AS the investigations into Bernie Madoff’s alleged Ponzi scheme continue, one thing is becoming clear: The reason it lasted so long and got so huge is that it was superbly designed and executed.
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Here are the key factors that burnished Bernie’s reputation to the point where potential clients were begging to be allowed to invest.
* Never promised (or delivered) huge returns. There’s no better way to earn trust than to seem more reasonable and realistic than the typical salesperson. If Bernie had gotten short-term greedy and posted huge fake returns for a few years to draw in new investors, he’d have been found out long ago. As a further sign of this effective soft sell, Bernie often urged new clients to start small: After a few years, as they got more comfortable, they could increase their investments.
* Turned money away. How much did people want to have Bernie run their money? Some people joined country clubs in the hope that he would allow them to invest. And, in many cases, he wouldn’t! Assuming Bernie eventually just opens up completely about this, it will be interesting to hear his motivation for turning people away. Did he just want to keep the number of investors small, or, at some level, was he warning some people away from the fraud?
* Trusted representatives. Bernie himself didn’t sell his services much. Instead, most of his clients appear to have been recruited by pillars of each respective community. These folks weren’t paid (generally). They were doing favors for their friends. Bernie’s services were also sold by entities such as Tremont Capital, Fairfield, Nomura, and other trusted institutions. Who would suspect that these brilliant folks would allow themselves to be snookered by such a con?
* Strategy with a simple name that was too complex for most people to understand. Bernie told everyone he used a “split-strike” strategy. Ninety-five percent of his clients probably had no idea what that was.
* Another potential explanation for the performance, which also involved cheating. This is important. Many sophisticated Wall Streeters have long suspected that Bernie was crooked. But they invested with him anyway because they assumed that what he was doing was “front running” – an illegal but effective practice in which traders take advantage of the knowledge of impending order flows.
The possibility that Bernie was front-running explained performances that no one could replicate and that some experts thought were impossible.
Henry Blodget is the editor-in-chief of clusterstock.com