Before Madoff Troubled Jews, Whitney Stung WASPs

Jan. 8 (Bloomberg) — American Jews are watching the Bernard Madoff case closely. Their concern, spoken or not, is that there is something about the Madoff scandal that will be perceived as inherently Jewish.

Perhaps only the intimate Jewish culture, whose members work, eat and pray together, could foster a Madoff, a man who apparently misled friends, annihilated whole fortunes and now faces prosecution for securities fraud estimated at $50 billion. Implicit in the concern of American Jews is the sense that a cool, old-boy-Protestant money manager wouldn't have been able to pull off a trick so immense for so long.

My advice is to have no such fear. The Madoff scandal is not about how different a Jewish clan is from a Protestant clan. It is about how the two are alike. And how Jewish and Protestant clannishness in turn resembles that of Italian-Americans, Russian-Americans, Chinese-Americans, and on down the line.

Clannishness transcends any specific group. The clan can have value as a cultural or economic institution. It also harbors a unique power to destroy.

Want proof? The Securities and Exchange Commission has a Web page dedicated to what's known as "affinity fraud." From blacks in Florida to Korean-Americans in California, many groups have fallen prey to tricks of their brethren.

The clan problem in its purest form shows up in the story of the Madoff of another day: Richard Whitney, president of the New York Stock Exchange in the 1930s.

Diverted Client Funds

Whitney landed in New York's Sing Sing prison after being convicted of diverting client funds for personal use. Like Madoff, Whitney triggered special outrage because — in addition to breaking the law, something Madoff only stands accused of at this point — he misled or lied to peers at the stock exchange whose reputation he epitomized.

Whitney sprang from the original American clan, that of the white Anglo-Saxon Protestant. Then, as now, there were also clans within the clan. It wasn't sufficient to be a Harvard alumnus. You also had to have attended the right school before that. Or sport the gold pig of Harvard's Porcellian Club. Or have important family connections to Wall Street leaders.

Clan members enjoyed access to credit from other members. The closer someone was to the club's center, the more trustworthy he was deemed to be.

Richard Whitney stood at that epicenter. His uncle served as a partner at the House of Morgan, the closest thing to a central bank the U.S. had just before the creation of the modern Federal Reserve. His brother, George, was a senior partner there as well.

Steeplechasing, Yachting

Whitney had attended Groton School and Harvard, just like President Franklin Roosevelt. In addition to rising to the NYSE presidency, Whitney sat on the executive committee of the National Steeplechase and Hunt Association and was active at the New York Yacht Club.

Whitney, like Madoff, did plenty of good in his day. He raised funds for the Salvation Army. He also rescued the stock market itself at a crucial moment, personally halting the Black Thursday panic of October 1929 by placing the most historic single order in exchange history.

As John Brooks recalls in "Once in Golconda," his account of Wall Street in the 1920s and 1930s, Whitney bought 10,000 shares of U.S. Steel "at 205, the price of the last previous sale, although the stock was actually being offered at that moment at well below 200." Whitney then "matched this grandly uneconomic gesture by proceeding to various other posts on the floor and placing similar orders for other blue chip stocks."

Fleecing Others

The move sealed his reputation as the "voice of Wall Street." Yet even at the moment of his Black Thursday triumph, Whitney was well on the road toward fleecing his own.

He had borrowed more than he could afford. He was investing in obscure Florida properties and in companies so questionable they would never be traded on his exchange. Though his loyal brother and others would cover his ballooning loans — the SEC complained about a "code of silence" — Whitney's misdeeds eventually expanded to writing checks to himself or his creditors from accounts of the exchange and the yacht club.

The sheer duration of Whitney's deception was among its remarkable features. He misrepresented the state of his finances for at least a decade. Likewise, Bloomberg News has reported that regulators are now finding evidence that Madoff's troubles may date all the way back to the 1970s.

Classic Clan-Think

In 1938, in hearings like those being held today, an SEC attorney probed Thomas Lamont of J.P. Morgan on why he had ignored warning signs.

Lamont's reply was classic clan-think: "It made me ill almost that all that time he could have been deceiving his brother, deceiving his partners, deceiving his wife and community. Well, it was just — it is inconceivable."

That sounds a lot like the combination of wistfulness and nausea that Madoff is generating today in his community. (I've seen a small piece of it myself, since one of my children attends a school that lost money in Madoff-land.)

In both instances, the clan failed to view a member with the skeptical eye that should be brought to all business dealings.

Often the scammer hurts his own the most. Now, many Jews are hurting. Back then it was WASPs who got stung the worst.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2009 Bloomberg

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