Bernie Madoff and Trumps’ Big Lie
Trump Madoff With More Than Our Money.
Thoughts of the Madoff scandal seems a world away, only to come back to us now on his lonely death in jail. There are so many parallels with our Trump saga, that do apply to this moment.
Fakery is not an innocent sin, lies about important stuff could break your bank and make you sick.
Madoff, like Trump, was a phenomenal faker. Madoff created a sub-reality that continued to comfort and assure his numerous investors (not unlike Trump followers) with the belief that they needed his “miraculous” skills. None of it was true.
The financial “returns” were faked, as interest or dividends were compounded, merely on paper, for some investors, while some lucky few were paid out monthly to investors who chose not to “re-invest”.
But these dividends and interest did not flow from real investments. They were paid out from funds supplied by new investors. The original investments were quickly gone, in financing the Madoff life style, office expenses, and in attracting new investors, to continue the scam.
You might ask, how can “investors” be so naïve? And surprisingly, his roster included some very wealthy, thought to be sophisticated investors, and their accountants and attorneys who signed off on their ’ investments.
So how could have Madoff attracted and fooled so many smart and successful people? and was Trumps’ success (short though it was) a direct parallel?
Three critical red flags stand out:
1.Madoff paid interest or dividends somewhat above what was readily available in the then current investment market, but not quite high enough to be terribly abnormal. Trumps’ equivalent, reward cronies with posh jobs, acolytes who could possibly (albeit with a generous mental stretch) be considered qualified and therefore “normal”.
2.Recruit select and prestigious investors (such as known personalities) to act as “attractors,” that is, as informal salesmen, “model” believers and promoters, who could persuade others to invest, due to their standing in the public eye. Trumps’ version, give the biggest tax breaks to rich folk voters, to create supporters (or new investors, as it were). And use the concept of “social proof.” That is like Trump saying “look at all the prestigious and famous folks who want to serve under me, who support me, and who will vote for me.” It’s easy to note how Trumps’ very wealthy supporters were vocal and strategic. It is unreasonable to imagine they would have been so, absent the enormous tax benefits that they were rewarded.
3.Get rid of auditors, supervisors, and managers that are not totally compliant to your wishes and who would not be willing to overlook obfuscations and lies. Replace them with believers and cronies.
Let us look at #3 first. Mutual funds, hedge funds, exchange traded funds, money managed funds, all have one thing in common. They all use a professional custodial service. This is typically a trust bank, like the DTC (Deposit Trust Company). Many large banks also offer this service. This involves the trust company taking delivery of the security, such as stock shares, bonds and notes, that are purchased and verifying their “good order”.
Effectively, they serve as objective monitors or overseers. It is a big and important job, and just one of those companies, for example, the DTC (Depository Trust Company), holds 54 trillion dollars worth of securities for the benefit of investors.
Not having a custodian is akin to not having an overseer like a Walter Shaub, past head of the U.S. Government Ethics Office, who described the Trump White House as setting a tone that “ethics does not matter”. Prior to his resignation, Shaub was concerned that the United States would be seen as a kleptocracy. Trump couldn’t wait to get rid of anyone who was a designated overseer, replacing them with a crony.
Interesting to note, the use of a trust custodian, which Madoff also declined, is not illegal.
Now #2. Rich people are respected, often thought smarter than most. They are attractive perspective investment endorsers because they are influencers. How did Madoff attract them? How did Trump attract them? Simple, give them what they desire. Just give them more money. How? Give them invented dividends and interest on their money, more than they could otherwise earn in traditional safe investments, such as bonds and certificates of deposit.
Similar to Madoff, Trump was enabled to “give” the richest Americans money by simply lowering their taxes. The national debt (falling on rich and poor together) created was of no concern, not coming due until long after the Trump era. Like Trump, Madoffs’ only concern was keeping the ponzi scheme going. Obviously, Madoff was creating an ugly future for his investors. But unlike the Madoff investors, the majority of Americans were pulled into the disastrous Trump “investment” program even after voting against him.
Now #1. One of the first principals of investing is that higher returns inevitably involve higher risk. Great money managers often trade risk for higher returns, though in a very measured and educated way. One of the key measures for a money manager is their “risk adjusted return.” This is simply a measure of the fluctuations of their portfolio compared to the return it generates. Even a high return portfolio in the longer term, could be considered inferior to one with a lower return. Put simply, if the high return portfolio fluctuates markedly, it will have a diminished risk adjusted return. Thus, a lower return portfolio, could often be considered superior, if it has less fluctuations.
Consequently, Madoff invented and credited dividends that were too high, and too stable, in light of what “normal” investment portfolio assets might generate.
Effectively, the “return” generated in his portfolio would have been a remarkable achievement since unaccompanied by greater portfolio fluctuations (implying greater risk). The credited dividends were too stable and regular. They were abnormal. It appeared that Madoffs’ program was defying gravity. And those dividends were Madoffs’ largest selling point.
Indeed, if it was just plain old dumb luck, why would anyone bet on that? Many people actually believed Madoff was a genius.
Simply combining that notion with the known reality that there was no custodian, no outside objective due diligence, no accountant public audits, it was really the simplest of calls.
It was a bad intentioned “emperor” who really was naked situation. Who couldn’t see it coming? One really does have to question the common sense of Trump’s endorsers and voters, so similar to Madorf enablers, investors and promoters.
The giant difference, we were all forced to invest with Trump, and we very predictably lost.