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The Genius of Bernie Madoff

I spent a sad and depressing, but highly instructional evening with Dr. Stephen Greenspan, who had just lost most of his personal fortune with non other than the notorious Bernie Madoff.

The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky’s Tremont feeder fund and received convincing trade confirms and rock solid custody statements from the Bank of New York. It all looked as good as gold.

This is a particularly bitter pill for Dr. Greenspan to take, because he is an internationally known authority on Ponzi schemes, and just published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It. It is a veritable history of scams, starting with Eve’s subterfuge to get Adam to bite the apple, to the Trojan Horse and the Pied Piper, up to more modern day cons in religion, politics, science, medicine, and yes, personal investments. Greenspan is a frequent speaker on the lecture circuit offering PowerPoint presentations on how to avoid getting ripped off by investment schemes.

Madoff’s genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. Some of the other recent high flyers came crashing to ground documenting annual returns in excess of 50% that were never really there.

Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club. Some investors pleaded five or six times before he finally took their money. Madoff’s scheme is known by professionals as an “affinity scam,” because the members of a narrow social group are used to convince each other of its merits, and then are taken as a whole. Bernie targeted the Jewish community. The dues Madoff paid to the establishment, such as becoming the chairman of NASDAQ, also paid huge dividends for him.

 In 1920, the original Carlo Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days, or 100% every 90 days. His strategy involved buying discounted postal reply coupons in Italy and selling them at face value. It was an early and primitive form of currency arbitrage. It all sounded too good to be true. The scam lasted less than a year, and at its peak, Ponzi was taking in $250,000 a day. Ponzi spent 3 ½ years in prison for his efforts and went on to commit several frauds in Florida real estate.

I have been investing other people money for nearly 40 years now, and I have lost count of the number of times people of tried to rob me. When considering a new manager, I now hire a private detective to research their backgrounds, going back to their high school days. Private dicks are cheap, performing this service for only $1,000, and will dig into remote county records that are unavailable on the Internet. It’s pennies, really, when multimillion dollar investments are involved. You wouldn’t believe the muck that has floated to the surface over the years; especially involving oil and gas limited partnerships.

For a deeper look into Greenspan’s fascinating, but expensively learned observations and analysis, go to his website at ww.stephen-greenspan.com.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com . There you will find the conventional wisdom mercilessly flailed and tortured daily. You can also listen to me on Hedge Fund Radio by clicking
the “Today’s Radio Show” menu tab at the left on my home page.