IBG, YBG

The New York Times is carrying the first on-the-record interview of Bernie Madoff since being jailed.

Madoff—he of the famed multi-billion dollar Ponzi scheme—said something ved interestink about the banks he had to deal with:

“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

While he acknowledged his guilt in the interview and said nothing could excuse his crimes, he focused his comments laserlike on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. In an e-mail written on Jan. 13, he observed that many long-term clients made more in legitimate profits from him in the years before the fraud than they could have elsewhere. “I would have loved for them to not lose anything, but that was a risk they were well aware of by investing in the market,” he wrote.

Mr. Madoff said he was startled to learn about some of the e-mails and messages raising doubts about his results — now emerging in lawsuits — that bankers were passing around before his scheme collapsed.

“I’m reading more now about how suspicious they were than I ever realized at the time,” he said with a faint smile.

Just a few days ago, the Wall Street Journal carried the following:

J.P. Morgan Chase potentially faces reputational damage, and maybe even more legal woes, from allegations leveled in a lawsuit by the trustee seeking to recoup losses forBernard Madoff's victims.

One issue raised by the suit that might be particularly troublesome is the allegation the bank sought to make money by offering financial products tied to Mr. Madoff even though the bank had concerns about the legitimacy of his returns.

There is an expression in the financial services industry, whenever a banker or executives comes across something that is sure to blow up at some time in the future:

IBG, YBG

I’ll Be Gone, You’ll Be Gone.

The tacit inference is, This thing will blow up—but we’ll both be long-gone by the time that happens. 

This attitude was pervasive throughout the mortgage loan industry, especially as regards to sub-primes and alt-A’s, and the mortgage backed securities derived thereof. And it was clearly pervasive throughout Wall Street as regards to Bernie Madoff’s Ponzi scheme. 

Madoff himself says in the interview (which is worth reading in full) that it was “willful blindness” on the part of the other Wall Street firms. 

Another way of characterizing this attitude is with the word collusion. 

If someone is involved in a transaction that they know for a fact will result in damages to a third party, but the damages will happen years after they are no longer involved in the business, is that person responsible? 

Obviously yes—of course! 

The question is, will the justice system in the financial sector punish the guilty? Not just Madoff—who is being punished as we speak—but the JPMorgans, and all the other counterparties to Madoff’s scheme, who likely realized what was going on, yet did and said nothing, so as to continue mining fat fees from the Madoff scheme. 

The longer these people who colluded with Madoff continue not being punished, the more it disheartens the rest of the financial sector from doing “the right thing”. And in fact, the longer those who colluded with Madoff remain not just unpunished but free—that is, not in jail—the more it encourages the rest of the financial industry to aggressively pursue illegality. Because they know that they won’t be punished. At worst, they’ll get a fine—a traffic ticket. But they won’t lose their reputation, or their prerogatives, or their freedom. 

Allowing IBG-YBG is no different than putting dynamite under the foundations of the Empire State Building. Yet that is what those people charged with policing the financial industry are doing, by charging no-one but Madoff, and letting all the IBG-YBG people get off scott-free.