Ethics Ripples from Madoff Scandal Highlighted by Press
Dec 22nd, 2008 • Posted in: NewsThere are moral issues beyond the obvious, including whether investors should have known better
NEW YORK
The stunning revelation that Wall Street icon Bernard Madoff allegedly scammed sophisticated investors by luring them into a Ponzi-style scheme has raised ethics questions beyond the obvious issues concerning purported criminality. At issue: whether investors should have known better, and whether regulators fell down on the job.
The Boston Globe reports that some analysts maintain that the list of Madoff’s apparent victims include banks, insurance companies, and investment firms — in other words, people who should been able to smell a Ponzi scheme. According to one expert interviewed by the Globe, the fact that sophisticated investors did not challenge the source of unrealistic returns indicates that some of those investors failed to exercise due diligence.
The Los Angeles Times notes that the Madoff case is prompting renewed criticism from those who say the Securities and Exchange Commission (SEC) has a history of toothless enforcement.
“The regulatory mechanism that was effective for so much of the 20th century is not relevant to the period that we’re in today,” Arthur Levitt, who chaired the SEC from 1993 to 2001, told the Times. “You need new leadership there, and you need new leadership at every level.”
Washington Post financial columnist Sebastian Mallaby weighed in with this observation: “For sheer toe-curling embarrassment, it may be a while before Wall Street does better than the Bernard Madoff scandal. Here was a rogue who practically telegraphed his unreliability by hiring a tiny, no-name audit firm, by reporting monthly investment results that never fluctuated and by claiming a trading strategy that could not possibly have been implemented given the billions of dollars he managed. And yet, despite these warnings, the rich, the famous and the supposedly sophisticated entrusted their money to Madoff, who defrauded them with the most laughably crude of methods — an old-fashioned Ponzi scam.”
Bloomberg’s Jonathan Weil added this observation on what he considers the subtle difference between fraud and the business model that eventually fractured the economy: “Madoff’s scheme — at least in spirit, if not in its nefarious intent — wasn’t much different than the business models at some of the nation’s largest failed financial institutions.”
“Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion,” Weil writes.
He concludes: “Whether you call that a Ponzi scheme or something less sinister, AIG was paying old investors with money raised from new investors. The same could be said of many banks that blew through billions of dollars in freshly raised capital the past couple of years, continuing to pay large dividends even as their balance sheets quietly imploded.”
Sources: Boston Globe, Dec. 21 — Bloomberg, Dec. 21 — Los Angeles Times, Dec. 18 — Washington Post, Dec. 18.
For more information, see: Related Newsline Commentary, Dec. 15 — Related Newsline story, Dec. 15 — Related Newsline story, Dec. 8 — Related Newsline story, Nov. 3 — Related Newsline story, Oct. 27.
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