Finance 101, And How the Wilpons Failed It
Posted by JD on February 2, 2011
The New York Times published an excellently researched piece on Bernie Madoff’s wide role in Mets’ finances. Craig Calcaterra of Hardball Talk summarized the piece perfectly, and Greg Prince of Faith and Fear in Flushing offers a thoughtful, Bobby Bonilla-laced commentary here. Excellent works all, reading them consecutively left me sad, mostly for Madoff’s victims and Mets fans, but for Fred Wilpon and Saul Katz, too.
You can put this post in the category of “kicking a guy when he’s already down”, but I cannot get over the fact that men who were smart enough to build a successful real estate business in one of the most competitive markets in the world could display such staggering incompetence in personal and corporate finance. Yes, complicated investment vehicles often require degrees in mathematics to fully understand. But finance, at it’s heart, is driven by some very basic principals, one of the most basic of which is that returns are never guaranteed (often described by the phrase “past returns are no guarantee of future profits”). The Times article goes to great lengths to convey the impression that Fred Wilpon was very focused on the returns generated by Madoff. I wasn’t there, and I’ve never spoken with Wilpon about Madoff, but the Times certainly suggests that he was blinded by past (albeit fictional) successes.
But what is truly striking to me is how blindly Wilpon, Katz, and others ignored another fundamental axiom: there is safety in diversity. While no one investment is ever truly guaranteed, spreading your money among many different investments minimizes the chance that you’ll lose your entire fortune in one bad investment. According to the Times, Wilpon and Katz did just the opposite:
“According to an analysis of the list of Mr. Madoff’s 15,000 clients, done by Jamie Peppard, a former financial auditor who has studied the Madoff case, more than 500 accounts can be tied to Mr. Wilpon and Mr. Katz. Mr. Wilpon had at least 17 accounts just under his name, according to her analysis.”
I mean, that’s just astounding. Bernie Madoff sold himself to Wilpon and Katz, and they bought in wholeheartedly. I guess I understand that. Sure, I struggle with it, but I guess I can understand that they were completely taken in by Madoff. But what I absolutely cannot reconcile is how willingly they invested so much of their fortune with him. No salesman, however effective he may be, should be able to convince a successful businessman to abandon diversity altogether.
Which leads me to my final point: greed is not good. If that NY Times article is remotely accurate, the Wilpons’ fascination with the false profits Madoff was showing them blinded them. Yes, they were victims of Madoff’s ponzi scheme. But they were just as much victims of their own failure to follow common sense.
It comes down to an old saying that I learned a long time ago: “If something looks too good to be true, it most certainly is.” It saddens me that Fred Wilpon, Saul Katz, and others in the Mets organization didn’t remember it when it mattered most.