Bernard Madoff shocked the World on Dec. 11, 2007, when he admitted that his well respected hedge fund was, in fact, a $50 billion ponzi scheme responsible for swindling investors worldwide, including corporations, individual investors, many who lost their life savings, and even charitable organizations.
Today a Federal Judge sentenced Mr. Madoff to spend 150 years in prison, which was the maximum possible penalty to be imposed. Clearly, Madoff, a 71 year old man is not expected to ever get out of jail alive.
After being sentenced, Mr. Madoff offered an apology to the Court, but then turned to face the audience gathered behind him, many who were his victims who had been investors in his fund. Madoff reportedly said, “I’m sorry, but I know that doesn’t help you.”
The question is, does his sentencing begin the healing that we need to see in the hedge fund and investment community?
At the time of the announcement of his ponzi scheme, World stock and bond markets were already digesting the myriad news stories regarding massive financial losses and the possible insolvency of the U.S. banking system. Bears Stearns had collapsed, Lehman Brothers had filed bankruptcy, Fannie Mae, Freddie Mac and AIG had been seized by the government and Merrill Lynch was being forced to merge with Bank of America in order to survive. Even the venerable U.S. Auto Industry reported that they needed billions of dollars in government funding to ensure its survival.
Now there were new questions to be asked about the capability and even the desire of regulators to root out and punish investment scammers. The SEC had already failed to uncover, report or resolve issues of the banking systems severe under-capitalization. There were stories about rating agencies like Moody’s and Standard & Poors, who were being paid by the companies whose debt they were rating. Could these companies really be expected to render an unbiased rating?
And after hearing all of this, what is an investor to believe? Where can they put their money in order to keep it safe?
During the months following these crises and scandals, many investors had clearly chosen that U.S. Treasury bonds were the safest investment. Hundreds of Billions of dollars were invested in U.S. Treasuries pushing Interest rates, which is the rate of return an investor demands in order to lend his money to the government, to the lowest levels on record.
But recently, some confidence has been restored. We have continued to hear stories of how far the banking crises and the Madoff scandal reached. But we also got reassurance that the government will protect the financial system. We have even absorbed the bankruptcy of General Motors and Chrysler. And the financial markets rose anyway.
In the months since March, some investors have sold U.S. Treasury bonds and bought riskier stocks, including those of financial institutions.
The government made it clear that they will provide money to backstop the debt of systemically significant banks, will ensure the warranties of American cars and will provide additional trillions to stimulate the economy and job growth.
And as we have gotten closer to the sentencing of Bernie Madoff, there has been at least some sense of relief that there are regulatory bodies charged with uncovering scandals, and the perpetrators of those crimes will be punished.
Surely, investors weren’t expected to hide forever. Maybe this will act as a needed catalyst which will allow investment capital to venture out and take risk again.