That title isn’t meant to be provocative: The title of Joe Nocera’s latest piece is “Madoff Had Accomplices: His Victims”.
His basic argument is that anyone who looked seriously at Madoff’s returns and methodology realised it was a red flag and that his investors violated some of the most basic tenants of good investing decisions.
I suppose you could argue that most of Mr. Madoff’s direct investors lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered. Isn’t the first lesson of personal finance that you should never put all your money with one person or one fund?
But is that the first lesson of personal finance? Everyone’s heard the d-word, diversification, over and over again, but as we’ve argued in the past, these people thought they were diversified. Remember, they were sent statements about the Google holdings and their Coke holdings, etc. Certainly many thought they were diversified with respect to securities.
On the other hand, he’s right that his uber-rich victims, like Fred Wilpon or Bob Jaffe ought not to have so much money tied up in one man, especially a man they knew to be a trader. Traders can always blow up and go to zero. Mutual funds and Jewish T-bills typically are things you’d think of as conservative.
Even if multi-manager diversification were the first lesson of investing, perhaps the takeaway is that the preachers of personal finance have done a terrible job explaining these ideas. Again, if Fred Wilpon can make such a boneheaded decision, it’s not at all surprising that pensioners in Florida would do the same.
This part is right, however
I spoke, for instance, to Phyllis Molchatsky, who lost $1.7 million with Mr. Madoff — and is now suing the S.E.C. to recoup her losses, on the grounds the agency was so negligent it should be forced to pony up. Her story is sure to rouse sympathy — Mr. Madoff was recommended to her by her broker as a safe place to put her money, and she felt virtuous making 9 or 10 per cent a year when others were reaching for the stars. The failure of the S.E.C., she told me, “is a double slap in the face.” And she felt the government owed her.
Even though the SEC was grossly negligent in this case, having them act as a form of insurance or backstop against all fraud would be a horrible precedent, and would likely lead to all kinds of moral hazard down the road. We understand the frustration with the SEC, but this has got to be a no go.
We certainly can’t throw stones about a writer trying to pour some kerosene on the news pile, but calling his investors accomplices is beyond reasonable.
Oh, and Nocera also draws equivalence between the Madoff victims and the Enron victims, but we’ll leave that one alone.