San Leandro, CA

Tuesday, July 07, 2009

Well, of course I am taking some liberty with the headline. But in too many cases, the accusation is completely valid. With the Ponzi scheme now up to about $65 billion, one has to ask how could so many people just give Madoff money.

Nope, that's not the issue..

It's how could people have given him ALL their money. There are far too many interviews with people who put all their money with him and are now completely destitute.

There are a few elements for consideration.

People are greedy. They do not want to read and think. They do not read and think. While pundits may want to get all over me for this, it is just how people emotionally react in situations where they are promised all sorts of money from someone they TRUST. I recently acted as an expert on a case involving over $30 million in losses. Literally every person not only gave money to the shyster, but actually took out loans on their homes to give him more because he offered 12% 'guaranteed" return plus tax benefits, plus, plus, plus........ Most came from his church. Some had limited education, some had masters. No matter, nobody did any homework.

Unfortunately, I'd bet, for those that gave Madoff without the use of an adviser, they did it through simplistic referrals or introductions of some type. A personal referral from a gold buddy, fellow tennis player, somebody at the bridge club. Or the absolute worst- the church. People get really silly with money when they see someone with a bible in their hand. Regardless, no homework at all.

Admittedly, the homework looked somewhat good on Madoff. The problem is, it was spectacular. Far more than possible. But greed intercedes where risk would have said something diametrically different. No matter, I repeat, you cannot put all your money in one area no matter how good it all appears when a reasonable, objective person would have concluded "something was not right". There has never been anything that provides flat rates of returns that Madoff gave them. Nothing.

Of course, there is one offset. Even assuming they were to look objectively for assistance, where were they going to go?? To Merrill Lynch? Bank of America? Goldman Sachs? Worse yet, SEC??? FINRA???

The SEC, FINRA, every state insurance department- pick any other entity you want- failed in their investigative duty and will continue to do so. Even now, no organization- after this entire monumental debacle- has even remotely indicated any viable new instruction of any kind to any brokering entity in any form whatsoever. FINRA is throwing out stuff about fiduciary duty, but it is a worthless gesture when the fundamentals of investing are not taught. You at least have to know risk. They do not. 

I have read that some professors at major universities expressed that they must 'adjust' their risk modeling. That will take years at least. And it might be wrong anyway since so few have much in street smarts. After all, the lessons of the default of Long Term Capital should have said something about the failure of computerized programs that could analyze every economic scenario that might exist. Extreme arrogance?

So, what's left? Not much. Financial planners have not been taught risk. And since most people getting referrals assume that all sorts of scrutiny has been done, this situation will continue.

With the advent of the computer and Internet, the economic/financial world changed forever. Unfortunately, the consumer has not kept up. Most have not made much of an effort. But as long as they continue the charade of referrals, they will lose more and more.

It is very sad overall but until advisers are forced to acknowledge the real world of risk, it will remain,

CAVEAT EMPTOR

Errold F. Moody, Jr.

PhD LLB MBA MSFP BSCE CFP

Life and Disability Insurance Analyst

San Leandro, CA

510-352-4127