Lessons Bernie Madoff Taught Us

John C. Coffee, a law professor at Columbia University Law School, has suggested changing a few rules for investment managers to separate temptation from fate. For example, Bernard Madoff legally acted as custodian for the securities he allegedly bought and sold. In a column on CNN Coffee suggests that those roles be separated. Not a bad idea, but I doubt it would have made one whit of a difference: The regulators gave a pass to Madoff because he was a pillar of the community. If they didn't notice that his assets and well-publicized trading strategy would have dwarfed the options exchanges, how hard would it be for Madoff or others like him to create straw custodians? He outsmarted high-powered consultants who robotically handed over unconscionable fortunes to one person with no verifiable investment process or risk controls. Who needs due diligence when the initials on the black box are BM? Or AIG?

Bernie was the dream catcher to the rich just as option ARMS were catnip to guileless homeowners. He had a mathematically rigorous system for investing -- the split strike, a sure thing, no big deal for the computer geeks in the land of financial Shangri-La. Mortgage brokers had a sure thing for the unlucky chumps who were short on cash.

What piece of regulation could really stand in the way of a $50 billion Ponzi scheme when the free markets had declared all risk dead -- from mortgages to stocks to credit cards? Only sky-jumping seemed risky over the last few years, unless a Ph.D. could have come up with a way to bundle the jumps and sell them piecemeal, one altitude at a time.

Still, even in the age of risk-free investing this $50 billion sum is unlike any other number that has sauntered across the financial pages. Until now the numbers and players have been typecast bureaucrats, politicians, and financiers --- all foils in a financial horror flick. But this number, $50 billion, has a face and a personality. It's Palm Beach and Hollywood. It's mostly Jewish and filled with many, many charities. Fifty billion dollars -- about 50 times the price JPMorgan paid for the mortally wounded Bear Stearns, a firm that once employed 15,500 people. Fifty billion dollars! Nearly the same size as the securities portfolio Barclay's snatched from Lehman Brothers after it stumbled into bankruptcy. Bernie lost $50 billion.

For better or worse, Bernie Madoff is likely to become enshrined as the symbol of the current morass, the Great Gatsby of the new millennium who fed on our desire to achieve, be safe, and continue endlessly into the future. Hubris was his currency and the zeitgeist his multiplier.

Wall Street sold with religious fervor its belief in the death of risk to itself, to gullible regulators, 401(k) investors and families seeking bigger and better homes. It was packaged as the ultimate American dream. When everyone awoke and peeled away the layers from the carefully wrapped box all they found inside was the tight-lipped face of Bernie Madoff.