Madoff’s Holiday Gift

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It is easy to see the Madoff affair as all bad. Regulators missed critical warnings. How many other cases like this are still hiding under rocks? Foundations and personal fortunes were wiped out. A number of financial firms will take large losses and the courts will be tied up with litigation for years.

But, Madoff has helped the overall investment community immeasurably by putting an exclamation point on the habits which have cause most of the financial pain of the last year both here and abroad. The damage may not be over but the practices that caused it may be coming to an end.

Madoff has given the habits of risk without regulation and investing without intelligence or care a face which will remain in most people’s memories for years and in the history books for decades. Slipping back into old habits is hard without one monstrous picture to capture the disaster and the events which led up to it. Madoff is the Cartier-Bresson image of almost everything which ruined the financial and credit industries and pulled down the broader economy with them.

The two things about Madoff which remain extraordinary but really are not were his ability to hide his investment practices and the magnetism of his results. A look at the history of mortgage-backed securities has almost identical circumstances even though the element of fraud was potentially absent. Almost no one understood why mortgage-backed paper carried great risks. Analysts, ratings firms, and regulators missed one of the most spectacularly dangerous financial creations in history.

But, the world of mortgage-backed derivatives and their complex systematic failure is beyond the ability of most people to fathom. That would include the CEOs of companies which created them and held them on their balance sheets.

Madoff turned a totem of the mysterious creation of great wealth into something which is taboo. He did it in an instant, and over time, the financial world will be the better for it.

Douglas A. McIntyre