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Former NYSE Chairman Grasso Speaks, Part II
Daniel Acker, Bloomberg News / Landov
In the second part of our exclusive interview, former NYSE Chairman Richard Grasso tells Allan Dodds Frank how Bernie Madoff made $1 billion (legitimately), why the SEC looked the other way, and why it all went foul.
Plus, Part I: Grasso on oversized AIG bonuses, Spitzer, and Citi.
For nearly three decades, former New York Stock Exchange Chairman and CEO Richard Grasso viewed Bernard Madoff as one of the top competitors of the NYSE.
Madoff was one of the leaders in promoting computerized trading of stocks, in lots of 5,000 shares or fewer, outside the trading pits of the New York Stock Exchange. As an influential promoter of over-the-counter stock trading and regional brokerages, Madoff was regarded in New York and Washington as an industry leader.
“I wouldn’t be surprised if in a 20-year period—call it ’79 to ’99—his entity made $700 million to $1 billion.”
Grasso had a bird’s eye view of how the former Nasdaq chairman made his money. He talks with The Daily Beast’s Allan Dodds Frank about Madoff’s rise and fall, how much he believes the disgraced financier legitimately earned, and what investors can learn from the case.
You knew Bernie Madoff. What was he like?
He was very personable, although he was the arch-nemesis and competitor of the NYSE because his third-market business was our largest competitor for order flow, particularly at the so-called consumer end of the market transactions of 5,000 or less; he was very effective at buying order flow from broker-dealers to execute in his model away from New York. He was a likable person; he was involved in virtually every market-structure exercise from the late 1970s forward. He was always at the table with the organized markets and the SEC, and he developed a relationship with me and my predecessors that was very cordial.
So you’re telling me that he had a legitimate business?
Absolutely.
How would you describe it to a layman?
His broker-dealer, Bernard Madoff [Investment] Securities, executed orders in Big Board-listed stocks away from the Big Board that were given to that broker-dealer by other broker-dealers in return for payment from order flow. He would pay a penny a share to many of the regional broker-dealers in the U.S. to effectively buy their order flow. And in return, he would execute those orders in-house, at Madoff [Securities], and take the risk of the offset—meaning that when he had an inventory, he would lay that inventory or sell that inventory back to the primary markets, principally to the NYSE. And when he had an exposure as a result of being short, he would cover, or buy shares to cover his risk on the primary markets. The broker-dealers who gave him that order flow effectively got a penny a share.
How did Madoff start to be a player in market-making?
He was a third-market maker in the…’60s and ’70s, but he was primarily not in listed securities. I think he did more in preferred stocks. Then, when the National Market System Act passed in 1975 and we proposed to the Congress the model of satisfying that being an intermarket training system, which linked all markets, listed and unlisted, together in listed securities, that’s when he really rose to prominence. He was the first third-market participant to be admitted to that system.
When you saw what he was doing, did it seem to be profitable to you?
Extraordinarily profitable, because remember during the period of time when he was doing it, the minimum price variation was 12.5 cents—meaning the tightest the spread could be was separated by an eighth of a dollar, which meant that if he paid a penny coming in and paid a penny going out—meaning a penny to the buyer and a penny to the seller—it was potentially 10.5 cents of profit for the Madoff organization.
How much money do you think he made?
Hard to quantify, but I wouldn’t be surprised if in a 20-year period—call it ’79 to ’99—his entity made $700 million to $1 billion.
So you think he might have made $1 billion legitimately?
It wouldn’t surprise me. Because he was the premier third-market maker in listed securities.
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The Daily Beast is dedicated to news and commentary, culture, and entertainment. We carefully curate the web’s most essential stories and bring you original must-reads from our talented contributors.
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Paul Schrodt is a writer living in New York City. He has contributed to New York magazine, Radar, and Esquire.com.
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Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime. He also is President of the Overseas Press Club of America, one of the many journalism organizations that protests the arrests of journalists abroad and repression of freedom of speech.
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Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime. He also is President of the Overseas Press Club of America, one of the many journalism organizations that protests the arrests of journalists abroad and repression of freedom of speech.
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Allan Dodds Frank is a business investigative correspondent who specializes in white collar crime. He also is President of the Overseas Press Club of America, one of the many journalism organizations that protests the arrests of journalists abroad and repression of freedom of speech.
exploora
This is amazing. Keep it up (no pun intended).
exploora
It is not news though that his market making business is legit, that is why they are able to sell it.
That is another reason why this fraud is so strange, he was making money on the market making business legit, the ponzi scheme was totally separate, they hired much lower educated people, had much lower technology, and this is common knowledge now, that is possibly why no one understood what was going on, accept the ones that were ignored, and who knows how many were being ignored, or talked to like fools.
The details are interesting anyway. Though it still does not explain why Madoff's accountant was allegedly allowed to audit the fraudulent fund, which we now know is a ponzi scheme, he may have not known it was a ponzi scheme, no one may have known except madoff, because this making market company was a great distraction, without going through the peer audit review which is required by his state, because he said he wasn't auditing.
The market making business is separate from the fraud. That is old news. This is why big media hardly ever breaks a story anymore, the last ones to know, it seems, is the big media.
exploora
"The calm as a cucumber was the clue", duh, because he was in control, most traders have to work with the emotions, that is big part of the course work, because the market is in control.
I was talking about the emotional training stuff to someone yesterday, and she said well people don't respond, don't do anything, that was the criticism at SEC, people were non responsive, that is why people have to be trained so they don't freeze up and get like that,
Being cool as a cucumber is different, than not responding, he probably had all the answers.
He was the one that turned himself in, no body discovered this, or if they did discover it, it remained private information, not available to the public. Until he turned himself in.
Derida
I hope Mr Grasso doesn't visit Bernie with a cake. Surely there will be a knife tucked inside. Family not involved- Hello???
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