Bernard Madoff - Where Integrity crumbled in the Face of Greed

Most readers here should be familiar with the case of the rogue hedge fund manager Bernard Madoff, who appeared in the news after admitting to running a Ponzi scheme of unprecedented scale. He is allegedly the mastermind of the world's largest Ponzi scheme (valued at US$50 billion and counting) and who had been duping investors for quite some years before everything began falling apart like a house of cards. Much has been reported in the news (CNN, CNBC, Time, Reuters and Forbes), each with their own views on the case and also different commentaries about what happened and why it happened. Perhaps I can take the time to dissect some aspects of the case so that we can all learn a lesson about honesty, integrity and greed.

Leaving aside the details of how Madoff managed to fool investors (and amazingly, the SEC) for so long, we delve into the fundamental reason for his deviant behaviour. It all simply boils down to - GREED. Greed of course is simplifying the whole issue, since arrogance, failure to accept losses and probably even self-denial came into the picture somewhere along the way, but the penultimate driving force should have been greed (for money and reputation) because it is like lifeblood for some people - it keeps them going and it fills them with a sense of self-importance. Were investors to know that Madoff had lost money in certain years and opened his fund more judiciously to outsiders, he would then have lost that "awe" which he commanded in his loyal followers. It was precisely because of this hero-worshipping that got so many "sophisticated" investors into deep trouble. Madoff was a man hungry for power and status, and the recognition which came with it. If he had admitted being anything less than infallible, his demi-god status in the hedge fund circles would have been instantly shattered.

The most important thing in investing (and, in fact, all other aspects of life too), I feel, is to have integrity and honesty. Warren Buffett did mention that it takes almost a lifetime to build up a solid reputation but just 5 minutes to ruin it totally, and this is oddly reflected in the way Madoff totally blew everything in just under 3 minutes by confessing to his sons that he was "finished" and had been running a massive Ponzi Scheme all these years. I value integrity more than making money, and would gladly admit to all my investment mistakes, missteps and failures rather than delude myself and others that I am always doing well (and making money). Because once people lose that trust (and consequently, their respect for you), it can almost never be recovered and it's like tying a noose round your neck and releasing the trap door.

Another point I would like to grouse about is the apparent lack of controls and procedures in regulating these hedge funds. The SEC was given ample warnings over the years over Madoff's operations, yet chose not to pursue these leads further. This makes one wonder if the current body in charge of oversight and policing these funds is sufficiently equipped to handle their role competently; or has there been a conflict of interest in allowing Madoff to get too close to them; such that independence has been compromised, allowing familiarity to breed into complacency which then led to the loss of the life savings of so many individuals and retirees. The SEC is probably in need of some soul-searching and after this scandal has been fully investigated, needs to undergo a radical overhaul to ensure this kind of nonsense does not occur again. If necessary, President-Elect Obama could even suggest the setting up of a separate body to regulate the SEC, so that the 2 bodies act as counter-balancing weights such that neither gets too cosy or dominant in terms of influencing decisions which could have a life-changing consequence.

The promise of 1% returns per month consistently through good times and bad stinks of impossibility, as even Warren Buffett (arguably the greatest investor who ever lived) had periods of severe under-performance as the economy and stock market went into periods of extreme volatility. One would have suspected that if something is indeed too good to be true, it sometimes isn't ! Ponzi schemes are perpetuated on the fact that human beings are gullible and will let their guard down when they are greedy for supernormal returns. This also applies to expert investors as much as novices, because we are all subject to human emotions which can cause us to make flawed investment decisions.