Transactions: Jan. 12, 2009

Did you score your 10%? Were you happy with your 10%? There it was, shimmering through the smoke and shrapnel of whatever we're calling this mess this week, a fading chimera, like Fitzgerald's green light, of a bygone age: 10%, give or take a tenth. The number, of course, was the amount Bernie Madoff dispensed to his steadily inflating circle of friends and admirers. This occurred in up years and down years; years of crisis, years of plenty. Bernie was, well, a magician. But beyond his self-evident sleight of hand, the most interesting thing about this street-corner larceny blown up to gigantic proportions was that 10%. How did Bernie conjure up that figure? Did he dig deep into the Zeitgeist and discover that, lo, that was the veritable sweet spot of performance: the kind of expectations your run-of-the-mill rich pal would expect without taking on too much of the kind of risk favored by a racier bunch? The kind of performance that would satisfy, without attracting untoward attention? Double your loot in less than a decade. Beat inflation handily. Not bad, you bad boy. Indeed, the age now gone -- the Age of Madoff, now universally known as the Age of Made Off -- might legitimately be thought an era where risk-free expectations buzzed around, say, 10%. Bernie was a friggin' genius, if only for recognizing that.

Sorry Bernie. Age over. Right now, 10% might as well be 1000%. (Negative numbers were apparently verboten in Bernie's faux books in triplicate.) But we are now in an interregnum, a drafty hallway between two holding cells. The crisis will eventually end, and we will be deposited, like some renditioned soul, in a land we do not immediately recognize. The number will be different; odds are, lower. The disturbing fact is that historically that number is a lot lower. And we have some downside making up to do, although Bernie is helping us in his own small way. Even in boom years, 10% crowded the red zone, and only seemed reasonable because of the publicity showered on five-year, even one-year hedge fund wonders who would rack up 30% and still not get onstage at the Robin Hood ball. Remember when Eddie Lampert was the next Warren Buffett? Remember when Warren Buffett was still Warren Buffett? Anybody heard from Carl Icahn? Bill Miller?

There is a deeper theme beating weakly here. It involves investors, mostly institutions or richniks, but also -- this stuff trickles down -- milling crowds of just folks. Let's review a matchbook cover history lesson. The essential thrust of New Deal regulatory reform was to make the world safe for investors. Up to that point, even in eras where investment became a fad like the '20s, they were mostly on their own. Investment was viewed as a speculative enterprise, and the investing world was lousy with wolves, wolves dressed as sheep, sheep dressed as wolves and just sheep (Madoff, technically, was a wolf-sheep). But in the '30s came a recognition of investors as a class that needed protection; and a bracing belief that transparency and honesty might make everything work better. Skip ahead. The system worked so well that stocks, by the '50s, shed their outré reputation, and institutions emerged and began to pile in. Back then (and for many years), the Madoff Number was low, say 3%. But by the '60s, that inched higher and a performance culture swelled, which was dealt a blow in the '70s but resumed in the '80s. By then, investors -- and practically speaking that meant institutions, particularly as the milling crowd embraced them -- had achieved primacy, every one of which was supposedly above average. That was certainly the case as governance embraced the shareholder-centric model. And everyone from the Federal Reserve to CEOs to Uncle Harry came to accept the view that share prices were a proxy for economic (even general) welfare, except maybe better.

And so we wended our way to the totemic belief, as unrealistic as it was unshakeable, that a number, say 10%, was every investors' constitutional due. And how will we cope if that 10% flops back to, mercy me, 3% or less? We know how individual expectations were shaped by the Madoff Number. But how will underfunded pension funds saddled with Madoff-like performance goals cope? And as this structure readjusts to tightening new realities -- I hear screams in the next cell as readjustment commences -- how will we view performance? Will we continue to view investors as the closest thing to the peerless populi in this democracy of ours? Will we question a culture built upon equities? I won't offer a Madoffian certainty about this. But as fundamentals change, so do expectations. And in a world as meta as ours, expectations are everything but true.