Could there have been a more perfectly maddening madcap ending to a madcap maddening year than the saga of Bernie Madoff?
Before we say, “Out with old, in with the new,” let’s review: We entered 2008 torn between denial and trepidation — the Dow Jones industrial average had fallen nearly 10 percent by the end of 2007 from an unaccountable high of more than 14,000 in October that came after the onset of the credit crisis. Then all hellzapoppin’ broke loose. Bear Stearns collapsed, Fannie Mae and Freddie Mac got nationalized, Lehman Brothers fell, AIG got bailed out, Merrill Lynch was sold; a failing Wachovia was bought by Wells Fargo after it nudged aside Citigroup, which in turn had to be rescued (all of which sounds like lyrics for a new version of Billy Joel’s “We Didn’t Start the Fire”). Then the government put a slug of equity into all the major commercial banks (there being no more major investment banks after Goldman Sachs and Morgan Stanley became commercial banks), all but nationalizing them as it guaranteed all money market funds and much higher levels of bank deposits. Then came the individual acts: the fall of Eliot Spitzer, the mortgage woes of Ed McMahon, the antics of high-flying attorney Marc Dreier and finally, the revelations of seemingly everybody’s pal, Bernie Madoff.
The Ponzi scheme Madoff allegedly ran is extraordinary not only for its duration — years, maybe decades — and for the number of otherwise shrewd people it took in, but also for its sheer size. For weeks we’ve read the figure $50 billion, which is roughly $10 billion more than the market capitalizations of Citi or Goldman.
But what’s most amazing about that routinely bandied-about sum is that our only known source for it is Madoff, who under the circumstances ought to be the last person on earth we should trust when it comes to financial numbers. To be sure, we have grown accustomed to big figures seemingly plucked out of thin air: to wit, the earnings of a few too many companies in the U.S. and abroad.
Financial companies and their critics have debated recently all kinds of accounting matters, such as how assets should properly be valued. Did mark-to-market accounting, valuing assets at current visible market prices, worsen the credit crisis? Should banks instead rely on mark-to-model methods, based on financial models or internal assumptions? It turns out there was another approach available that may have been among the most popular. This is known as mark-to-Madoff accounting, or simply using whatever numbers happen to come to mind.
So in with the new: Illinois Governor Rod Blagojevich has made his U.S. Senate appointment. Time Warner is writing down $25 billion in assets. And in India the chairman of Satyam Computer Services resigned after admitting he’d been making up key financial results. Happy New Year!
