Sunday, January 4, 2009

Bernie Madoff's One-Way Social Contract

A 2001 profile on Bernie Madoff in Barron's magazine carried the telling title Don't Ask, Don't Tell, a reference to how impossible it was to get any real information from Madoff. No one understood how his firm was managing its funds, and returning such stellar profits for Madoff's clients.

The article's subtitle was Bernie Madoff is so secretive, he even asks his investors to keep mum. Secrecy was Madoff's hallmark. When the reporter for Barron's pressed him for details, Madoff simply replied "It's a proprietary strategy. I can't go into it..."

We know now the principle reason why Madoff was so passionate about keeping his methods secret. The questions in my mind, though, are these:

Why was Madoff's firm allowed to keep its methods proprietary, in the first place?

Why do we have a system that permits billion dollar companies -- whether financial firms or otherwise -- to keep their major activities and strategies a secret?

No one who has gotten burned by Madoff would be likely to argue that they benefitted by his penchant for secrecy? Even those who took their profits before Madoff's mega-Ponzi scheme collapsed didn't necessarily benefit, as they are recipients of stolen goods, and, when all is said and done, may not be allowed to keep their 'profits'.

Society at large certainly doesn't benefit. No one is looking forward to the years of trials, lawsuits, counter-suits, insurance claims, and everything else that follows in the chaotic wake of Madoff's multi-billion dollar collapse.

Even had Madoff's enterprise been a legitimate one, the question still stands: What is the benefit, to anyone other than Madoff, of allowing his firm's key activities to stand as corporate secrets?

There simply are no external benefits. None at all. And if Madoff is the only one benefitting by legally permissible secrecy, then there is something drastically askew. No contract should be a one-way street. All parties involved in a contract should gain proportionate benefits. That's just a fundamental principle of how society is supposed to operate.

But when it comes to corporate secrecy, the social contract is totally one-sided. It's time it was rewritten.


  1. Hi Dave. Interesting site...keep up the good work.

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  4. Nice article and very well written. Just right for those of us who are a little slow with financial terminology, lol. Best wishes.