Madoff's Innocent Victims

The saddest aspect of the Madoff scandal is the number of people who gave Bernie Madoff money they couldn't afford to lose. Many charities fall under this general heading: They were formed for the purpose of giving money to the needy, and ended up giving it to the greedy.

I hope that the Madoff affair will mark the point at which charities start thinking much more seriously about how they invest their money. As I wrote last year about the Gates Foundation, why do good with only 5% of your assets, while having no mandate to do good with the other 95%?

There is a big problem here, that charities generally have a strong institutional bias towards self-preservation, and therefore seek to invest the overwhelming majority of their funds in a manner which will allow them to operate in perpetuity. As a result, they end up taking quite a lot of market risk. (Not to mention Ponzi scheme risk.) Almost never do they ask themselves whether they could do more good by front-loading their disbursements now and deliberately putting themselves on a road to disappearance.

Alternatively, charities could at least invest their money somewhere socially responsible and do good with it, at the cost of lower returns. One example which is close to me personally: they could invest in preferred stock in community development credit unions, or just make non-member deposits at them, which are federally guaranteed. Such an investment carries much less risk than a Wall Street split-strike strategy, and fits much more cleanly into the charity's mission.

Then there are the individuals who invested their life savings with Madoff, normally with the express intention of passing it on to the next generation. As Justin Fox says,

When I think of all the Jewish grandmothers and grandfathers (a.k.a. Bubbies and Zadies) who lost everything with Madoff I get very sad. They weren't being greedy, and they weren't stupid. They just wanted a steady investment managed by somebody they knew and trusted.

He's quite right. But on the other hand, some of them -- not all, by any means, but some -- were being greedy, like one anonymous guest at a birthday party in Palm Beach:

Several Madoff clients were among the 70-plus guests. One had mortgaged two homes to maximize his investment.

Talk about a perfect storm: Not only are you underwater on your Palm Beach mortgage, but you invested all the proceeds with Bernie Madoff. Ouch. If only you just lived happily in your bought-and-paid-for multi-million-dollar home and didn't try to be clever or greedy, you'd be infinitely better off.

Most of us save up money to buy a house; some people, it seems, do it the other way around. Which makes much less sense to me.

Comments

[herbert hoover:]

Sorry, but my Bubbe and Zadie taught me from a very early age that if something seems too good to be true then it probably is. Why do people who lost money trying to "ensure that their money lasts in perpetuity" deserve any more sympathy than someone whose life savings were invested in AIG and LEH shares?

In the near future, how much sympathy will we muster for those poor schmucks who will be trying to live on pension checks (yeah right, like they're gonna be around) and social security checks when the Fed's policy ensures inflation rates in the double digits "in perpetuity"?

2008 Dec 17 12:30 PM

[Rick Nias:]

Index index index - greed is killing capitalism - rely on our founding principals - most ETFs, DFA funds, and Vanguard all do.

2008 Dec 17 01:12 PM

[joshuaodonnell:]

50 billion? Thats it? Over 10 years.... I guess Madoff wasn't as good everybody thought... I wonder how much the intial investment was..

BUT, Satan has a special place on his mantle for evil genius Bernie....Im just surpised somebody hasn't taken a shot at him yet...he got out of jail a few hrs ago.... I wonder if his wife was in on it? maybe. That would make the story a whole lot more interesting.. they can turn into the 50 billion dollar Bonnie and Cylde hesiters! ah!!!!!!!

2008 Dec 17 01:13 PM

[Hutch:]

A number of 'charities' seem to be Political Farm Clubs where political parties can separate the wannabees from those with real party potential. The actual performance of charitable actions is a mere by product of their true purpose of paying off loyal supporters and grooming the next generation of power brokers and need not have any positive results. Occasionally a manager forgets that a few such by products are necessary to keep up the appearance of being a "Charity".

www.latimes.com/news/l...

2008 Dec 17 01:19 PM

[bagman432:]

How do you stop the never ending fraud and restore confidence?

The answer is simple. Make the punishment fit the crime. Put these white collar criminals in prison for life without parole. Sound harsh?
It is, and that's why some of these greedy bastards might think twice before they pull this crap. It's sickening and i'm tired of seeing these crooks use high priced lawyers to delay and manipulate our extremely flawed legal system. It's time to try something drastic because whatever were doing now is definitely not working.

2008 Dec 17 01:21 PM

[Jimmy Lathrop:]

sadtrombone.com

2008 Dec 17 01:28 PM

[Jimmy Lathrop:]

Obviously, the person who gave me a thumbs down was a Madoff investor. In that case, my contact information is on my web page, and you can feel free to wire me as much money as you like since its obvious you are clueless on how to handle your finances and the law of the jungle is that money goes from weak hands to strong hands. Wah wah wah WAHHHH.

2008 Dec 17 03:15 PM

[Mafeking:]

Wait a minute, you are blaming everyone except the SEC. Let's face it, if you don't follow the market closely you are probably not aware that this guy is returning 10% p.a. and that is a crazy figure in this economic climate

Somewhere there is probably a legitimate hedge fund returning 10%, so how do you tell the difference? Answer you don't: you expect the SEC to ensure that reputable companies that have been in business for years are OK.

2008 Dec 17 03:18 PM

[bobbobwhite:]

Charities or foundations should have as their top priority the capital preservation of donated funds. None would get my money if they took chances with firms such as Madoff's where trust is the only protection.

As a result of his secret accounts in China and Dubai, I am so very sure Bernie(Oye Vey!)Madoff made off with a lot more than we will ever hear about, and after prison will live like a king in either place, maybe both.

