Sesame Street explains the Madoff Scandal

[jducoeur]

Thanks to Between the Lines for the pointer to this lovely little video about economics. Okay, it's probably not really from Sesame Street, and it's not in any way accurate.¹ But regardless of correctness, it is rather viscerally satisfying...

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¹ I find most of the "Madoff is Evil Incarnate" hype to miss the point: the scary thing is that I suspect he simply fell into an easy trap of his own making, and that most people, after the first few steps, would have made just the same decisions he did. The thing about pyramid schemes is that they are easy to start, and *very* hard to stop. You get deeper and deeper so fast that all you can do is keep feeding the monster until it eats you. Indeed, it wouldn't surprise me if it started the same way as the Satyam mess: cooking the books just a little to smooth out a glitch, and then covering over each successive layer until all you have left is the fraud...

Comments

[goldsquare.livejournal.com]

I took your challenge - and the result showed vanishingly few funds that did, and just about all of those were "feeder funds". That is to say, the professionals that did it, didn't invest their own money, but that of clients, and were paid directly by Madoff for doing so.

[doubleplus.livejournal.com]

When you're less busy, I'd be interested in some citations. I can only find one professional, J. Ezra Merkin, who is accused of being a Madoff "pal" and hiding the fact that he was investing with Madoff, and no articles that mention anyone being paid by Madoff (lots of managers who took a percentage of the funds invested, though.) On the other side, in the first couple of pages of google results were this, (http://www.reuters.com/article/businessNews/idUSTRE52414820090305) this, (http://www.bloomberg.com/apps/news?pid=20601087&sid=aipTGtffZU1o&refer=home) this, (http://www.marketwatch.com/news/story/unicredits-pioneer-unit-invested-madoff/story.aspx?guid={0B0DE84B-E209-463E-B763-90FD4BAF1294}&dist=msr_1) this, (http://www.haaretz.com/hasen/spages/1046529.html) and this. ()

But basically, the claims that all professional investors avoided him and therefore can label everyone who didn't as "stupid" sound like bluster to me -- the ones who did are posting about how smart they were, and the ones who didn't are understandably keeping quiet, but that doesn't prove they're nonexistent. Yes, from what I've read, if you checked him out the way you're supposed to, it wasn't hard to figure out that Madoff was fishy, but there was a strong social engineering component to the scheme, and it reveals more that plenty of people take shortcuts when they think there's a web of trust than that those taken in were just stupid. I found this column (http://www.latimes.com/business/la-fi-hiltzik16-2009mar16,0,5992464.column) to be a more honest appraisal of how it all happened than either of "Madoff was pure evil" or "only stupid people were fooled." (http://triangle.bizjournals.com/triangle/othercities/austin/stories/2009/02/16/daily27.html)

[goldsquare.livejournal.com]

I'd like to have that free time too, so I could (perhaps) spend it looking up that answer. Or, see my family more. (Startup, doing first release of product this week and next...)

The first article I read on this, some time ago (back when he was first indicted) was that professionals know that when investing, one separates 3 functions: allocation, investment, oversight. That's what I was taught, and what I learned, a long time ago.

Madoff insisted on all three functions being under his complete and absolute control.

As for "paid by Madoff", what I meant was what you said - that they got commissions for placing funds with him. The term is called "feeder funds". That's not unusual (how did you think non-fee investment professionals get paid), but that's not a model for the best possible financial investment advice. It strains the fiduciary relationship too much.

[doubleplus.livejournal.com]

Perhaps I'm misunderstanding -- I read "percentage of funds invested" to mean they took a percentage of the funds clients invested with them (regardless of where they were invested downstream), not that Madoff paid a percentage of the funds invested with him. I certainly could be wrong.

Good luck with surviving the product release -- been there!

[goldsquare.livejournal.com]

If what I read is correct, it was a classic feeder fund, and the firms that placed money with Madoff were compensated directly.

Obviously, lack the time to dig and see if my understanding and recollection are correct.