Liverpool University Press history - The global political and economic impact of the madoff crisis

The Ponzi scheme scandal that came to light around the fall of Bernie Madoff in 2008 did not just affect those who had trusted him with their money. The larger global economic and political atmosphere also felt the effects of the fallout from the affair, and there were many changes in its wake that are still in place today.

The scandal

The former non-executive chairman of NASDAQ and founder of Bernard L. Madoff Investment Securities LLC (BLMIS) effectively lost funds invested by more than 12,000 people by faking investment returns over the course of many years. The fact that the whole thing took place in the midst of the US's biggest financial crisis since the Great Depression made matters all the worse.

Lasting effects

The effects of what Madoff did with his criminal investment scheme can still be felt throughout the investment community both in the US and across the world. As soon as Madoff had confessed, the US Securities and Exchange Commission (SEC) began taking steps to make sure that similar scandals could not happen again, with the Dodd-Frank Act bringing in new registration requirements and rules for exemptions whilst also giving the SEC authority to monitor financial firms with the potential to pose systemic risk.

The investment industry itself looked at how it could introduce greater transparency, with a subsequent rise in comprehensive due diligence inquiries. Even more recently, in July 2013, the SEC voted through a rule to require brokers to file quarterly reports about how they maintain their customers' cash and securities.

Personal impact

As well as impacting heavily on those investors who had not only given Madoff their money but also their personal trust in a process of what is known as an "affinity relationship", his direct family were also profoundly negatively affected. Although the swindler's eventual confession came at the insistence of his children, there was still a media undercurrent revolving around the question of whether the sons knew - for more information on this question, see the Vanity Fair article “Did the Sons Know?

Madoff's son Andrew was engaged to his future wife Catherine Hooper at the time, and she is a great example of how to turn around a disastrous situation. Hooper had to deal with all the negative publicity surrounding the family, but her strong character and belief in her husband-to-be got them through the tough times. Today, she is a successful entrepreneur running her own business, Black Umbrella, which helps people work out their own bespoke plans for dealing with worst-case scenarios.

Investment industry

With Bernie Madoff currently serving a term of 150 years in federal prison for his crimes, the effects of his criminal activities still reverberate around the global investment industry. Perhaps the most damaging and saddest effect is the loss of trust and increased suspicion of investors towards their advisors. In a financial sector where mutual respect is a basic element for success, the problems that Madoff caused look likely to continue for some years to come.

 

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