ShareThisWe are supposed to feel sorry for the people wiped out in the Bernard Madoff scandal.
I do feel for some - like the old folks in Florida who lost their nest eggs and the charities who had their endowments wiped out.
I will tell you whom I don't feel sorry for: Those who, in terms of dollars, are the most catastrophic victims.
I'm talking about the private investment funds that lost billions.
Why don't I feel sympathy?
Because they weren't victims at all. They were enablers.
The big investment houses could have seen this coming. They should have. Why didn't they?
Let's begin with Walter Noel. His firm has emerged as the single biggest loser in the Madoff mess.
Friends say Walter Noel is a terrific, down-to-earth person, despite his collection of mansions in the Hamptons and the Caribbean. He ran the Fairfield Greenwich Group, which, pre-Madoff, had $14 billion in assets. It's now half that. That's because the entire $7.3 billion "managed" by one of Noel's funds was invested with Madoff. I put the word "managed" in quotes for a reason.
Setting Madoff aside for a moment, Noel's situation has revealed one of the great scams of the investment business. In short, some investment houses get paid huge dollars for doing absolutely nothing.
The New York Times pointed out that Noel, a mere "middle man," didn't personally manage one dollar of that $7.3 billion -- Madoff did. And yet Noel annually charged his clients 1 percent of the total -- plus 20 percent of profits. The Times said that means Noel's firm made at least $70 million annually off this fund, and an additional $140 million off the 10 percent profits Madoff allegedly made every year.
What did Walter Noel do for this obscene income?
Zero.
True, most investment houses give some money to other funds to manage, but the valid approach is to spread it widely to avoid risk and invest a chunk of it yourself in various stocks and instruments. Noel just handed 100 percent to Madoff. Then he charged his clients as if he were overseeing it himself. Ironically, that's standard practice. Some business, asset management.
The main job Noel could have done for his $100 million a year or so was to make sure Madoff was legitimate. He seems to have not done this so well.
Oh, people like Noel also say clients are paying him for his connections -- his ability to put funds with wizards like Madoff. And thanks a whole lot for that one, Walter.
With lawyers circling, Noel and others are insisting they did appropriate due diligence.
This is untrue, of course. Had they done so, they would have found that many things about Madoff didn't add up -- like having a tiny three-person accounting firm no one had heard of to keep track of $50 billion. Or Madoff's suspicious refusal to let even big investors look at his books.
To that, folks like Noel say Madoff fooled the most sophisticated financial people in the world.
But he didn't fool everyone.
Mohammed Syed, of London-based Axiom Funds, told Bloomberg.com: "I looked at investing in Madoff many years ago but there was just no transparency."
Syed is a responsible investment guy. So are several others who dutifully tried to research Madoff and were scared off.
Embarrassingly, the Web site for Walter Noel's firm still brags about putting money only in funds that "provide complete transparency." There are other almost satirical boasts on it such as the firm's focus on "capital preservation." If that's what they call losing $7 billion, I'd hate to see their high-risk strategy.
I also checked the home page of Darien, Conn.-based MAXAM Capital, which put its whole $280 million fund with Madoff. At least that group was ashamed enough to have taken down its Web site. MAXAM had been headed by Sandra Manzke. I Googled her and got another glimpse into the smoke-and-mirrors side of the investment world. The other day, Manzke told The Wall Street Journal she had put every dime with Madoff and had been wiped out. Yet Barrons business magazine did a laudatory profile of her not long ago where she boasted of her careful, diverse investments. Ahem.
The Noels of the world, defensively, also say everyone trusted Madoff because he was once chairman of the NASDAQ stock exchange. This reminds me of a journalistic axiom about the need for skepticism: "If your mother says she loves you, check it out." That should apply triply for firms that are putting people's financial lives at risk -- firms like Tremont Holdings of Rye, N.Y. The managers of its huge Rye Investment Fund gave their entire $3 billion to Madoff, then presumably went golfing while arrogantly charging their clients 2 percent annually, plus 20 percent of profits. That fund was wiped out, and Tremont lost half its worth.
So why didn't firms like that vet Madoff?
Because they smelled easy money.
Various banks fell victim to the same lure, and have lost hundreds of millions to Madoff. Weren't banks the ones that created the subprime mess by giving $350,000 no-money-down mortgages to people making $30,000 a year? I guess all you have to do is promise financial institutions a golden goose, and they won't assess risk.
That's why they are enablers instead of victims. Madoff couldn't have lost those billions unless banks and investment houses like Walter Noel's handed it over. Their naivete caused this crisis.
They were among the most sophisticated money managers on Earth, and they might as well have given their clients' cash to a guy playing three-card monte on Fifth Avenue.
The same goes for AIG, and the now bankrupt Lehman Brothers and Bear Stearns.
Victims?
Hardly.
(E-mail Mark Patinkin can be reached at mpatinkin(at)projo.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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