Trader or Traitor?

Just at the moment when our confidence capital is in its shortest supply, the Bernard Madoff scandal is another black eye for the American financial system.

Everyone, of course, is innocent until proven guilty, but should the allegations be true, Mr. Madoff’s actions are, in my view, right up there with treason, in terms of the damage done to this country’s standing in the world. The only mitigating factor is that treason probably wasn’t his intention, but the result is about the same.

You may not have a lot of sympathy for the Madoff clients in Palm Beach rushing to pawn their Ferraris, but many individuals who thought they had a comfortable retirement suddenly have nothing. Some cities face an instant financial crisis, as well as some of the most respected charities. A big problem, though, is how many foreign banks have been affected and the resulting loss of faith in the American system, especially our system of regulation.

The difference between this situation and the mortgage-backed securities meltdown is that this crisis is the result of alleged criminal activity, a giant Ponzi scheme. Wikipedia defines that as “a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from profit from any real business.” The earlier Wall Street shenanigans were at least legal, so far as we know now.

If Mr. Madoff did what he’s accused of doing, he will likely get what’s coming to him. It’s pointed out that the analysts for many of his investors should have taken the time to find out what he was doing and figure out that the deal was just too good to be true. As is typical with these situations, the stain of blame has begun its rapid spread.

But what about that international crisis of confidence? Do we in the United States have an obligation to make the foreign Madoff victims whole, or as whole as possible? Instead of letting our own banks continue to stuff the bailout funds in their vaults, maybe some of the $700 billion should be reserved for the foreign entities that have been scammed. The necessary restitution isn’t available from Mr. Madoff or those folks who should have known better, including those in our own regulatory system, if there is one.

Restoring international confidence in our economy is practically a matter of national security. We have to show the world that whatever legitimate loss is the result of the Madoff case, the United States is good for it. And then we have to get about the business of plugging the holes in our regulatory dike. That is, if we want to continue to be proud to be Americans.

There, now I’ve said it.