MADOFF INVESTMENT SECURITIES

Consider the case of Bernie Madoff investment securities firm which failed catastrophically in 2008. In this case, Madoff, successfully deceived his many clients by asserting and providing evidence that he had invested their money in a collection of stocks that consistently beat the market. However, he never actually made these investments, because he only knew ex-post but not ex-ante, which portfolio would generate the extra-normal returns. He was able to maintain this fraud for many years because the inflows of new investments were always sufficient to cover any requests for withdrawals.

This Ponzi scheme came crashing down when the financial crisis of 2008 led to substantial withdrawals by his investors and he was no longer able to cover his deception. Just like with Enron, this too represents a case of greedy behavior (as defined here) rather than the enlightened self-interest necessary in the standard neoclassical system. It was a case of a company NOT following the rules of capitalism.

Steven Suranovic, December 1, 2019

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