The Pace

His approach was to offer good, steady returns to an exclusive clientele. The decent returns lowered the guard of many, and their regularity, even during bear markets, made his reputation. This steadiness did ring a few bells. Yet they did not act earlier. Maybe it was thanks to B. Madoff’s marketing

The marketing

To those who questioned the scheme, the basic answer was that such feat was possible through a combination of index-tracking stock purchases, hedged with related options. Of course, the exact details were kept secrets… Those who asked too many questions were simply given their money back and shown the door.

As with all Ponzi, this strategy was very efficient because the loss of a potential steady profit made other clients think twice before asking questions. Additionally, B. Madoff clientele were very exclusive and most were referred to him by friends. Being kicked out of his scheme could be compared to a social rejection.

Last, but not least, Madoff’s scheme also differed in that some hedge funds also invested with him. Their clients expected them to diversify their portfolio and protect them against the market aleas – in search or the infamous Alpha – and were willing to pay expensive managements fees for their expertise. Most did not know they were exposed…

2008 as a revelator

The credit crisis and difficult market in 2008 forced many to cash out their positions. Madoff struggled to honor them until the end of 2008. By then, too many had done so at the same time, and the scheme collapsed due to a lack of liquidity.

Now what?

Markets’ ability to operate demand a strong confidence in the system. Without it, we would never accept paper payment, online trading and other modern marvels. The real feat or B. Madoff’s scheme, aside from working so well for so long, is the long lasting impact it will have on the financial circle of trust. The general public will think about it twice before investing their hard earned money, markets and hedge funds are going to face difficult times, security committees are going to be extra vigilant. All in all, not a bad thing if we learn from it. We should end up with a cleaner system.

The real question I still have is this one: Why is he not in Jail yet?