STAFF NEWS & ANALYSIS
FBI Charges Former Nasdaq Chairman in Alleged $50 Billion Securities Fraud
By Staff News & Analysis - December 12, 2008

Bernard L. Madoff, the founder of Bernard L. Madoff Investment Securities and a fixture of the Wall Street trading world for decades, was arrested Thursday morning by Federal Bureau of Investigation agents and charged with criminal securities fraud by federal prosecutors in Manhattan. The criminal complaint filed against Mr. Madoff alleges that he told senior employees Wednesday that his business was "a giant Ponzi scheme," according to a person familiar with the matter. The alleged scheme involved tens of billions of dollars, but the extent of investor losses wasn't immediately clear. The disclosure came after Mr. Madoff tried to distribute early bonuses to employees of his firm, prompting questions by senior employees, a person familiar with the situation said. Mr. Madoff, 70 years old, allegedly told employees he had a couple of hundred million dollars left and wanted to distribute it before turning himself in to authorities, this person said. – Wall Street Journal

Dominant Social Theme: What a shocker. Even the best minds on Wall Street go astray.

Free-Market Analysis: The Madoff story is pretty much a local New York story, but those who believe that it is any less important for being regional news may be missing the point. Bernard Madoff was as big a name on Wall Street as anyone; and that is the part of the story that will be missed by most. Madoff was a legend in financial circles, a man who was held up as an electronic visionary by those in the know, a trader whose clout at the Nasdaq, America's second largest equity market, was unrivaled. Madoff and his brother Peter epitomized a certain kind of trading and a certain kind of securities speculation – seemingly the best kind. The Madoffs were a cut above, a trading elite, and recognized as such.

Not only was Madoff seen as one of the most successful securities entrepreneurs of his generation, his reputation was such that he was able to attract tens of billions to his separately managed accounts – the tens of billions that are now said to have vanished. (Upwards of US$50 billion, perhaps according to Madoff himself.) These billions are not just run-of-the mill billions either. Here is where the story gets interesting. These billions belong to upper classes of New York, New Jersey and Connecticut. In other words, these billions belong to the upscale charities and upper middle class accounting, legal and investment families of the New York region – until recently the banking capital of the world. These are the people who make the rules, write the books and magazines and make the markets for the United States and for much of the West, including Europe. And these people, some of them, perhaps a good chunk, are about to become very, very angry.

This is a much bigger story than it seems – and it is one that will not ever be reported in all its breadth and depth because much of the ramifications will be hidden, the way the tremendous power of the New York money establishment is hidden. But like ripples of water spreading in a pond, the ramifications will be evident in increased regulation, in a dampening of entrepreneurial spirits within U.S. market capitalism and a general tendency toward making it even harder for modest businesses to gain financing. Madoff sowed the wind and U.S.-style capitalism will reap the whirlwind.

After Thoughts

You may not hear much more about the Madoff story – or only intermittently as news about what really happened dribbles out. But the real story is that establishment money just took a hit. The Park Avenue widows with a couple of million dollars – all invested with Madoff, the charities that didn't do much, but to which everyone contributed – all invested with Madoff, the Madison avenue doctors, laywers and accountants – all invested with Madoff. Madoff ran the New York establishment's money and there is going to be hell to pay. Madoff couldn't have picked a worse group to bilk.

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