Okay, so as the news this week makes infuriatingly clear, in my ongoing round-up finance types, I have forgotten one of the rarer but most risk-loving creatures of the finance world. This critter is the con, the crook. If the published allegations are true, the case of Bernard Madoff is remarkable, but not only for the dollar amount of the swindle. The number of investors involved, the sophistication of his Ponzi scheme, and the longevity of the scam are astounding.
Madoff had to have a very detailed understanding of the workings of the equities and bond markets and real mastery of the operations of a legitimate hedge fund. If the everyday Wall Street hedger uses statistical analysis to analyze historical performance and Monte Carlo software to sort through decisions on value-at-risk and option valuation, what kind of complex formulas and high-powered tools did Madoff have at his finger tips in order to maintain a double set of books whose secrets were kept even from the family members who were his employees?
Many commentators on the scandal have pointed out that even the slickest Ponzi scheme is doomed to collapse. While I am very curious about the technology and analytical techniques Madoff might have used, I am truly intrigued by the mind that perpetuated the scam. If he had the smarts and education to make such an elaborate swindle work, why not put these talents to work legally? Why take a risk with such adverse probabilities? As the sophistication of his scheme implies, he must have had a finely honed estimate of the risk of being discovered. Is it possible that he enjoyed walking down this razor’s edge every day?