Burned by Bernie
With Bernard Madoff's sentencing we are again being treated to the gnashing of teeth and rending of garments of victims who lost everything to his scam. While Madoff richly deserves to die in prison, I wish the intrepid media would dare to dig a little deeper into what some of these people were thinking. I think it would be instructive--not to generate sympathy for an evil thief--but to remind people that it does not require a genius-level intellect to make sound financial choices.
To be fair, among the 8,000 estimated victims one will find elderly widows and the occasional guileless charity case, but the vast majority of Madoff's investors were sentient adults. "Diversify" is not exactly difficult investment advice, especially to the multi-millionaires who comprised the vast majority of his personal clients. While none of them deserved to lose everything, most were voluntary if unwitting accomplices to their ruin.
Why would a person with several millions of dollars, nearing or past the end of their earning years, not choose to sock away a sizable chunk of that in savings bonds, Treasuries, or other such maximum-safety assets? Greed, enabled by hubris, provides the answer. Greed causes a person to put everything they have in a bucket that pays 10-15% interest rather than splitting it into another bucket that pays 3% or so but truly has no risk. Hubris, to think that you had discovered the fountain of financial youth, allowed people to transform their greed into wisdom. Average schlubs had to invest in the markets where you could lose 30% at any time, but you "knew people" and so could safely rack up better returns year after year.
This is all true even if we elide a point that is only slightly more subtle and yet far more profound--that economic theory and history alike effectively disprove the existence of riskless assets that pay greater returns than T-bills. This is only a marginally more complex restatement of the old "if it sounds too good to be true" rule, but it was enough to convince many investors that Madoff was up to something fishy. Particularly in the cases of larger investors (such as my alma mater, which counts more than one billionaire among its alumni and lost $20 million), the willingness to overlook this seems almost pathological. Far from being "sold," more than a few of these institutional players paid fees to middlemen for the right to be robbed blind. Their share of any monies recovered deserves to be infinitesimal.
It is popular in some quarters to regard the financial markets as little more than a casino without the cocktail waitresses, so stories of shirt-losing play easily into the narrative. While it is true that outcomes will be unequal, they are almost never irrational. While I will refrain from ascribing deliberate intent, presenting the tale of Madoff's victims as blameless militates for the notion that true financial security can come only from the government, which reserves for the crown the right to operate the very type of scheme for which Bernard Madoff will spend the rest of his life in jail.
To be fair, among the 8,000 estimated victims one will find elderly widows and the occasional guileless charity case, but the vast majority of Madoff's investors were sentient adults. "Diversify" is not exactly difficult investment advice, especially to the multi-millionaires who comprised the vast majority of his personal clients. While none of them deserved to lose everything, most were voluntary if unwitting accomplices to their ruin.
Why would a person with several millions of dollars, nearing or past the end of their earning years, not choose to sock away a sizable chunk of that in savings bonds, Treasuries, or other such maximum-safety assets? Greed, enabled by hubris, provides the answer. Greed causes a person to put everything they have in a bucket that pays 10-15% interest rather than splitting it into another bucket that pays 3% or so but truly has no risk. Hubris, to think that you had discovered the fountain of financial youth, allowed people to transform their greed into wisdom. Average schlubs had to invest in the markets where you could lose 30% at any time, but you "knew people" and so could safely rack up better returns year after year.
This is all true even if we elide a point that is only slightly more subtle and yet far more profound--that economic theory and history alike effectively disprove the existence of riskless assets that pay greater returns than T-bills. This is only a marginally more complex restatement of the old "if it sounds too good to be true" rule, but it was enough to convince many investors that Madoff was up to something fishy. Particularly in the cases of larger investors (such as my alma mater, which counts more than one billionaire among its alumni and lost $20 million), the willingness to overlook this seems almost pathological. Far from being "sold," more than a few of these institutional players paid fees to middlemen for the right to be robbed blind. Their share of any monies recovered deserves to be infinitesimal.
It is popular in some quarters to regard the financial markets as little more than a casino without the cocktail waitresses, so stories of shirt-losing play easily into the narrative. While it is true that outcomes will be unequal, they are almost never irrational. While I will refrain from ascribing deliberate intent, presenting the tale of Madoff's victims as blameless militates for the notion that true financial security can come only from the government, which reserves for the crown the right to operate the very type of scheme for which Bernard Madoff will spend the rest of his life in jail.
posted by The Snob at
10:15 AM
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