The Madoff Scandal--Get Ready for More

Watching the Bernie Madoff debacle, it has truly been amazing to see the missteps--

• The Audit firm of 3 people responsible for reviewing a portfolio larger than most big-name insurance companies is incomprehensible.
• Allowing this man bail, and watching him send personal possessions to friends and family worth millions of dollars.
• Seeing some of the tip offs people have given the SEC on his alleged trades-saying that they were either lying about their strategy, or running a ponzi scheme

Because I am not a sophisticated investor (not rich or, well, sophisticated enough), I have to put my savings into regulated institutions, like Citibank, Wells Fargo, or Fund companies like T. Rowe Price, or Vanguard. The advantage of that, in this case, is that I DON'T have my money with Bernie Madoff. And if the company has been pulling a Madoff-like scandal, the SIPC would protect my funds, up to $500k.

If I did have my money with a Money Manager like Madoff, though, this whole saga would make me take one immediate action. I would go to that manager and demand an immediate cash return of some amount, say, 10% of all my holdings, in cash, within a week. I would tell my manager that it was strictly a sign of good faith, and trust, and that he or she should understand my consternation.

The reason I would demand this? I may trust my manager, but I would want some proof that my portfolio really existed.

Most people who are sophisticated investors are also pretty good about their money, and are also smart enough to think about some sort of similar proof of solvency from their money managers.

My question, then, is this: Why haven't we seen another ponzi scheme or two uncovered yet?

Warren Buffett's line is that "when the tide goes out, you can see who isn't wearing a bathing suit." Even if I believe that 99 out of 100 Money managers are honest, I still believe that there are at least a few more big ponzi schemes, or other such scams taking place, that are yet to be uncovered.

But haven't we seen another ponzi scheme yet? Perhaps the flaw in my logic so far has been that either there are more honest money managers out there than I am aware of, or people have NOT demanded a cash return like I would have expected. But a continuing drop in market prices could spark a similar admission from at least a few more money managers.

So what to expect coming up on this? I really think it could just be a matter of time here, before we see a few more Bernie Madoffs. Then the concern about the financial institutions becomes this: If we can't trust our money managers, will there eventually be a bank run in our future, as people start to panic? I hope not, but I can't shake this concern. Let's keep an eye on the news reports, and see who else isn't wearing a bathing suit in the lowering tide.