“TO KNOW, KNOW, KNOW HIM IS TO (TRUST, TRUST, TRUST) HIM”?

2/6/09

I heard on WBBM Newsradio 78 (Chicago) this morning the tale of a North Shore widow (Her identity isn’t important; this post is not about her but applies more generally to Madoff investors.) who lost $120mm (Later reports put the total lost as low as $15 to $20mm.)to Bernie Madoff. The report indicated that she will have to sell three of her homes, downsizing to one, but, while livid that Bernie made off with a big pile of her cash, feels grateful that she is not “destitute.” How many of you would like to be able to lose $120mm (or even $15mm or $20mm) and still not be destitute? But I digress.

This particular Madoff investor stated, concerning Mr. Madoff: “We knew him for twenty years. Who can you trust?” Since when did this nexus between knowing someone and trusting him arise? One of the first things I teach my students in a survey Finance course, and something everyone should know intuitively, is that you don’t trust everyone you know.

As I said in my prior posts concerning Bernie Madoff (See my 12/12/08 post BUT HE BELONGED TO BOCA RIO AND FRESH MEADOWS!, my 12/18/08 post “YOU ONLY FALL FOR LIES AND STORIES WHEN YOU REALLY WANT TO”, and, to a lesser extent, my 1/26/09 post OOOHHH, ZSA ZSA!!!), if I had an inexhaustible supply of compassion, like Someone I know, I would extend some of it to Madoff’s victims. But I don’t have such a bottomless bin of sympathy, at least not yet. Despite the efforts of much of the media to scrounge up “average guy” victims of Madoff, their efforts have been largely fruitless. Almost to a person, Mr. Madoff’s “victims” were sophisticated investors, certainly by the SEC definition, or were people who hired such financial mavens to manage their money for them, doubtless without a lot of due diligence. And, though this might be something of a stretch, I dare say that most Madoff investors were the types of people who would with scorn on “plain vanilla” investments like index funds or CDs. You can almost here the cocktail chatter at Boca Rio: “An index fund? Ha! Those are for the plebeians! I’m with Bernie Madoff. And he says that, as long as I don’t ask many questions, I can stay with Bernie Madoff. What a guy!”

Ken Phillips, who runs a fund of funds out of Boulder, Colorado, and who was quoted in the Wall Street Journal this morning, put it best when he said, referring to the list of Madoff “victims” currently circulating on the net: “This is the best prospecting list ever. You’ve got the names and addresses of a whole bunch of rich people who don’t demand much accountability.”

No, I’ll expend my humanly limited amounts of compassion on the guy who lost his house because the corporate master of the universe who ran his company closed his factory and shipped production to China, reasoning that doing so would enable him to justify an increase in his bonus sufficient to buy a another fleet of yachts (this time on the west coast) and perhaps send another $20 million or so Bernie Madoff’s way.