Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

(Updated )

I will not write about Martin Shkreli this week... I will not write about Martin Shkreli this week... I WILL NOT write about Martin Shkreli this week... .

But, aw shucks, what else this week could compare to the current poster-boy villain of capitalism, the smirk seen 'round the world, the guy who pleaded the Fifth to Congress even when he was simply asked about his record collection?

Luckily, ABC this week provided a throwback look at arguably the greatest villain of capitalism in history, a man whose scheme and smirk were so over-the-top that they make this whole Shkreli business look like child's play. Of course we're talking about none other than Bernard L. Madoff. He was played in the mini-series by Richard Dreyfus, who gives a great "Goodfellas"-like narration of how Bernie built his scheme with an endless supply of fake documents and even fake computer screens showing fake options pair trades and a fake account with the DTCC clearinghouse.

Since Madoff's day, of course, spotting the next great Ponzi scheme has become a popular parlor game, with mixed results. Harry Markopolos, who uncovered Madoff, is warning of three new Ponzi schemes, according to ABC. Just on Friday, Business Insider reported that hedge-fund manager Kyle Bass is accusing United Development Funding IV of  exhibiting "characteristics consistent with a Ponzi scheme." The REIT in question, for its part, says it's a victim of a “short and distort” strategy. Bass acknowledged on a website that he set up to promote his argument that he has accumulated a short position in UDF.  

Cliffhanger
Shares of United Development Funding IV have been under pressure amid criticism of its business.
Source: Bloomberg

The Madoff mini-series was a reminder of how remarkably hard taking down a Ponzi scheme can be, even when the party involved is not just showing "characteristics consistent" with a Ponzi scheme but running a full-on, no-holds-barred Ponzi strategy. One way to describe Madoff would be: "History's largest Ponzi scheme that collapsed in December 2008." Another completely truthful description would be: "A New York-based market maker and money management firm that survived the global financial crisis longer than Bear Stearns, Lehman Brothers, IndyMac, Countrywide Financial and an independent Merrill Lynch."  

In the television version of the Madoff saga, one of the most dramatic moments is when one of his sons demands that he be allowed to participate in the "asset management" part of the firm. Madoff shoots him down, saying he'll know when his sons are ready. But just for the sake of a thought experiment, what if he took that opportunity to use his bottomless charm to invite his sons -- or some other young go-getters -- into the fold?

Imagine dialogue along these lines:

"Look, son, I'm going to come clean. I've been running a Ponzi scheme all these years. And I agree with you, I think it's time you got involved. Here's what I need you to do. We've saturated pretty much all of the opportunity set among the gray hairs in New York, Florida and Europe. I need you to go West, young man. Head on out to Silicon Valley and tell every punk in a hoodie you see that you're very sorry, but you simply can't get them into the Madoff fund, no matter how many billions they have. Go see Gates, go see Bezos, go see Larry and Sergey. Cuban. Andreessen. All of them. Give them my card but tell them they probably shouldn't even bother calling, since only a super genius could convince your old man to let them into the fund. I'll take care of the rest. Just pick up some more Funyuns for Mom before you go."

Indeed, the mind marvels at what Madoff could have accomplished if he had just encouraged the next generation to take the ball and run with it. Imagine all the innovative new financial products that could have easily been tailored to the Madoff business model. The natural first step would be an exchange-traded fund (ticker symbol "PONZ" apparently is still available). If there was skepticism about the net-asset values of the Bernie ETF, no problem! Simply offer an inverse Bernie security, triple-leveraged of course. 

The explosion in popularity of index funds would be no risk at all. Madoff could simply have offered both active and passive Ponzi, what difference would it make? There could be Smart Bernie Beta products, peer-to-Ponzi lending platforms, even a digital currency called (what else?) BernieCoin! For the millennials looking for automated investment advice, could we interest you in our new product, Robo Bernie? 

In short, it's worth contemplating on this dreary pre-Super Bowl Friday: What if the only flaw in the Madoff business model was poor succession planning? 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds confirmation from hedge-fund manager Kyle Bass that he has acquired a short position in United Development Funding IV.)

  1. It's hard to say whether it's "too soon" to make jokes about Madoff. Certainly it is for the victims. If you're one of them, we apologize and advise you stop reading now because there are a bunch of Madoff jokes coming. 

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net