It was 10 years ago on Tuesday that Bernie Madoff's Mother of All Ponzi Schemes burst into public view. Some newspaper retrospectives got me thinking about the last time markets kept pros and ordinary investors alike up at night.
The headlines in December 2008 blared that investors were on the hook for $65 billion, the total amount listed on clients’ account statements. But that included the “fake” profits Bernie pulled from thin air and allocated to his investors. The “real” principal deposited with him turned out to be about $20 billion, according to Bloomberg, which says $13.3 billion has been recovered through settlements with banks and others involved in aiding and abetting the Manhattan con man, and clawbacks of profits from investors.
Still, that’s a loss of $6.7 billion for some 2,265 clients. Bernie bilked an average of $2.96 million per account.
The Madoff madness hit hardest in New York and Florida, but it had plenty of Boston connections. Harry Markopolos, a Boston area forensic accountant, had been warning the Securities and Exchange Commission for years that Bernie was up to no good. He was ignored. And we had our fair share of Madoff investors: Philanthropist Carl Shapiro, the Massachusetts state pension fund, the Maimonides School, and Stop & Shop founding family members Avram and Carol Goldberg, just to name a few.
It was a sad and sordid scandal: personal savings wiped out, suicides (including, two years later, Madoff’s 46-year-old son, Mark), and willful ignorance or complicity by hedge funds, banks, and regulators.
And it played out during the depths of a brutal sell-off in the stock market sparked by the mortgage crisis-turned-housing crisis-turned-banking crisis-turned-financial crisis. Before the markets melted down, greed had been rampant, and investors were willing to believe in something — steady, sure-thing profits — that was too good to be true. It was a fitting disaster for those dark times.
It was just a few months after the Ponzi scheme blew up that the stock market bottomed out and began what many consider the longest bull market on record. After a tumultuous couple of months, it feels like our good luck is about to run out. But will it?
The markets are amazingly jumpy. On Monday, after an early big decline, stocks repeated a scene we witnessed last week, recouping their losses and this time finishing with a small gain. The Dow Jones industrial average reversed a 508-point loss.
Investors have a long list of concerns and obsessions. To recap, they include:
■ US trade tensions with China and economic and political riptides pulling at the United Kingdom, France, Germany, and Italy.
■ A very likely drop-off in corporate earnings.
■ The Federal Reserve, which has deeply unnerved investors with uncertainty about its future interest rates moves, and Robert Mueller's investigation of Russia and the Trump campaign, which has deeply unnerved investors with uncertainty about a possible constitutional crisis.
■ A cooling off of housing markets from New York to Dallas to Colorado to Seattle (and, yes, Boston).
“Sentiment has shifted massively in the past month alone,” said Megan Greene, global chief economist at Manulife Asset Management in Boston. But don’t count Greene among the pessimists.
“I think the adjustment has been overdone,” she said, referring to the sell-down in stocks since October. “When we look at the fundamental economy, there are very few signs of late-cycle overheating or inflation.”
Greene has one big concern: Smaller and midsize companies have taken on a lot of debt during what is closing in on the longest postwar expansion in US history.
If profit growth shrinks dramatically, and interest rates spike, these companies could have a hard time paying off their debts. That could send the markets into a tailspin. But she believes it’s more likely that profits will hold up and rates won’t soar.
At Merrill Lynch, Raj Sharma puts it this way: “I don’t believe this is the beginning of a bear market. It is a nasty correction.”
Sharma, who is managing director at Merrill Lynch’s private banking and investment group in Boston, thinks along these lines: Next year the economy will expand at a decent 2.7 percent rate and corporate profits will rise by 6 to 7 percent, while interest rates remain “quite benign.”
“Stay diversified, stay the course,” he advises. This, too, shall pass.”
That’s comforting, but I am a pessimist by nature. I don’t have a doctorate in economics (I barely made it out of my 10th-grade math class), but we all know that something always bursts the bubble. Hopefully, we don’t get a 2008-style firestorm that leaves 40 percent of our 401(k) balances in ashes. It's time to brace for at least a mild downturn, as soon as next year.
At times like these, when there is so much uncertainty and things look bleak, I like to remember something that great Barnstable writer-philosopher Kurt Vonnegut used to say: “And so it goes.” To which the great pop musician-philosopher Nick Lowe once added: “But where it’s goin’ no one knows.”
In other words, it’s damn hard to predict a recession or a market collapse, at least consistently. But when we do get clawed by a bear market, I am pretty sure headlines reminiscent of 2008's mortgage greed and Madoff-like wrongdoing won't be far behind.
On Monday afternoon I talked with Markopolos, who just knew Madoff’s steady 11 percent a year returns couldn’t be real. He’s getting out of the whistle-blower game. The SEC has a program to allow whistle-blowers to share some of the monetary penalties paid by violators, but he’s been waiting four years to get a payment in a case involving State Street Corp. and foreign exchange trading.
“I don’t trust the SEC to pay in a timely manner,” he said.
Instead, Markopolos is trying to line up hedge funds to help finance bets against publicly traded companies he believes have “cooked the books.”
I asked him what lessons he sees 10 years down the road from Madoff (who, by the way, is 80 years old and serving a 150-year sentence in North Carolina).
“In the short term, people learned the lessons of Madoff — that is, if it’s too good to be true, it isn’t true,” he said.
“In the medium term, people slowly forget. In the long term, here we are and no one remembers anything.”
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