Whocuddanode? [Updated]

Here’s a believable explanation for why all the Wall Street smart guys missed the fact that Bernie Madoff of the disappearing $50 billion was a fraud.

They didn’t.

According to one econ blog speculation, maybe some of the big money behind his giant Ponzi scheme was placed in his funds precisely because of the assumption that he was up to something shady. Where they missed the mark was exactly what.

If Madoff, a former chairman of the NASDAQ exchange, were using his position at the center of huge trading operations to exploit advance knowledge—the same practice that landed Martha Stewart in jail—then he could plausibly be making steady gains in all kinds of weather. According to this theory, if Madoff had knowledge of trades ahead of anyone else, he would know market movements and could turn them into personal/institutional gain. Others leaving their cash with him would then be piggybacking on his dubious practices with little risk to themselves and full deniability if he got caught.

Imagine the chagrin of these crooks (because this would all be unambiguously illegal) to discover that Bernie wasn’t scamming the system—he was scamming them.

I haven’t seen any coverage so far suggesting that the latest debacle could undermine New York’s role in global finance. But if I were a big money manager in Milan, Singapore or São Paulo, I certainly would be thinking about the ludricous failure of any sort of regulatory controls and the prudence of parking cash with anybody within 50 kilometers of Wall Street.

[Update] Here are the latest estimates of potential losses around the world from the Madoff rip-off:

HSBC (UK) $1 billion
Santander (Spain) $3 billion
BBVA (Spain) $700 million
Fortis Bank (Netherlands) $1.2-1.36 billion
Royal Bank of Scotland $598 million
Natixis (France) $606 million
BNP Paribas (France) $490 million
Nomura (Japan) $303 million
South Korea (several institutions) $95 million
UniCredit (Italy) $100 million
Switzerland (various banks) $5 billion
Bramdean Alternatives Limited (UK) $31.2 million

This last outfit had the most pointed comment to date from any of these red-faced experts: in a statement it said that the debacle raises ‘fundamental questions’ about the American financial regulatory system. Um, yeah.

The statement continued: ‘It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith’.

I await the next unthinkable statement: maybe no one’s money is safe there.