Sunday, December 21, 2008

Madoff and Memory ...

So far one good friend has lost virtually her entire net worth. Two active clients have been hit: one by the collapse of a billion dollar foundation that had been giving this charity a million dollars a year in unrestricted money. A second has likely sustained significant losses in donor gifts of as yet undetermined severity.

Flash back to Philadelphia,1995: I was representing three charities at the same time: the public library foundation and two museums when something too good to be true (and it was) came to the attention of first one board and then the other two. It was my first direct professional exposure to a Ponzi scheme. It was called the Foundation for New Era Philanthropy and was started by an area businessman with an interest in Christian causes. His name was John G. (Jack) Bennett Jr. The Wikipedia entry details his activities but on a smaller scale it worked the same way as the Madoff scam.

Bennett first created an aura of mystery by inviting ten "anonymous" business leaders to invest initially and of course the next round of investors paid off the first, and the third, the second and so on until much more money was going out than coming in and the whole thing imploded. When I heard about this "unbelievable man with a genius for investing" for the first time - from the VP for development and a trustee of one of the three institutions my bullshit detector immediately went off. By then I was an investor of sorts and I actually had some money. I was careful. I managed half my portfolio myself, had a financial advisor for the other half, invested only in mutual funds and then far and wide, and I kept about 75-80% in equity funds the rest in bonds. I was a moderate risk-taker.

I mention this only to say that I had some sense of investing; I certainly sensed that the "fabulous" returns Jack Bennett was delivering to the first round of business leaders "allowed in" would and could not last. I those I could that this guy came out of nowhere and had no track record with which anyone was familiar. Where was the due diligence and who had done it? In a nice way I was more or less told to stick to the consulting I was hired for and so I did.

When New Era sank the institutions involved lost some money from their reserves. The sophisticated early investors on the boards who pushed the institutions into investing with Bennett and New Era lost tons more. The idea that nobody knows anything - especially about the stock market and actually much else - has stayed with me ever since.

I think you will find Michael Lewis's (Liar's Poker) essay called "The End" brilliant. Check out Conde-Nast's, December 08. Enjoy.

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