Mad at Madoff
Some believe Madoff’s scheme has caused irreparable damage to both financial risk takers and conservative account holders. Here’s why.
January 4, 2009 8:50 by Ehtesham Shahid
Ponzi schemes are as old as organized finance. They also predate Charles Ponzi, the man who gave financial frauds a fancy name. However, Bernard Madoff, the New York investment manager, took dubious pyramid schemes to another level – by fooling investors for years and then calling his own scheme “one big lie.” He ran a giant pyramid scam, paying returns to certain investors out of the principal received from others. Eventually, Madoff ran out of luck and was busted on December 11, 2008. By then a sum of $50 billion had disappeared into thin air.
While anything is expected in today’s embattled financial markets, the Madoff saga continues to unfold and is proving to be more than just “one big lie.” Madoff, 70, is a former Nasdaq stock market chairman who attracted high profile investors by virtue of his name and years in the business. One of his victims, Thierry Magon de La Villehuchet, a French money manager who lost $1.4 billion, even committed suicide two weeks ago.
Various theories suggest that Madoff’s scheme would have been undone by the crisis in the stock and credit markets. Some reports even claim that he may have jacked up losses to save money stashed away elsewhere. While investigators and investors prepare for a long haul, we have yet to hear the last words on the scam.
The Gulf region has responded to the developments with the usual mix of caution and denial. Contradicting reports of losses, the Abu Dhabi Investment Authority (ADIA) said it has had no direct investments. The authority, however, admitted it invested $132 million three years ago in a fund that had partial investment in Madoff’s Investment Securities “could have suffered some losses.” More such revelations in the weeks and months ahead shouldn’t surprise anybody.
But what about ordinary mortals, those who stay away from, or don’t have the resources to tap into the world of intricate financial instruments? Unfortunately, they have also been affected. A number leading international banks that have a significant presence in the region are have been exposed to Madoff’s scheme. “Every account in an international bank in Dubai not only has investments in Madoff’s fund but also offers special products that the bank put together that leverage Madoff’s funds three times,” says an investment banker on the condition of anonymity. Those who hold bank accounts in Dubai can only hope the UAE’s bank deposit guarantees would come to their rescue should trouble arrive.
Madoff’s contagion to the Gulf region notwithstanding, the scandal doesn’t mark the end of financial misadventures. Greed will have the better of the man in times to come, no matter what. It is time for us to stop getting mad at Madoff.