, committed suicide by slicing his wrists. A relative of Thierry’s tells Frontline that it was an honorable, if old-fashioned, way for him to end his life. Again, like in ancient Rome. Except that in this case—this being an empire of fraud—the proconsul killed himself, not because he had betrayed the emperor, but because he had believed in him too much.

The Frontline program also goes into the SEC’s total failure to investigate Madoff despite the credible accusations made against him by Harry Markopolis. When you see the SEC’s enforcement chief Linda Thomsen being grilled by a congressional committee, it becomes clear that she didn’t do anything. In particular, she didn’t do the simplest thing that would have revealed in one day the truth about Madoff’s Ponzi scheme, i.e., demanding that Madoff show the records of his trades with the companies he was supposedly trading with. Since no such records existed, because no such trades had ever taken place, his entire fraud would have been exposed by the posing of the simple demand, “Show us your transactions.” But they didn’t make that demand. Alternatively, they could have looked at the lists of the companies Madoff was supposedly investing with, gone to five of those companies, and said, “Has Madoff purchased these stocks from your company?” The truth would have been revealed in one day. But the SEC didn’t do that.

The SEC people give new meaning to the term “empty suit”—a person who is supposedly filling a certain job and carrying out certain functions, but in reality is doing nothing. There’s no one there, except a self-important non-entity receiving the salary, perquisites, and respect accruing to the job that he is not performing and hasn’t the slightest interest in performing.

(And let me add in passing, in connection with this entry, that I now believe that essentially the entire conservative movement is an empty suit.)

The biggest question for me, which is the question I’ve asked from the start, remains to be answered: how did Madoff carry it off? How did he churn out, month after month, decade after decade, records of financial transactions that had never occurred, without a large number of his employees knowing about it? And what were all those young million-dollar-a-year men working at computer terminals in Madoff’s office, shown in the Frontline program, DOING all day long? Did they think they were making trades, which in reality did not exist but were part of some super-program on Madoff’s computer which no one knew about but himself? I’m reminded of a science fiction short story I read in my early teens. It’s about the first spacemen who fly to the moon. But in reality they haven’t flown to the moon. Their entire trip to the moon turns out to be a simulation of a trip to the moon, which they themselves don’t know about. And when they inadvertently find out the truth, boy are they mad. But they weren’t making millions.

* * *

Another point of interest. An interviewee tells Frontline that Madoff could have continued successfully operating his vast Ponzi scheme as long as he lived, had it not been for the financial crisis and economic downturn. But when more and more of his clients, because of the economic troubles, began asking him to return their investments to them, he didn’t have the money to pay them, and the end came very quickly. There was no there there. Evil only continues to thrive and to seem true, because no one seriously challenges it. (Which, by the way, is why evil has been taking over the West. I refer you again to the so-called conservative movement.)

Posted by Lawrence Auster at December 30, 2010 11:05 PM | Send

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