The Fraud of the Century Revealed


On this day in economic and financial history...

Some men aren't content with having it all. Bernard Madoff was such a man. A self-made millionaire many times over, Madoff and his Madoff Securities firm were behind the computerized quoting systems that would later underpin the electronic Nasdaq OMX exchange, where Madoff once served as chairman of the board. Madoff is estimated to have made $25 million per year during the 1980s, thanks to this computerized market-making technology.

Of course, the name "Madoff" now means something very different. Madoff became the modern personification of the Ponzi scheme on Dec. 11, 2008, when he was arrested and charged with spearheading one of largest investment frauds the world had ever seen. At the time, federal prosecutors thought the losses of Madoff's investors could exceed $50 billion. The size of the fraud later swelled to $65 billion, of which less than $4 billion has been recovered.

Madoff's high-profile fall from grace highlighted the need for due diligence in selecting a capable investment manager, as well as the need to question anything that seems too good to be true. The allure of "safe" growth in unsafe times is a powerful lure for even the most experienced financial professionals: Banco Santander , HSBC , and Royal Bank of Scotland all invested many millions in Madoff's funds, despite the fact that red flags had been raised against Madoff for years before his arrest.

Madoff has been imprisoned in a North Carolina medium-security prison since 2009. He will remain there until his death, as release will not be possible until 2139. Attempts at recovering investor assets are ongoing, but most will never be made whole.

A deadly homecoming
RCA began its life as an offshoot of General Electric in 1919. On Dec. 11, 1985, the long-estranged entertainment company finally returned when GE agreed to acquire its former spin-off for $6.3 billion.

The acquisition, one of the largest non-energy deals of the '80s, brought an entertainment conglomerate with 1984 net income of $246 million and revenue of $10.1 billion into the fold of a growing manufacturing concern. The combined companies were estimated to have revenue of more than $38 billion and assets worth more than $32 billion. At this point, the companies' combined revenues would have made GE the seventh-largest industrial corporation in the country, just smaller than fellow Dow Jones Industrial Average component IBM but larger than chemically focused Dow component Dupont .

GE wound up divesting itself of many RCA assets soon after the merger's completion. The only part of RCA that GE chose to keep was NBC, which is now majority-owned by Comcast . GE was thus responsible for both the birth of RCA and its slow death by degrees of divestiture.

GE has spent much of the last few years backing away from this sort of diversification and has returned to its industrial roots in a big way. Will the company's renewed focus carry it through an uncertain economic climate in 2013? The Fool's industrials analysts have put together an in-depth premium research report to answer any GE-related questions you may have. Subscribe today and get a full year of updates -- you'll be the first to know when anything important happens.

Fuller than full employment
On Dec. 11, 1968, the U.S. Department of Labor announced that unemployment had fallen to a minuscule 3.3% for that November -- the lowest level in 15 years and a mark that has not been reached again in American labor history. In this total there were only 350,000 long-term unemployed, or those who had been out of work for more than 15 weeks. Only 2% of American men were out of work, although 12.2% of teenagers were considered unemployed at the time. However, Department of Labor officials cautioned that the steep drop from 3.6% in the previous month might have been attributable to error.

This abnormally low level of unemployment didn't last. The Dow had peaked mere weeks before the report, and a recession that struck during incoming President-Elect Nixon's first year in office not only destroyed more than 35% of the index's value, but also shot the annual unemployment rate up from 3.5% in 1969 to 5.9% in 1971. The lowest unemployment rate ever reached since 1968 was a 3.8% rate reported in April of 2000.

The Middle Kingdom trades up
"Made in China" was seen for decades as a mark of inferior craftsmanship made at the lowest possible cost. On Dec. 11, 2001, China formally became part of the World Trade Organization, and that perception gradually began to change. BBC News published a smart overview of the march to membership and its long-term expectations on Dec. 11. Here are a few excerpts:

It comes after a long set of negotiations in which China has had to satisfy its trading partners, notably the United States and the European Union, that it is doing enough to open its economy to international competition.

China has already threatened to use its powers as a WTO member in a trade dispute with Japan over the export of shiitake mushrooms.

The restrictions on [China's] capital markets will eventually have to be lifted and market access for foreign goods and firms will be improved. China's vast state-owned industries will have to reform, and that could lead to a huge rise in unemployment. In a report, the Chinese government admitted that parts of its economy were "in chaos", with rampant corruption, counterfeiting, fraud and embezzlement.

China put the WTO on notice that a trade round could only succeed if it addressed the gap between rich and poor nations, and ensured that all countries would gain from globalization, as it staked its claim to lead the group of developing countries.

China's economy has boomed since its acceptance to the WTO. In 2001, Chinese GDP was $1.3 trillion. A decade later, China's GDP had grown to $7.3 trillion, representing a staggering annualized growth rate of 18.8%. In this time frame, Chinese exports to the U.S. grew from $102 billion in 2001 to $399 billion in 2011. The Economist now expects Chinese GDP to overtake U.S. GDP by 2018. On many measures, the Chinese economy has already raced ahead of America's.

China's success can also be a boon to your portfolio. Many American companies have made inroads to the Middle Kingdom, but some have made themselves into must-have brands for millions of Chinese. Find out more about these "Three American Companies Set to Dominate the World" in our exclusive free report -- click here for more information, at no cost.

The article The Fraud of the Century Revealed originally appeared on

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of International Business Machines. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.