Reader Joe Hartley comments on our post asking why did so many people put all their money with Madoff.
An old Midwestern saying: pigs get fat, but hogs get slaughtered.
Too much hoggish behavior of late. I also fail to understand why people did not diversify, except that they were, well, hoggish. They sure make mighty tasty bacon, though….
A major factor was, I think, the whisper rumor that Madoff was making the profits by front running in his brokerage.
Front running is the illegal practice of a stock broker executing orders on a security for their own account before filling orders previously submitted by their customers that will predictably affect the price of the security. After the broker has made their original transactions, they can expect to close out their position at a profit based on the new price level.
Thus, many of those giving money to Madoff might well have assumed their returns were guaranteed because he was a crook doing illegal but profitable transactions. They of course failed to understand they could get swindled too.
There’s considerable truth in the old saying, you can’t cheat an honest man, because such a person wouldn’t have invested with Madoff if he thought the deal was fishy.
And,, as it turns out, it now appears Madoff wasn’t doing any trading at all, and that the whole thing was a scam.