Madoff’s unanswered billions

Wall Street icon must reveal where money is hidden

On March 12, former Wall Street icon Bernard Madoff pled guilty to all criminal charges brought against him, including fraud, theft, money laundering and perjury. Most people will be more than happy that the 70-year-old confessed and that he will get no less than 150 years behind bars.

The latter is of course a symbolic figure, essentially meaning a life sentence. The length of sentence mainly gives weight to the notion, at least among the general public, that justice will be done. At the same time, however, it obscures the fact that as a consequence of Madoff pleading guilty, no in-depth trial will take place and many questions will likely remain unanswered. For example, it is still unclear if his wife and sons will be charged or if the family fortune will be drawn on to pay back his victims.

Also, as no jury-trial will take place, we will probably never know how Madoff operated. How was a well-respected member of Wall Street’s inner circle, and former Nasdaq chairman, able to fool not only his clients, but the entire finance and banking community for almost 30 years? Where were the institutions that are supposed to apply checks and balances to Wall Street?
These questions are all the more pressing as Madoff’s fall from grace follows hot on the heels of the sub-prime crisis and the collapse of the financial markets, which has given investment bankers worldwide a bit of a bad odor. Notably, almost no financial institution or publication saw them coming either. Madoff stands accused of running a Ponzi scheme described by the US authorities as “extraordinary” and “unprecedented” in scale, as losses could amount to $65 billion. Named after an Italian swindler who immigrated to the US in 1903, a Ponzi scheme pays returns to investors from their own money or money paid by later investors, rather than from actual profit. In other parts of the world it is more commonly known as a pyramid scheme.

Madoff is said to have run the scheme since the 1980s. He apparently told clients he had found a magic formula, one that could not go wrong, as he spread investment risk over volatile stock markets and more secure government bonds. Now, anyone who is familiar with investing and stock markets should know there is no such formula, yet Madoff’s clients were keen to believe him.
While many people were angry to hear that Madoff lived on bail in his $7 million New York apartment after his arrest, they will be even more furious if Madoff’s wife and two sons are not prosecuted. So far, no charges have been brought against them and there is a widespread fear that Madoff may have pleaded guilty in exchange for his family to be let off the hook.

Madoff’s defense team argues that he was the only one in charge and the only who knew what was really going on in the company. This is very hard to believe. His wife and former high school sweetheart, Ruth Madoff, who was at his side when he set up the firm in 1960 knew nothing? His sons, both senior executives, knew nothing? None of them thought it odd that most of Madoff’s possessions were in Ruth’s name?

Court papers filed in March revealed that the net value of Madoff’s ownership in his firm was $700 million, while the estimated net worth of Bernard and Ruth Madoff amounted to some $826 million, most of which is in Ruth’s name. The papers, for example, listed real estate in Manhattan, Florida and France worth $22 million, a $17 million bank account at Wachovia bank, $45 million in municipal bonds and a $12 million interest in an aircraft company, all in Ruth’s name. What’s more, a few weeks before Madoff’s arrest, Ruth withdrew $15.5 million from her account.

The claim that a banker or investor acted on his own — a rogue trader — has become quite familiar in recent years. Just think of the cases of Nick Leeson and Jerome Kerviel who lost billions for Barings Bank and Société Générale respectively. Now suppose they did indeed act on their own, the question remains: should not someone within the bank, or some financial watchdog outside the bank, have noticed? Or were they just happy to go along for the ride and to give them the benefit of the doubt, as long as profits were made?
The same appears to be true for Madoff. As he pled guilty, we may never know how the web around him worked or if any institutions related to his firm could be held responsible for negligence.

Peter Speetjens is a Beirut-based journalist

Peter Speetjens

Peter Speetjens is a Dutch journalist & analyst based in Brazil.