Something I’d like to start doing with this blog is giving a “Who’s who” in the financial world on Fridays. I think the best way to learn something is to study someone who is an expert in the area you want to become proficient in. We can learn a lot on what to do and sometime just as importantly what not to do.
On April 29, 1938 one of the biggest villains in the financial world was born. Bernard Lawrence Madoff was born in Queens, New York Ralph Madoff and Sylvia Muntner.
After graduating from Hofstra University with a degree in political science and a brief stint at Brooklyn Law School Madoff started a investment securities firm. (I think he missed the part in law school where they talk about lying to the SEC and defrauding people out of billions of dollars was frowned upon)
The Bernard L. Madoff Investment Securities LLC started out selling penny stocks but through innovative trading procedures it quickly became one of the largest market movers on the New York Stock Exchange. Essentially through the use computer based technology the firm helped to eliminate some of the red tape between investors and over the counter brokers. Many of the techniques and technologies used by his firm is what led to the creation of the NASDAQ, which he served as the chairman of.
The firm quickly grew both in the number of investors and the amount in assets. At the height of the firm it was estemated to be worth about 65 billion dollars. They gained a lot of investors by having a steady return rate of around ten percent. Basically Madoff had found that ten percent was a high enough return to attract investors but not high enough to raise the suspicions of regulators. Although there were numerous whistle blowers who tried to expose him his actions were not exposed until the financial crisis of 2007-2009.
How his massive Ponzi scheme was operating was he would take money for his investors, putting it into a large bank account and then using those funds to pay his clients a fake “interest” return. As long as there was more money coming in from investors than the “interest” payments going out the scheme could have lasted indefinitely.
As the financial crisis was at its height and people were pulling out of investments left and right trying to preserve their capital the Madoff Ponzi scheme came crashing down. The funds quickly dried up and investors learned that all of the statements and gains they were receiving were completely fabricated and fake.
It was actually his sons that exposed him after Madoff came clean to them about what he had been doing for years. After turning himself in and being branded as a financial monster for squandering billions of dollars from investors, Madoff received a 150 years sentence which he is serving in a medium security prison in North Carolina.
There has been efforts to compensate the victims of his actions but so far they have been minuscule compared to the amount they lost.
Madoffs wife was allowed to keep 2 million to live off and unfortunately of of their sons committted suicide and the other died of cancer. I will admit that it could be hard to feel sorry for her because there is speculation as to if she knew what was going on. However I do feel sorry for her and Madoff about their sons. No parent, no matter how awful you are should have to bury your child.
I think the biggest lesson to learn from this is that sometimes when something in the financial world seems too good to be true, it often is. There were many lessons learned by the SEC and they did not come out smelling like a rose.
There is a lot more to read about and there are several videos and news stories you can watch if you are interested.
Not every one in the financial industry is a greedy criminal so I promise next Friday we will talk about one of the heroes of the industry. Thanks for Reading!
Fine Finance 