Just when we thought it couldn’t get any worse, we find out that our banks have been the victims not only of their own incompetence but of fraud as well. Even the cleverer banks, like HSBC and Santander, who managed to avoid the worst of the sub-prime toxic debt, have been taken for a ride by Bernard Madoff’s pyramid investment scheme.
Because that’s pretty much what it was. He conned one set of investors into putting up some money and then paid them off with what the next wave put in. It all worked fine until the financial crisis meant that he couldn’t find another group of mugs to cough up.
As this Wikipedia article succinctly puts it:
Pyramid schemes exploit greed and gullibility. A successful pyramid scheme combines a fake but credible-seeming business with a simple-to-understand but sophisticated-sounding moneymaking formula.
We usually associate pyramid schemes with people who are unsophisticated and who lack a basic understanding of the financial system. You know, Columbian barrio-dwellers, people on low pay or benefits, Albanians and those who are likely to be taken in by failed TV show contestants. Some are motivated by greed but, mostly, it is that lethal mix of desperation and ignorance that makes the victims vulnerable to the unscrupulous scheme promoters.
Which makes me wonder why some of the world’s supposedly most experienced and well informed people fell for this one. OK, we’ve got used to RBS screwing up by now, so its £400 million loss probably didn’t surprise anyone, but HSBC, Nomura, Man Group and Santander? Weren’t these supposed to be among the cannier financial organisations?
And what about City Superwoman Nicola Horlick? She’s hardly the typical pyramid scheme victim, yet her company was taken for £21 million. Now she’s falling back on the defence that the criticism of her for falling for this scam is sexist. I bet the people who got conned by Women Empowering Women never thought of that one.
Of course, the main difference between the usual pyramid scheme victims and those who got taken in by Bernard Madoff’s scam was that the conned financiers have lost other people’s money rather than their own. Even so, this is incredibly embarrassing for them. People who we have been led to believe are among the cleverest and most sophisticated investors in the world have been conned by one of the oldest tricks in the book.
A scam which we usually associate with hard sell presentations given in the upstairs rooms of seedy hotels, to uneducated, desperate and gullible people, has laid low some of our most venerable financial institutions. But for the fact that, in some way, most of us will lose out from this scandal, it would be the funniest business news story for years.
Update: The nasty horrible sexist Mr Dillow has joined in the Horlick bashing, reminding us that the erstwhile superwoman didn’t always slag off Bernard Madoff and only last May had this to say about him:
He is very, very good at calling the US equity market.
This guy has managed to return 1 per cent to 1.2 per cent per month, year after year after year.