In our system, we are producing in this country goniffs like Bernie every day who have the same patronizing and smug attitude George Bush has if disagreed with..."you just don't understand, I did my best with the information I had at the time". Bullshit. Yes, we understand all too well that what you did your best at was feathering your own nest at the expense of innocent others, both Bush and Bernie, peas in a pod.

2008 Dec 17 03:39 PM

[MikeG:]

it is awful what Madoff did. but how is it different than social security, which is the largest Ponzi scheme in the history of the world? the message is that theft is ok, as long as the government is the thief.

2008 Dec 17 03:39 PM

[Chris B:]

"Almost never do they ask themselves whether they could do more good by front-loading their disbursements now and deliberately putting themselves on a road to disappearance."

I disagree. A charity system in which tiny organizations are built, raise funds, disperse all those funds, disappear, and then start over again every year or two would be much less effective and much more wasteful than a charity system that acts as a going concern. Imagine running a business that way! As far as endowments are concerned, this is a way to parlay current donations into greater amounts in the future - a worthy effort indeed, and far more stable than relying on a steady stream of donors that fizzles out during economic downturns!

Perhaps if I ran a charitable endowment, I would have an online trading account with 10% VTI, 5% VWO, 40% BND, 10% TIPS, and the remaining 35% in FDIC-insured bank CD's. Simple. Cheap. Virtually immune to malfeasance and easy to rebalance during economic downturns when the funds are most needed.

2008 Dec 17 04:13 PM

[RonC:]

If our Government wants to do good things for our economy they could start by acknowleging their lack of oversight has cost many more than Madoff has. My Dad is 63 years old and cannot retire because of 401k destruction. What effect will this have on joblessness? People retiring creates job openings. Our Government should at least restore initial investment values lost plus reasonable interest to all whose life savings in 401k were promoted by Goverment and destroyed by their lack of oversight

2008 Dec 17 04:15 PM

[Jimmy Lathrop:]

Ron, I feel your pain, but as long as people keep giving me thumbs-down on my comments, you will understand that the influence peddlers don't care about working class people, they only care about filthy rich people who arrogantly abdicated their responsibility to MIND THEIR OWN BUSINESS. Now they need a bailout and the working guy gets pushed to the back of the line, along with the homeowners who were supposed to be helped out with the TARP program. Bernie Madoff redistributed dead, inherited, static, hoarded wealth in a way that Che Guevara only fantasized about. He should be given a medal, not a prison sentence.

2008 Dec 17 04:29 PM

[Sailingwind...:]

I don't see where Madoff actually did anything wrong, the whole market regulation has been a scam for the last eight (8) years, the energy loophole that set Enron off is still in effect, Wall Street CEO's get paid millions of dollars while the companies lose billions, the government gives away 7.3 trillion unaccounted for taxpayer dollars to the same Wall Street losers who put us in this mess, Madoff lost only 50 billion, so what, I still want to know where the 9 billion is from the Iraqi reconstruction that was lost.

2008 Dec 17 05:17 PM

[Shakes:]

what are CHARITIES doing investing in anything even remotely like a hedge fund? that is money that was GIVEN to them to help people. they should PROTECT it, not gamble with it! it should have gone into a lock-box and stayed there until allocated to whatever cause. unbelievable. yet another example of people's disgustingly careless attitudes about the value of others money. if you don't want to lose it, invest it yourself! nobody cares more about your hard-earned dollars than YOU!

2008 Dec 18 09:56 AM

[Shakes:]

to jimmy lathrop: you keep getting thumbs-downs because you pollute every blog you go into with your stupid website address without adding a shed of value to the conversation. why don't you say something intelligent or go away. nobody cares about your website.

2008 Dec 18 09:58 AM

[SivBum:]

At 63, or 62 before the market crahed, his allocation to equity should be less than 20% with the rest in fixed income. If so, he is doing fine. It's the young guns with 100% exposure to the market getting the shaft.


On Dec 17 04:15 PM RonC wrote:

> If our Government wants to do good things for our economy they could
> start by acknowleging their lack of oversight has cost many more
> than Madoff has. My Dad is 63 years old and cannot retire because
> of 401k destruction. What effect will this have on joblessness? People
> retiring creates job openings. Our Government should at least restore
> initial investment values lost plus reasonable interest to all whose
> life savings in 401k were promoted by Goverment and destroyed by
> their lack of oversight

2008 Dec 18 10:34 AM

[jackooo:]

The SEC blew it. They do it over and over. Hold Mr. Cox's feet to the fire and you will have results. Prison is a good start. Without severe penalties we can only whine about it.

2008 Dec 18 11:26 AM

[carey_jim:]

As long as Bernie is forced to stay in his room at night for the rest of his life, capitalism should remain safe.

2008 Dec 18 12:18 PM

[Hutch:]

My apologies,
This was an inappropriate place to make this comment. It was in no way meant to be a comment on the victims of Bernie Madoff.


On Dec 17 01:19 PM Hutch wrote:

> A number of 'charities' seem to be Political Farm Clubs where political
> parties can separate the wannabees from those with real party potential.
> The actual performance of charitable actions is a mere by product
> of their true purpose of paying off loyal supporters and grooming
> the next generation of power brokers and need not have any positive
> results. Occasionally a manager forgets that a few such by products
> are necessary to keep up the appearance of being a "Charity".
>
>
> www.latimes.com/news/l...
>
>

2008 Dec 19 01:39 AM