In just a week, Bernard Madoff has reinserted the term ponzi scheme back in the public vocabulary. As we discussed earlier, these schemes are a lopsided business model and have been victimizing investors and the public for decades. Various financial commentators such as Peter Schiff and Max Keiser are beginning to echo sentiments that the U.S. economy is, in hindsight, resembling a larger scale ponzi scheme itself.
Shifting our focus back on the man who brought back our attention to this economic phenomenon, one has to wonder at the motivations and circumstances that created the Madoff scandal. Ponzi schemes are nothing new but every new incarnation doesn’t cease to disturb me. This Madoff caper in particular has three things I find bothering.
The first thing that disturbed me about the Madoff case is the high-profile nature of the parties that were affected by it. Madoff’s client list reads like a who’s-who-of-the-elite in the U.S.
Fox News reported that wealthy socialites comprised Madoff’s list of ruined clients:
Many of his investors came from the enormously wealthy enclaves of Palm Beach, Florida and Long Island, New York, where people had invested billions in Madoff’s firm for decades. He was a fixture on the Palm Beach social scene, and was a member of some of its most exclusive clubs, including the Palm Beach Country Club and Boca Rio Golf Club, where he drummed up much of his business.
The Wall Street Journal describes Madoff as a household name among elite circles:
During golf-course and cocktail-party banter, Mr. Madoff’s name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff ” ‘the Jewish bond,’ ” says Ken Phillips, head of a Boulder, Colo., investment firm. “It paid 8% to 12%, every year, no matter what.”
Evidently, the ability to make money grow consistently is a somewhat of a nectar to the rich folk, and arguably was the key in creating the brownie points for Madoff’s pedigreed credibility. In an analysis that Andy Kessler of Forbes on the Madoff tale, he drew some similar points in qualifying Madoff’s motivations in this context: (more…)