Thursday, March 12, 2009

What Bernie Madoff Told Us Today

Bernie Madoff pled guilty to 11 felony charges today in the federal court in Manhattan. In his plea statement, he said, "[A]s the years went by I realized that my arrest and this day would inevitably come."

He knew he'd face the music because his Ponzi scheme was ultimately untenable. He couldn't continue to pay steady, above average returns forever. Wall Street is in New York, not on the shores of Lake Wobegon. Bernie was a little man in a booth, and he knew that when someone drew back the curtain, he would be revealed as a humbug.

Unfortunately for his victims, they can't just click their heels three times, repeating "there's no place like home" and miraculously get their money back. The principle of caveat emptor hasn't legally applied in the stock markets since the federal securities laws were adopted in 1933 and 1934. But it remains a sound practical guidepost. When the money has evaporated, as is the case with Bernie's little scam, all the legal liability in the world can't make the investors whole. Be cautious about investment opportunities. If it sounds too good to be true, it probably isn't true.

One wonders whether Bernie has leveled with the court and with his victims. He didn't agree to cooperate with the government. That suggests that he has secrets he'd prefer to take to the grave. His plea statement (which lawyers call an "allocution") was carefully crafted to point the finger at himself, and only himself. It would make Bernie appear to be a super-con, who perpetrated a $64 billion fraud all by himself. Yet, one would have to suspend credulity to accept that he could have pulled this off alone. Too much work was required, too many documents were necessary, too many communications were made, and too much money was involved. There are plenty of American banks that don't have $64 billion in deposits. Are we to believe that ole Bernie, all by his little lonesome self on the 17th floor of the Lipstick Building, was able to skim off more money than the GDP of some nations?

Bernie's scam takes us from the world of stocks and bonds to the world of crime. In the criminal world, a guy doesn't plead guilty to almost a dozen felony counts, putting himself in federal prison probably for the rest of his life, unless he's got a powerful reason or two. What's his game? Who's he shielding? Is he protecting his former colleagues? If so, why? What do they have on him? Is he protecting his wife? Or other family members? Why not try to cut a deal with the prosecutors to shield his family and perhaps others from criminal prosection in return for his guilty plea and cooperation? Such deals are not unknown.

Let's recall that a $64 billion Ponzi scheme implies a cash flow of $64 billion. That's really quite a lot of cash. Neither Bill Gates nor Warren Buffett have anywhere near that much cash. Their wealth is embodied in stocks and other assets. Much of the $64 billion probably was paid to withdrawing investors to maintain the appearance that all was well. But you have to consider the possibility that Bernie was up to something more than stealing from his family, friends, colleagues, charities and others. Was he laundering money? That would probably have been easy, given the cash flow he controlled. If so, whose money was he laundering? U.S. citizens evading taxes? Mobsters and other drug dealers trying legitimize their ill-gotten gains? U.S. intelligence activities that couldn't be funded through conventional government appropriations processes? Russian oligarchs trying to stash a nest egg in a safe Western country? Leaders of foreign governments stealing from their citizens? Other dark forces? If such persons were among Bernie's victims, they might not consider civil remedies available in American courts to be adequate recompense.

Bernie could be better off than some of his victims. He'll always get three squares a day, and a warm place to sleep. He'll have access to indoor plumbing; no peeing in an alley. He'll get free medical care and free clothing--not exactly stylish stuff but he won't look out of place for his environs. He won't have to skulk into a supermarket and buy dog food for a fictitious dog. And there's the fact that security in federal prisons isn't bad. Not all that many inmates are murdered. Bernie, in effect, might have today talked his way to free security service for the rest of his life.

An intelligent guy like Bernie Madoff doesn't ensure that he'll quietly stay in the pen for life without having a really strong reason or two. The government is continuing its investigation, as it should, because it's doubtful we have the full story. And we don't want the government to be scammed by Bernie, not this time.

No comments: