By Bradley J. Fikes, C.O.R.
The Bernard L. Madoff Ponzi story put financial journalism in its worst light. Madoff conducted his massive scheme over decades, and the financial press did almost nothing.
Since the story broke, there have been a plethora of morning-after stories, along with highly inaccurate statements about what Madoff did. For example, confusing how much money Madoff supposedly had invested with his clients, with the actual amount he had.
In a Ponzi scheme, the swindler takes in money from victims, and pays earlier victims with money from later victims. There’s no real investment. This can only go on as long as there’s more money coming in from new victims than is paid out to previous ones. But the alleged profits were never really there.
So when you read about Madoff victims losing $50 billion (later raised to about $65 billion), this is how much money investors thought they had. Most of that money was fictional, existing only on Madoff’s statements to investors.
The March 10 press release (PDF) from the U.S. attorney’s office about Bernard L. Madoff Investment Securities, the vehicle for the scam, makes this clear (My emphasis):
As of November 30, 2008, BLMIS had approximately 4,800 client accounts. On December 1, 2008, BLMIS issued account statements for the calendar month of November 2008 reporting that those client accounts held a total balance of approximately $64.8 billion. In fact, BLMIS held only a small fraction of that
balance on behalf of its clients.
In the hands of inaccurate reporters, that $65 billion in fictional cash became $65 billion in real cash bilked from investors. And so you have such ridiculous items as this Forbes column, “The Shame of it All: Bernie Madoff Redistributes $65 Billion.”
“The U.S. Attorney’s listing of the counts of fraud shows just how easy it is to steal and launder billions of dollars simply by shifting them from continent to continent by wire. The document is a must-read for drug cartels and terrorist groups. Bernie Madoff laundered $65 billion,” writes Forbes columnist, Robert Lenzner, evidently unacquainted with the meaning of “small fraction”.
Lenzner, is a fairly big name in financial journalism, according to his Forbes biography. He’s Forbes’ national editor, with “areas of expertise” including Wall Street, investment banking, finance, the oil industry, corporate takeovers, insider trading and litigation.
More from the bio:
“Prior to joining Forbes, Mr. Lenzner was a Columnist for the Boston Globe and the Dallas Morning News from 1990 to 1992. He was New York Correspondent for the Boston Globe from 1971 to 1982 and their New York Bureau Chief from 1983 to 1990. He was also a Correspondent for The Economist from 1973 to 1992.
“From 1969 to 1970 Mr. Lenzner was Manager of the Arbitrage Department at Oppenheimer & Co., and he was assistant to the partner in charge of trading and arbitrage at Goldman Sachs & Co. from 1962 to 1968.”
With all this knowledge as close as the Internet, Lenzner still made an egregious howler in financial reporting.
UPDATE: Here’s a reporter who got it right, Scott J. Paltrow, at Conde Nast Portfolio (my emphasis):
While the fraud has been talked about almost universally as a “$50 billion” Ponzi scheme, it’s clear that the amount investors lost is significantly less, at least in terms of the total amount they had actually invested.
Estimates, based almost entirely on speculation, have ranged from $10 billion to around $30 billion. Madoff himself purportedly told federal investigators that the fraud totaled $50 billion, but that evidently includes paper profits investors never actually earned; the cash they’d actually put into his fund is likely to have been much less.
At a recent Condé Nast Portfolio-sponsored panel on the Madoff fraud, former Securities and Exchange Commission Chairman Harvey Pitt estimated that the amount would come to around $17 billion.
Lenzner has other colleagues in financial reporting folly. Allen Stanford, Madoff’s Ponzi Mini-Me, generated this credulous article, “Why Allen Stanford is No Bernie Madoff“, in Clusterstock: (not my emphasis)
However tempting it may be to say it, the Stanford Financial “fraud” is no Bernie Madoff 2.0. Not even close. Let’s start off with the fact that nobody is accusing it of being a Ponzi scheme.
Shortly thereafter, the SEC accused Stanford of operating a Ponzi scheme.
