So, I was watching CNBC (because its one of my favorite channels, seriously) last night, and caught the full hour of "Bernie Madoff and the $50 Billion Heist." Some thoughts:
1) Turns out that fellow money managers alerted the SEC not once, but twice, a decade ago, about the impossibility of Mr. Madoff's "returns" - almost 12% a year using a strategy that usually tracked the S&P, albeit with less volatility. Doesn't take too much of a genius to figure out there is something wrong with that. The whistleblower, who was flat out ignored, said "this is either massive fraud or a huge Ponzi scam." Thanks, SEC, for being on top of that.
2) This man cannot have acted alone, and there have got to be more scams like this out there. The answer, though? Not more regulation, as many will call for, but better, more qualified regulation. Let's have a change of culture in regulation - an SEC that is as smart as the people they are trying to regulate, and who aren't as integrated into the system over which they are watching.
3) Charles Ponzi made this type of fraud famous, when he used money from new investors to pay off old investors. The scheme works as long as no one wants to withdraw their money outright, and you can still maintain a steady stream of new money. Bernie Madoff did it on such a large scale, his fraud is being called the "heist of a century." I beg to differ.
The biggest Ponzi Scheme of the century? That's Social Security, folks. As Jim Cramer explains, in a Ponzi scheme, "investors get returns from the money paid in by subsequent investors." How is this different than Social Security? It isn't. The people who got into this Ponzi scheme early - the current retirees and Baby Boomers - are going to be just fine. Young people today should get ready for the bottom to drop out, though. We've got no better chance of seeing our investments when we retire than Bernie Madoff's investors did when they wanted their money back. The link to Cramer's outrage:
Jim Cramer sounds off on Social Insecurity
Sure, Bernie Madoff did a horrible thing to hundreds of individuals, charities, and families by abusing their trust and their life savings. But as we angrily point the finger at the man leaving his multi-million dollar apartment for misleading so many, let's not forget that he isn't the only one ripping off America. The SEC let this scheme happen, and the United States Congress is doing nothing to fix a Social Security program that is essentially no different in structure or outcome.
Nevertheless, Congress just voted to give themselves each a $4,700 raise. What better way to show solidarity with a nation in recession than to make its citizens pay an extra $2.5 million for a job well done?