On Madoff: the Scholar, the Regulator, and the Trader

Based on the information trickling out of the investigation into Bernie Madoff's fraud, it's safe to assume the man is a criminal, even if he hasn't been indicted yet. But what about the rest of Wall Street? Were the occupants of the executive suites of Lehman Brothers, Bear Stearns, or Merrill Lynch criminals?

The short seller Jim Chanos thinks so. And so does former SEC chairman Harvey Pitt.

Chanos, whose investment firm, Kynikos Associates, is one of the largest short-sellers on the Street, and Pitt, who now runs the consulting firm Kalorama Partners, joined Holocaust survivor and professor Elie Wiesel at a breakfast sponsored by Condé Nast Portfolio this morning in New York. The topic at hand was Madoff, but the conversation turned to the widespread problems on Wall Street.

"I believe there was criminality in the executive suites of these firms," Chanos said, after explaining how Lehman's "hole" in its balance sheet was twice that of Enron's. "I believe they materially misrepresented the financial shape of their companies." He added later that, while Merrill Lynch may not have known what its financial position was, "it always knew its bonus pool."

Pitt was equally as harsh. "I agree there was criminality at a lot of these firms, but where it resided, I'm not sure," he said. He pointed out that banks took multiple marks on the same assets, and gave them higher or lower marks, depending on what they were calculating. The assets were "worth" the most when calculating fees they were collecting; they were "worth" the least when calculating margin calls for clients.

"That reflects more than carelessness," he said. "It reflects criminality."

As for Madoff, there was no debate about criminality. Pitt, who was at the helm of the SEC during the post-Enron years of 2001 to 2003, while Madoff was perpetuating his fraud, chalked up the regulatory breakdown to human failure. More regulation wouldn't have stopped or prevented the fraud, he said, because his scheme should have been easy to determine. Pitt advocates for an annual outside audit of every firm that invests money on behalf of the public.

When Elie Wiesel, a prolific author and Jewish scholar, spoke of the impact of the losses he and his foundation suffered at the hands of Madoff, the room was silent as his carefully chosen words hung in the air.

Wiesel's foundation lost $15 million with Madoff and his own wealth accumulated over his forty-year career was wiped away. He began investing personally with Madoff after a mutual friend of the two made the connection. Wiesel met Madoff only twice, and the topic was never about finances or the economy -- instead, Madoff presented himself as a philanthropist and they spoke about charities, education, and, ironically enough, ethics.

"There was a myth he created about himself," Wiesel said. "He gave the impression there were maybe 100 people who belonged to his club."

Wiesel said to call Madoff a psychopath or a sociopath is too generous, as those are diseases of the mind and Madoff knew well what he was doing. He also said he's been overwhelmed by the generosity of people all over the world in the wake of the foundation's financial disaster. "Great events simply make the good better and the bad worse," he said.

When an attendee asked Wiesel, who has lectured and written about forgiveness and the Jewish faith, if he could ever forgive Madoff, he replied after a pause. "No."

by Megan Barnett