Curtis Welling Interview

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L.G.: I'm not a sophisticated investor. I have a 401(k) that, I have to admit, when the envelopes come with the statements in them, I can't even bear to open the envelopes anymore.

C.W.: That shows good judgment actually. My advice to you would be you take the envelopes and don't open them for about a year to 18 months. Everything will be fine then.

L.G.: So explain to me how ostensibly smart, knowledgeable, sophisticated people, including people who put their money with Madoff, thought it reasonable that in all kinds of market conditions, they should be getting 8 to 9 to 15 percent returns on their money year after year without deviation.

C.W.: Of course, it's why people like fairy tales, because they make you feel good even though you know they're not true. There's a quality in the investment community which is sort of like the willing suspension of disbelief—that everybody wants to believe that someone's found the ability to repeal the laws of gravity. And so, when people
are ratified by the stature of other investors who preceded them, they suspend their disbelief and their critical faculties because they want to believe and because they're a little greedy, and they go along. This is a spectacular example of a story that's older than the hills. The same phenomenon, you may recall, happened maybe 10 to 12 years ago with an amazing fundraising Ponzi scheme that had swept up, among other people, several senior partners at Goldman Sachs. I think John Whitehead might've been on the board of this organization where some fellow whose name I've forgotten, went around to a bunch of very high-profile charities and said, "I've got a great, committed group of investors who are social philanthropists who want to be anonymous, so if you give me $100,000, I'll give you back you $100,000 and 25 percent interest on it in six months."

L.G.: And the guy wasn't even Nigerian, huh?

C.W.: No, no, exactly. And that's the classic, the same thing. You don't have to have all the money, you just have to have enough money so you can keep giving people back money when you promise it. That's what Bernie did. And I'm not sure but I suspect what happened here was, he had a trading strategy that went bad fairly early on in the game, and he just kept trying to trade his way out of it, and it got worse and worse and worse.

L.G.: What about the enforcement agencies? How can you explain the Securities and Exchange Commission's complete falling down on the job?

C.W.: Well, I think you explain it by a complete failure of responsibility and incompetence. It's stunning to me. As people investigate this story, you're going to start reading all kinds of things about the fact there were a lot of professional investors who had reason to believe this was not a sound investment firm for a long time, that there was sort of a suspicion in the sophisticated investment community. You're starting to hear some of these people come forward who had actually done the due diligence who had raised exactly the question you're raising, so that information is all out there.

L.G.: And some of them had gone to the S.E.C. and said "Hey, take a look at this."

C.W.: Exactly, as far back as 1999.

L.G.: And an enforcement official at the S.E.C. was somehow related to Bernie by marriage.

C.W.: I don't know the family relationship, but I'm sure in part, Bernie got a pass because he was a member of the board of the N.A.S.D. [National Association of Securities Dealers], and he was a big figure on Wall Street and so on and so on. Of course, this is one of the things that happens in a protracted period of a growth and economic prosperity, and it's a reminder that the S.E.C. exists not to be chummy with people in the business, it exists to make sure people are doing what they're supposed to be doing. I don't think there's any way of sugarcoating this. This appears to be a complete breakdown of responsibility and competence at the S.E.C.

L.G.: Do you feel like by getting out of the business when you did, in the early part of the century, that you perhaps dodged a bullet?

C.W.: Well, I'm not sure. I obviously have 25 years' worth of friends who are involved in all kinds of organizations that are going through all kinds of pain, or have gone through pain and are out of business, and I'm not sure I have any sort of existential conclusions about all that. I would say that I think at its core, the investment banking business—capital raising and providing advice to companies and governments—is a worthy business. And the vast majority of people that did it have values and morals and integrity and so on. There is a clear sense in which this thing sort of spun out of control. It happened over a period of time, it didn't happen over the last couple months. If you go back and you trace the history of real estate lending in the United States and the creation of the subprime lending industry, it was aided and abetted by many of the same congressmen who are now raising demagoguery to a new level, and certainly aided and abetted by government institutions and banks. And everybody sort of had their hands in this pot. I think the period from the late '90s to today was a period where a sense of value and balance and some core values was lost in some ways. I had a great 25 years in the industry, I met many of the people I'm closest to as friends during that period of time, but part of the reason why I and I think other people have looked and continue to look for things to do beyond the securities industry is I think there is, for a lot of people, sort of a spiritually and morally empty prosperity that characterized Wall Street.

L.G.: Did you not believe in the tenet "Greed is good"?

C.W.: [Laughs] I'll give you two perspectives on that. "Greed" is obviously a pejorative word, but the more ennobling characterization of that is "initiative and aspiration to create prosperity for ones' self and ones' family," which is another way of characterizing greed, and it is what drives the fundamental free-enterprise system in an economic democracy. So the inherent human quality to aspire to be better off and to have one's family be better off is something I think is not only good but we rely on it in our form of government. The problem is that it needs to be bounded. Unfortunately the '90s and the first part of this century was a period in which we took down all the bumpers and the barriers and had this sort of slavish mantra that the market knows best. Well, the market doesn't know best. The market needs to be policed. The market does a spectacular job of allocating capital through a price-discovery mechanism, and it relies on the self interest and the aspirations—or the greed, if you will—of individuals to do that. But it needs limits and it needs boundaries, and all the people who were supposed to be maintaining the boundaries took the boundaries down. Then people did what people do when they don't have any boundaries.

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