Analysis: The Bernie Madoff lesson

By Alex Brummer, December 18, 2008

The last year has been appalling for individuals and charities seeking to hang on to their hard-earned savings and precious endowments.
Sharply lower equity prices, collapsing residential and property values, shrinking pension and trust funds and falling interest rates (UK rates could well be down to near zero by spring 2009) have made it all but impossible for investors to keep their money intact.

Amid this mayhem, Jewish charities, hedge funds such as Stanley Fink’s Man Group, Israeli insurers like Harel and discreet Swiss bankers could at least count on good old Bernie Madoff (above) to see them through with his steady returns of 10 to 12 per cent in all market conditions. The lesson, as with the now collapsed and nationalised Icelandic banks which offered the highest returns on the high street, is that if returns look too good to be true, they almost certainly are.

There is a natural tendency among local authorities, charities, universities and other groups sitting on piles of cash to want to do the best for council tax payers, for donors who contributed the cash and for the causes themselves by earning that little bit more. But such organisations, isolated as many are from the mainstream of the City of London and Wall Street, are prone to silly mistakes. It was no accident that local authorities and charities were in the frontline when BCCI was closed down in 1990, when the Icelandic banks failed early this Autumn and now in the Madoff swindle. If some of the biggest banks and most astute businessmen in the world fell for the Madoff spiel, then how were treasurers in modestly resourced organisations meant to cope?
The answer is by being ultra-cautious. Simply relying on reputation and recommendation is not good enough, even if the institution involved looks to be regulated — as was the case with Madoff’s outfits.

Alex Brummer is City Editor of the Daily Mail and author of ‘The Crunch’ published by Random House

Last updated: 4:24pm, November 15 2010