|
Page 1 of 4
The most intriguing questions surrounding the Madoff scheme is how he managed to pull it off. Did he do it alone? How many accomplices did he have? Was his family involved?
The assumption is that, given the large sum of money involved, you needed to have a whole lot of hands on deck to steer the ship. But, if you consider a minimalist approach to the mechanics required to construct and manage this kind of Ponzi scam, it just might turn out that he pulled it off with only a handful of accomplices.
You have to begin with the man's resume. He had a reputation for embracing technology early on in his career. He wasn't really an economist or an investment banker - he ran a state-of-the-art automated brokerage firm. His forte was perfecting the nuts and bolts of a trading operation - perfecting executions, managing transactions and sending out timely and accurate monthly and year-end statements.
Madoff was an early pioneer of deploying bleeding edge software and applying it to the brokerage business. In terms of his natural talents, he was more like Bill Gates than Warren Buffet.
Once you have his resume and analyze his skill set - you realize how he deployed his unique talents to pull off this scam. Madoff was not only a con man but a technological wizard.
In fact, Madoff could have pulled off his scam with a powerful notebook computer.
All he had to do was set up a database with the names, addresses and social security numbers - that sort of thing. When a new client came through the door, he would set him up on the data base and enter the initial balance.
Then he went about developing model portfolios that generated a targeted rate of return. That's easy enough to do in hindsight. All he really needed to do was look back at how the markets performed in the previous month pick and choose trading strategies that would have generated the exact return he was looking for. His genius was in putting together models that generated a consistent but plausible rate of return - around 11 percent a year on average.
Take a real simple model. If Madoff wanted to conjure up a one percent return for the month of January - he would wait till the end of the month, take a look at the Wall Street Journal, search for a stock that had appreciated exactly one percent over the course of the previous 30 days and claim that he purchased it on January 5th and sold it on January 29th at a price that generated exactly 1%. If a client went back and checked their statements against the charts, everything would look Kosher and the buy and sell transactions on the statement would match the charts.
Of course, Madoff's models were more complex and involved what appeared to be sophisticated hedging strategies that employed index options and other complex derivatives. That was just done for effect - you had to razzle dazzle the sheep to get them to salivate over their fictional statements and hand over more of their money.
|
