Thursday, January 15, 2009
More About Madoff and Trustees
I just finished reading another piece on the Internet about the Madoff fraud. In this piece they told how an investigation of the statements Madoff sent out to his clients did not even have the right price at which stocks were purchased on a particular day. This is just one more reason why a foundation, endowment, charitable trust or any other large portfolio of money and securities should have been held in safe keeping with the trust department of a commercial bank. If at the end of each month the statment from the money manager can not be reconciled with the statement from the trust department, then you have a problem. The trust department runs their own statement at the end of every month and uses a pricing system to generate the correct prices of each stock and bond and thus the total portfolio is priced independently of the money manager's statement and pricing. Again I ask, where were the people that sat on the boards of these organizations? How could not one of them ask, how are we reconcilling the money manager's statement at the end of every month? I don't care if Bernie Madoff walked on water, where were the checks and balances for these multi million dollar portfolios?
My next comment is with regards to performance benchmarks. What performance benchmarks was Madoff being measured against? Without specific benchmarks, the performance returns are meaningless. In order to have the correct benchmark, you must have the correct prices and the right securities in the portfolio for that benchmark. Again, where are the trustees?
Conclusion. There are a lot of people sitting on boards that have no business sitting on boards or investment committees. Perhaps it would not be a bad idea for people to pass a test before they took a seat on a board of trustees of a foundation, chartiable trust or an endowment fund. Having a lot of money and nothing between the ears when it comes to investments is a dangerous combination for any organization. Better yet, organizations should stop putting people on their boards if they truly do not know something about investing. Giving lots of money to an organization is fine, but holding on to that money is even finer.