How is it that the accomplished wife of a veteran journalist specializing in financial planning loses her entire 401k to Bernie Madoff’s Ponzi scheme? Sadly, the lady also loses her job because her employer — a North Boston area charitable foundation with a demographically loaded mission — has lost its assets in the Madoff scandal.
For whatever reason, Robert Powell did not dissuade his wife from putting all her apples in one basket. Should he have known better? Probably! Three years ago Powell wrote a MarketWatch column on Roth 401(k) plans — instruments created by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“Roth 401(k) rules of thumb,” Nov. 03). Powell had enough insight in 2005 to reveal for careful readers the attractions of the Roth vehicle for individuals confident of high rates of return on investment bets.
Robert Powell has written other columns exploring the landscape of 401(k) plans, diversification, and financial best practices. As a consequence, some MarketWatch readers are less than sympathetic to the Powell family losses. Personally, I feel sorry for Mr. Powell and his wife, for they have been defrauded. That said, working Americans have been massively defrauded by the financial architecture of Wall Street — a quasi-Ponzi scheme with no reasonable exit for the nation (probably by design). The electorate should have reformed the stock market long before the aggregate of market bets overshadowed and distorted the economy, creating a situation where corporations deemed by elites “too irresponsible to fail” supposedly have to be bailed.
The Powells are among thousands of “financial sophisticates” duped by Madoff. As reported, the Robert Lappin Foundation concentrated its resources with Madoff, as did many organizations. The Wall Street Journal online reported on December 13 that many older Jewish investors called Mr. Madoff “the Jewish bond.” How could individuals like Lappin (with a Ph.D. in clinical psychology and a far-flung clientele of elites) have been fooled? Why did sophisticates concentrate assets with Madoff?
There may be several important reasons for the debacle. Historically, there has been fraternal trust in Jewish investment communities — a trust that is breaking down in 2008 as hedge funds prey upon each other and people tell greed-filled lies. As explained in the research of social scientists Charles S. Liebman and Steven M. Cohen (“Two Worlds of Judaism,” 1990), most Jews have traditionally expected special financial privilege and back-guarding from other Jews. This tendency has not set well with some justice-minded Jews, fracturing the Jewish community and keeping some disenchanted Jews away from synagogues (which some call investment clubs replete with ritual — a situation that many Evangelical churches have mimicked but with little success except for the ministers).
Most Americans seem ignorant of the fact that young Russian Jews helped bring about the Bolshevik Revolution because of their repulsion to the capitalistic excesses of their fathers (see Yuri, Slezkine, 2004, “The Jewish Century,” published by Princeton University Press and winner of the 2005 National Jewish Book Award). Furthermore, it was the admirable idealism of American immigrant Jews in the 1930s and 1940s (so-called “fellow-travelers”) that pushed Hollywood to critique the excesses of capitalism that Hollywood moguls largely accepted. (In thanks for their efforts they were blacklisted.) Attempts to stereotype Jews are misplaced, as some Jews have been adroit in exposing hypocrisies wherever found, including in their own camp. In this respect and others, many Jewish scholars have outperformed their Catholic and Protestant counterparts. Unfortunately it is difficult to discuss these things without sparking reactionary, ignorant and unfounded accusations of “racism,” — the accusers crippling the public will to consider appropriate reforms when unconstructive behaviors are disproportionately evident in identifiable demographic groups.
A second consideration as to why supposed sophisticates concentrated assets with Madoff pertains to the nature of the hedge funds. Wall Street lobbyists managed to keep the burgeoning galaxy of hedge funds unregulated during the Clinton and Bush years by deviously playing upon the ideological weaknesses of free market advocates in the regulatory bureaucracy and the Congress. As a result, hedge funds were not required to do hedging in the traditional sense. Freed from regulatory oversight many hedge funds aggressively exploited global markets. The errant idea was that the “quants” — Manhattan’s emerging generation of financial wizards — had designed financial metrics too good to be beaten.
In reality, the hedge fund game aimed at using investment banks as enabling vehicles to exploit the Federal Reserve’s easy money policies. Hedge funds hoped to endlessly grow the money supply within their galaxy, freed from the money supply constraints that everyone else had to live by. Hedge funds became the legal and unregulated means by which compounded and leveraged derivative gains (counterfeit money in essence) could be “washed” and used to grab ownership of other people’s assets. The logic was simple: Since the planet’s “God of Justice” is merely a myth to keep workers in line, why not jump into a mercurial movement where a fraction of 1% of the population might be able to grab perhaps 50% of the planet’s important capital assets?
Disaster happens when a financial community comes to think of itself as holding a “right” to higher investment returns and less regulation because its superior attributes. What is to become of a nation when hedge fund managers succeed in getting Congress to tax their multi-million dollar incomes at capital gains rates (14%) while they exploit the investment positions of the general public? What happens when the well-heeled become willingly ignorant of the fact that the unmerited expansion of their wealth takes away from meritorious working people the ability to compete effectively with their limited capital for the goods, services and business ownership they need to lead reasonably satisfying lives? What is this thing Manhattan Island calls “the good life” but the raw exploitation of less well-positioned people?
There is something dysfunctional about charity that robs the working man then flips a few alms at his feet. Mr. Madoff supposedly aimed at charity. Yet his charity was delusional enough to justify a Ponzi operation. He, like many elites, must have held the SEC in complete derision, and viewed the regulatory oversight of Congressional committees as fools’ play.
The Madoff story is ominous for it calls into question the decency of thousands of extremely bright Madoff-ites — investors, advisors and money managers who were so blinded by a lust for financial gain that they cared not to question the implausibility of investment results that worked to their advantage. Especially in the case of money managers, these people are not good enough to tie the shoelaces of working Americans who harvest their food, prepare their meals, care for the nation’s sick, maintain its buildings and roads, and do the productive things that make society work.
Americans should act now and act with determination so that the Madoff saga will become a catalyst to unite whistle-blowers and reformers in overhauling our financial architecture and producing an honorable capitalism that fairly rewards scrupled prudence and productive merit. To get there we need honest and uncensored dialogue, personal and corporate accountability, an equitable redistribution of unfairly acquired assets, forgiveness for repentant elites who restore what has been filched, and brotherhood as the repairs are undertaken in good faith. Benevolence and wisdom must lead the way. Benchmarks must measure success. But if irresponsibility and the governmental subsidy of it persists, the whole world will come unhinged as justice seeks equilibrium.