Just finished reading No One Would Listen– a book written by the one analyst turned whistle blower in the Madoff fraud. Then read an article in a Philly paper that covered a talk by Vanguard founder Jack Bogle.
The Madoff fraud was indeed perpetuated by the greed of those profiting from the program. Bogle uses the work complicity. As the book notes and Bogle points out, fund managers did no due diligence and got paid $600 million in fees (Madoff did not collect the typical 2% management fee from investors and instead paid feeder funds huge commissions to sign up new investors, one of many red flags) to direct investors to Madoff. As a result, most of the Europena banks who directed clients to Madoff have made those investors whole – they knew they were culpable. Investors themselves (one of which committed suicide a few days after Madoff was arrested) refused to look too closely at what Madoff was doing, some in spite of numerous warnings.
No doubt there are a lot of innocent victims in the Madoff case yet their are a lot of responsible parties that chose to not look at the hard truth because of the risk that their profits would go away. How often are we responsible in some way for the pain we experience and blame others for?
Madoff started this thing because he is a sociopath but he kept it going and made it as large as he did because he could. He has said several times that he could not believe no one really questioned him along the way.
It is hard to be objective when you think in scarcity and when you are benefiting from a situation. This is why business ethics can be challenging. When questioned or when he hear a quiet whisper inside that something is not right, we rationalize.
A few years ago after loosing money I couldn’t afford to loose by investing in a quant-based program that used options on bonds to generate 15-20% annual returns, I realized I was in a pattern of stretching for returns, taking too much risk (or investing with strangers) then would loose money and feel like a victim. I became indignant with the “guilty” party.
I did this more than once before I saw the pattern – it took the help of a coach I called within hours of loosing the money with in the quant-fund. I was creating this pattern unconsciously so I could feel like a victim – the why behind that is another story. As soon as I saw that I became a lot less active an investor, took less risk and have made more money and have little to know investing angst.
Do your internal due diligence. Check in with your gut. Would you be comfortable if everything you were doing was outlined in detail on the front page of the morning paper? If not, your arrangement is probably costing your more that it is benefiting you.