Comment on “Is the Madoff Scandal Paradigmatic?” by John Graham and Kevin MacDonald

The article “Is the Madoff Scandal Pardigmatic?” by John Graham and Kevin MacDonald has the following conclusions:

  • Through his pyramid scheme, Madoff transferred assets from non-Jews to Jews and from poor Jews to rich Jews. This transfer is in line with theories of Jewish social hierarchies being structured in such a way that the Jewish elite gains at the expense of ordinary Jews
  • Jewish ethnic lobbying prevented an early detection of Madoff’s pyramid scheme
  • Madoff’s behavior is representative of the “conditionality inherent in the Jewish attitude to society at large.”

Whereas I will not argue against your second point, I’d like to make some comments in regards to your first and third conclusions.

During 1960-1975 Madoff built his business from scratch with Jewish “deep retail” money. Only in the 1990’s did Madoff’s asset management arm become big enough to take off as a market-leading business with global investors. One impetus was the endorsement from major Jewish banks in Europe such as Union Bancaire Privée (owned and managed by the Jewish family De Picciotto). That endorsement prompted other Jewish asset managers to recommend Madoff to their mostly Jewish clients.

As is mentioned in the literature in your article, Madoff also started to work with Jewish and non-Jewish frontmen in the 1990’s. The Madoff so called feeder funds of these frontmen were resold to institutions and high-net-worth investors, Jewish and non-Jewish. The non-Jewish frontmen participated in the Madoff Ponzi scheme with the same enthusiasm as their Jewish peers.

The third important factor was the exponential growth of the fund of funds industry in the 1990’s and 2000’s. The fund of funds industry has a reputation for being herd animals. Since many of the early funds of funds were Jewish (such as above mentioned UBP which set up its first fund of funds more than 40 years ago,) Madoff had a first mover advantage in this herd’s so called “selection process.” When the fund of funds industry took off, Madoff was one of very few “tried and tested” managers among the established, large and prestigious funds of funds. That made his funds a natural choice for the entire herd.

The end clients of the fund of funds industry were majority non-Jewish. Most of these clients were European investors (private and institutional) who lacked knowledge of hedge funds but who felt an irresistible temptation to put money to work in the industry. Asking a fund of funds to put together a hedge fund portfolio was a way for these European investors to “dip their toes into the water.” It also gave them the option to blame someone else (the fund of funds) if the investment went wrong.

In short, the Jewish elite (meaning people like De Picciotto) are therefore not to be seen as the big economic beneficiaries; on the contrary, the winners (if any) were the Jewish retail investors who put  money to work with Madoff many decades ago and who often had divested from Madoff before 2008.

The biggest moral losers were the elite Jewish individuals and organizations, who had recommended Madoff. These people lost much of their trust among both Jews and non-Jews. The herd mentality of the fund of funds industry (both Jewish and non-Jewish) was also mercilessly exposed. In the sense that Madoff was an example of a manager who relied on ethnic networking rather than own merits, the ethnocentric approach to fund marketing also took a hit, especially among the Jewish community.

So who were the economic losers from the Madoff scandal? This has not quite been determined yet. However, we know for sure that Madoff had a devastating impact on many Sephardic Jewish asset managers, especially in Switzerland. Many of these were Jewish “nobility” who had been ultra-wealthy for many generations.

The second group of economic losers are the investors who at this point in time do not want to disclose their assets with the IRS. (Irving Picard, the trustee appointed by the US courts, works in tandem with the IRS and demands full transparency from all investors who wish to be compensated.) Many of these tax evaders are likely to be Jewish millionaires or even billionaires, especially the ex-Soviet investors who invested in Madoff through Sonja Kohn. (Kohn alone reportedly raised $9 billion out of the $65 billion that Madoff “managed.”)

The remaining investors, majority non-Jewish such as European banks and asset managers, will probably not suffer so much from Madoff as was initially expected. These investors, who have cooperated with Picard since they haven’t had anything to hide, have already been offered around 40% back of what they thought they had with Madoff. Many of these investors have turned the offer down because they think much more will be recuperated as the process continues. Their decision might be correct.

These investors know that Picard’s next step is to go after the banks and auditors who put their stamp of approval on Madoff’s hedge fund operation. Most prominent of these banks are UBS and HSBC, who accepted Madoff assets as collateral for loans given to their clients. These banks have already suffered significant credibility losses after the financial crisis and given that they have deep pockets there is a high probability that they will accept a generous settlement with the Madoff victims.

So in contrary to what you contend in the article, I would assert that the Madoff scandal had a devastating economic and moral impact on the Jewish financial elite. I would also say that the “mom and pop” Jewish investors might have gained as well as lost and that non-Jewish investors are not likely to have suffered as large losses as initially thought; perhaps they might even get their money back.

Your article also discusses whether or not the Madoff scandal illustrates the “conditionality inherent in the Jewish attitude to society at large.” There have certainly been Jewish fraudsters other than Madoff in the hedge fund industry. However, of the roughly 100,000 funds listed in international databases, a large percentage are run by Jewish investment managers and very few of these display fraudulent behavior from what we can assess.  There are also numerous examples of non-Jewish fraudulent hedge funds, many of which display a behavior akin to Madoff’s without being accused of an ethnic agenda.

One example is the Swedish-managed hedge fund Weavering Capital, which posted Madoff-like returns during the period 1998-2008 before being exposed as a fraud in March 2009. In its early life, Weavering attracted Scandinavian and British retail investors and as the returns became too attractive to ignore, the fund became a choice for the same type of legitimate fund of funds which invested in Madoff at the end of his career.

In the aftermath of the financial crisis, it was discovered that the English wife of Weavering’s Swedish founder and chief investment officer was running an offshore company which carried out end-of-the-month transactions with her husband’s fund at fictitious trading levels in order for Weavering’s performance to look artificially good. In all, Weavering’s performance was inflated by $640 million. It looks like the early-stage Scandinavian clients of Weavering who divested before 2008 will not have to return the fraudulently created profits to the investors who lost when the fraud was exposed. The Scandinavian retail clients thereby gained in the same way as Madoff’s early stage Jewish private investors who divested before Madoff was exposed. Moreover, it looks like the non-Scandinavian investors will lose everything in Weavering, as opposed to the non-Jewish investors in Madoff who are likely to recuperate some of their losses.

However, as far as I am aware, no one has found the Weavering scandal to be “paradigmatic” for the behavior of Northwest European investment managers. I would therefore be careful when making general descriptions of Jewish behavior based on the Madoff scandal.

John Graham’s reply.

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