Madoff's Legacy

What effect will Bernard Madoff's high-profiled criminal offences have on investors' confidence?

Kate Gibson, MarketWatch reporter, wrote the following story:

"Everybody knew about the bucket banks, the boiler rooms, everything you saw in the movie 'Wall Street.' But this guy [Madoff] was chairman of Nasdaq. It's like reading history and finding out that George Washington was actually Benedict Arnold's contact in a huge spy ring," said Doug Roberts, chief investment strategist at ChannelCapitalResearch.com.

The issue extends beyond Madoff, given other recent cases that while smaller, give the same impression of regulators asleep at the wheel, said Roberts. He pointed to Allen Stanford, the Texas tycoon whose alleged fraud was shut down in late February by the Securities and Exchange Commission, and Arthur Nadel, the Florida fund manager who allegedly lost millions of investors' dollars.

"It's a colossal failure for the Securities and Exchange Commission when you can have a scheme of 20-plus years go undetected, even after the agency has investigated several times," said Karl Buch, a former assistant U.S. attorney now at law firm Chadbourne & Park.

Madoff on Thursday pleaded guilty to charges he stole billions of dollars from investors around the world, starting a huge Ponzi scheme in the early 1990s.

Others said major damage was already done.

"This man has single-handedly put the nail in the coffin for millions of baby boomer investors with respect to their desire to invest in the stock market. Billions of dollars have been lost and untold billions more have been pulled from equities, never to return," said Dan Greenhaus, an analyst at Miller Tabak & Co.

The "sheer size" of Madoff's Ponzi scheme got the media's attention, but was probably less of a focus for the average retail investor, who is likely more concerned about job security in the current economic climate, said Mike Zarembski, senior commodity analyst at brokerage optionsXpress Inc.

But the Madoff case does underline the case for diversified holdings.

"You don't get strictly bull markets. That's why asset allocation is very important," said Zarembski.

Greenhaus, however, believes the market's decline and factors such as Madoff is translating into a scenario where the 60-plus crowd is now done with equities, along with a large majority of those 50 and older.

"These people are going to hang on with a certain portion of their investments in order to have a shot at recouping some losses, but once they reach a point at which they are satiated, they will remove the remaining funds, finding fixed income very much to their liking after eight years of absolutely terrible equity performance," he said.

"This should prove to be a major headwind for equities going forward, as this segment of the investing population controls a tremendous amount of wealth," said Greenhaus.