Bernie Madoff: The Market Is A Whole Rigged Job, And There’s No Chance That Investors Have In This Market
Courtesy of Timothy Naegele
Convicted swindler and consummate narcissist Bernard Madoff is serving a 150-year sentence at the Federal Correctional Institution in Butner, North Carolina for his $65 billion Ponzi scheme. He was interviewed by New York Magazine, and its terrific article states in pertinent part:
From the beginning, Madoff . . . had a chip on his shoulder, along with a certain contempt for the industry he’d chosen. “It was always a business where you had to have an edge, and the little guy never got a break. The institutions controlled everything,” he said in a voice surprisingly thick with emotion. “I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market.”
. . .
At first, Madoff ground out a modest but steady income on the scraps of business tossed his way by Goldman Sachs and Bear Stearns, action that was too much trouble and too little profit for them. “I was perfectly happy to take the crumbs,” he said. Madoff was a market-maker, a middleman between those who wanted to buy and sell small quantities of mostly bonds—odd lots. “It was a riskless business,” he said. “You made the spread,” buying at one price and selling at a higher one, and in those days the spreads could be substantial, 50 or 75 cents or even a dollar a share. Madoff increased his profits by trading on the side.
. . .
Madoff wanted to grow his trading business, and a good way to do that was to expand his market-making business. But that meant going up against the New York Stock Exchange, the heart of the club. At the NYSE, a few firms controlled market-making, executing most large trades while getting rich on the spread. Madoff was one of the first to see that technology could match buyers and sellers more efficiently and cheaply than a human trader shouting orders amid a blizzard of paper on the floor of the exchange. By 1970, Madoff had hired his brother, Peter, who proved gifted at designing trading technology, and soon Madoff’s automated-trading systems began siphoning trading volume, and profits, from the NYSE.
. . .
[H]e became a criminal near the peak of his legitimate success. He’d always continued to trade with other people’s money, an activity that eventually fell under a separate investment-advisory business. His largest clients had invested with him for decades, records later showed. In the early days, Madoff mostly employed technical and fairly low-risk arbitrage techniques built around his market-making business. . . . By the late eighties, he had, he estimates, $3 billion to $4 billion under management.
. . .
Madoff started borrowing from his investors’ capital to pay out those solid returns. The returns, false though they were, were their own advertisement. New money started pouring in, saving him in the near term. And this was a different sort of money, the kind that came from bankers who wouldn’t have given Madoff the time of day earlier in his career. “The chairman of Banco Santander came down to see me, the chairman of Credit Suisse came down, chairman of UBS came down; I had all of these major banks. You know, [Edmond J.] Safra coming down and entertaining me and trying [to invest with Madoff]. It is a head trip.
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So Madoff took the money. While he waited for the market to wake up, he parked their billions in treasuries earning 2 percent a year, while generating statements that maintained they were earning about 15 percent—fantastic money in a slow market. He couldn’t bring himself to tell them that he had failed. “I was too afraid,” he said.
But Madoff distributes the guilt. “Look,” he said, “these banks and these funds had to know there were problems.” Madoff told them absolutely nothing about how he made those returns. “I wouldn’t give them any facts, like how much volume I was doing. I was not willing to have them come up and do the due diligence that they wanted. I absolutely refused to do it. I said, ‘You don’t like it, take your money out,’ which of course they never did.”
. . .
Madoff insists that rather than the pursuer, he was usually the pursued. People begged him to take their money. Madoff says that he waved red flags, issued caveats that should have been obvious to even an unsophisticated investor. “They were all told by me, ‘Don’t invest any more money than you could afford to lose. This is the stock market. There’s always stuff that can happen. Brokerage firms can fail. I could go crazy and do something stupid. If you want a [safe thing], put your money in government bonds. So everybody understood this.
“Everyone was greedy,” he continues.
. . .
He has disdain not only for the industry but for the regulators. “The SEC,” he says, “looks terrible in this thing.” And he doesn’t see himself as the only guilty party on Wall Street. “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”
Madoff’s views are consistent with my own—especially about “technical traders,” and the fact that average Americans should not be in the stock market at all—which are discussed in an October 2009 interview:
Question: The stock market is up significantly since Obama took office. Would you buy stocks now?
Answer: No. I believe the stock market is a “fool’s paradise,” and I cannot explain the stock market rise—except for the old adage that what goes up comes down. I bought my first share of stock when I was about eight years old; and the Senate Banking Committee studied the stock market when I worked there. I drew two conclusions, which I believe to this day: (1) The only people who make money in the stock market and know the reasons why are (a) those who trade on inside information, which of course is illegal, and (b) those who are “technical traders” (e.g., with seats on exchanges, or who trade on “up-ticks”); and (2) average Americans should not be in the stock market at all, because it is gambling—much like going to Las Vegas or betting on the ponies at the nearest race track.
As the economic tsunami continues to roll worldwide, other market fraud and vulnerabilities will be exposed, which might make Bernie Madoff’s machinations seem like child’s play.