For Madoff, Reputation Is Apparently a One-Way Street

Our friend James Altucher, in an interview at Yahoo!’s Tech Ticker, talks about visiting Bernie Madoff and his son Mark back in early 2005 to pitch them his fund of funds:

I had a fund of what’s called PIPE [private investment in public equity] hedge funds. And I went through the whole pitch. My returns were great, they were very excited, but they said, “James, we love you but we cannot invest in your fund of hedge funds.”

And I said, “Why not?” And they said, “Here at Madoff Securities, reputation is the most important thing, and to have that money go out there, you’re sending that money out there, we have no idea about the hedge funds you’re in. We cannot take any reputation risk. … I’m sorry, it’s just our policy. No reputation risk at all.'”

Just a tad ironic, no? The rest of the interview, by Aaron Task, is also interesting.

Among the highlights:

Task:

What is your sense about whether Madoff was really working alone as he has claimed?

Altucher:

No, clearly he wasn’t, because you know there were printed statements being sent out to people. You know, even Mark Cuban wrote on his blog: Who wrote the software to process all these statements? There’s some weird thing that’s going on that we don’t know about.

You know that saying, like if you owe $10,000 to the bank, they own you, but if you owe $50 billion to the bank, you own them? Bernie Madoff owns the country basically, because where is the $50 billion? And there’s a lot of unanswered questions here while he’s just running around.

I mean, I got a call the other day from somebody I knew, she had a million and a half invested with him and now she has $100,000 left to her name. She’s about 60 years old and her question was: what do I do?

There’s no more pep talks, there’s no more optimism for her. My answer was basically this: You’ve got to sell your house, you have to figure out what skills you have, and get a job. You’re going to have to do it. And then the optimism is, it’s not so bad to work. It’s not a bad thing. Like, trust whatever higher power you believe in and try to do good in the world.


ZBicyclist

General rule: if somebody tells you how honest they are, or how important a good reputation is to them -- run.

Adam

I don't understand why all the experts are now saying that you should have your money divided between multiple money managers. That seems like stupid advice to me.

The only reason one would give money to a manager in the first place is because you believe they possess the skills to outperform a simple non-managed index fund. When you do that, it's not like you're putting your money all in one stock - the manager themselves are allocating it into 10 or 100 individual investments, and you are thus diversified.

If you give your money to 10 managers who each allocate it to 100 investments, you now own 1,000 investments, and stand no possible chance of outperforming the market. It's as if you're invested in an index fund (extreme diversification), except you are allowing a group of managers to skim 2 and 20 off the top of your returns. An index fund is surely a better investment for someone who can't find one manager that they trust.

Read more...

chuck

I don't think it's about spreading out your money with different investors, but diversifying your investments.

If you are 20: no problem with risky stock or mutual funds investments. You know you can make +20% on good years, and lose 70% on bad years (2008 anybody?). And that's ok

If you are 60: you need to remove risk from your investments as much as you can. It means you need to look at bonds, money market, and real estate, although the later proved it can be risky as well.

I am no financial advisor, but this is common sense. Everyone knows you can lose it all in stock markets...

econobiker

#20 Michael,

I do not think that everyone believes that Social Security is a ponzi scheme.

It is just that the deductions for it during the baby boomers generation of working were not adjusted for the amount of people working and potential life longevity.

The scam, in my opinion, is that the gov't politicians and workers get a different pension system than the rest of the people. And that companies were allowed to dump pension systems and get 401Ks in order to "free" up that money for business investments in the macro aspect...

Larry Eisenberg

Reputation risk? Not for Bernie!
A paragon as all could see,
But came a new day,
Ponzi feet of clay
Had crumbled to bald bankruptcy!

Charlie

There is an old British quotation:

"The louder he praised his honour, the faster we counted our silver."

Ana Moure

Adam, indeed with those correlations dividing the money between different money managers will only give an illusion of safety. And also some insurance in case your judgement wasn't perfect, and the guy you trusted most was Madoff. Maybe if the lady had 3, one of them would have put her money in CDs.

I was thinking for a long time what could be the right incentive structure for the koney managers to act according to fiduciary duty. Sadly, no idea of mine is perfect yet.

It's very dangerous to blindly trust your judgement when dating; it's even more dangerous to trust your judgement when trusting that this guy or girl will significantly outperform the market and put all your money on it, - unless you are a finance professional yourself. And even then. Look at funds-of-funds performance!

I agree with your last part: viva index funds!

ZBicyclist

@Naomi: "So is it bad to have all of one's life savings at a company such as Vanguard?"

1. Vanguard has auditors, is an old established firm, and is regulated by the SEC. Oh, wait.

2. I trust Vanguard with my money, but frankly I have it split between 3 different firms located in 3 different cities [
TRPrice and Fidelity].

Paranoid? Maybe. But it doesn't cost much and I sleep better. I've played poker with the same men for 20 years, but we still cut the cards each hand.

Eric

Is SS a Ponzi scheme? By the strictest definition, perhaps not.

Form Wikipedia "A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit."

Other than the word fraudulent, SS is clearly a Ponzi scheme, and the people who run it would not deny it works this way.

From Merriam-Webster "Fraud: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right"

Personally, I think the way the system is sold to the American people is fraudulent. SS clearly is sold as a "savings'" plan that returns your investment, when in fact it is a massive welfare system to transfer money from the middle class to the poor (the wealthy are allowed to opt out due to limits on taxed income). You may disagree, but it is silly to imply anyone who believes SS is a Ponzi scheme is not taking a good faith position.

Read more...

kevin

I agree with Naomi #19, and others. The 60-year-old should be able to invest with a single manager. Now, that manager should invest both honestly and in a diversified manner. Madoff wasn't honest. But the problem isn't that he handled all of a person's money. Otherwise, people are arguing that everyone should hire several financial advisors or investment managers, thus incurring extra costs and running the risk that the managers are doing the same thing, rather than complementary things.

Brad Eleven

Social Security is, indeed, a Ponzi scheme, by definition. Some of you seem to be confusing Charles Ponzi's (and Bernard Madoff's) deceptive intentions with the definition.

The scheme named after Ponzi is defined by paying old investors with new investors' money. That is, the dividends do not come from profits made by investing the investors' money. The dividends come from the new investors' money.

This is how Social Security works. If I am drawing Social Security benefits today, the fund is paying me from money paid in yesterday.

Think it over: Where and in what could the Social Security administration invest? And if it did, what if the investments lost money? "Sorry, everyone, the Social Security fund managers screwed up, so no benefits this month, and probably none for a few months. We let those fund managers gone, though."

The moral difference between Madoff and the Social Security Administration is that investment in Social Security is coerced for the common good, rather than voluntary for private gain.

"Bernie Madoff with the money,
Bernie Madoff with the money,
Bernie Madoff with the money,
And you won't get it back!

"And you won't get it back,
And you won't get it back,
Bernie Madoff with the money...
And you won't get it back."
~my friend who lost $20M investing with Madoff Securities International

Read more...