Others in the financial press were slow to the game, with bloggers such as analyst Alex Dalmady driving the story, while the Wall Street Journal and other MSM acted parasitically and refused to acknowledge their contributions, says Felix Salmon of Porfolio:
“More generally, essentially no media source has had the guts to do what Dalmady expected of them — which is to take a critical look at Stanford’s financials, as he did, and try to work out whether they indicate the presence of fraud. . . It’s understandable, then, where Dalmady’s animosity towards the WSJ is coming from. First the WSJ, the rest of the MSM, and even parts of the blogosphere basically pretend that the blogs never had this story first — and then the WSJ asks the very same blogs to bend over backwards to cooperate with them. This is not a tactic with a high chance of success.”
Whenever I read the wailings of MSM that we can’t do without their fine reporting, I think to ginomous screwups such as these that belie the media’s claim to authority and indispensibility.
A little humility and housecleaning, along with hard-eyed realism, are what the MSM needs, not the journosaurs’ frantic attempts to deny reality.
DISCLAIMER: As with everything I write here, this is purely my own work, and does not necessarily reflect the views of my employer, the North County Times.
Alto cinco, hombre. Very embarrassing mistakes for a rookie much less seasoned vets like these guys. Another problem I can’t prove, but suspect, is that the Street players, bureaucrat watchdogs, and reporters have evolved into a loose kind of a fraternal society, interconnected by off the record phone calls, lunches, parties, shared acquaintances, industry dirty secrets…typical stuff which promulgates blind eyes and filtered stories. Admittedly, I don’t dig into these stories past the headlines and hearsay, but maybe you have seen the name of the auditor(s) of Madoff’s books. To me, that’s where the fraud was truly cemented. My guess is that the SEC didn’t even bother with any of their own audits, just read the hired auditor’s report and called it a day. But if it was the SEC who did the auditing, and they still are on the job…
Good work, Bradley. I’m reading Henry Hazlitt’s Economics in One Lesson, probably the best basic economics book ever written. It was written in 1946 and is still in print in a third edition. What is astonishing is his third chapter in which he predicts the real estate bubble. This is all stuff that has been known for centuries. I’m hoping I can get Annie to read it. Why haven’t these reporters ? Of course, it is conservative with the manuscript having been read by Ludwig von Mises before publication. Oh well.
This is also worth reading for other reasons.
Von Mises is claimed by Libertarians! You conservatives can’t have him! 🙂
There’s something else to consider with Shirky’s great essay: The people in top positions at newspapers, who have the most authority to effect change, are the least mentally prepared. The executives have spent their careers in newspapers, and just don’t want to change. They’d rather stretch out the days of newsPAPERS until they retire. And they’re wasting time ranting over how uncivil those emails from the Internets can be, as opposed to those written in parchment and delivered by Pony Express. And they think they’re making some profound revelation.
If a Luddite like that is an editor, it holds back the rest of the newspaper.
I updated my story to praise a financial reporter who got it right. Scott J. Paltrow of Conde Nast Portfolio actually took the time to understand what the claimed losses actually represented.
Madoff himself purportedly told federal investigators that the fraud totaled $50 billion, but that evidently includes paper profits investors never actually earned; the cash they’d actually put into his fund is likely to have been much less.
Bravo for Portfolio, for intelligent financial reporting!
I think there is an untold story about investors who smelled a rat and got their money out before the roof fell in. Legally, such investors are co-conspirators but I doubt anyone will be charged unless one of them is as dumb as Martha Stewart was to meet with feds sans lawyer and admit it. Bill Crystal this morning said Madoff was considered conservative because his returns were not “too” high. Obviously, Crystal knows some of them but there have been warnings about Madoff as long as 10 years ago.
Larry Kudlow has a good piece today on the AIG story and the whole bank meltdown.
Many experts believe mortgage-backed securities and other toxic assets are being serviced in a timely cash-flow manner for at least 70 cents on the dollar. This is so important. Under mark-to-market, many of these assets were written down to 20 cents on the dollar, destroying bank profits and capital. But now banks can value these assets in economic terms based on positive cash flows, rather than in distressed markets that have virtually no meaning.
Actually, when the FASB rules are adopted in the next few weeks, it will be interesting to see if a pro forma re-estimate of the last year reveals that banks have been far more profitable and have much more capital than this crazy mark-to-market accounting would have us believe. Sharp-eyed banking analyst Dick Bove has argued that most bank losses have been non-cash — i.e., mark-to-market write-downs. Take those fictitious write-downs away and you are left with a much healthier banking picture.