The more we peered into the world of Bernie Madoff last week, the weirder it looked. Madoff had become a Wall Street legend over 30 years thanks to the depth of his knowledge, stellar trading record and, more importantly, his old-fashioned, word-is-my-bond way of doing business. And it was all a lie. A $50 billion lie.

That’s what Madoff said when he confessed his alleged fraud to his sons before the FBI came to arrest him. He said the respectable façade concealed a simple Ponzi scheme, where money is siphoned off while investors are kept happy by the recycling of cash from new arrivals.

Even this admission leaves questions unanswered. How could Madoff have kept such a scheme going so long, and on such a large scale, without it having collapsed much earlier? Did he operate some kind of hybrid, with real investments being made to look good by Ponzi extraction when necessary? How was he able - almost single-handedly, if you believe that his sons and other family members were not involved - to generate the enormous quantities of fictitious paperwork necessary to deceive investors and, latterly, the Securities and Exchange Commission (SEC)?

Another question is why so many smart investors fell for it. Clever, professional fund managers such as Arki Busson and Nicola Horlick (and they just happen to be the most high-profile ones) had money sunk in Madoff, normally through intermediate “feeder” funds.

Yet one of the rules of the Madoff operation was that it never explained its methods. Many in the fund-management industry followed the simple rule of no due diligence, no investment, and were spared the debacle. Why, then, were Busson and Horlick investing? They are right to rail against regulators for failing to spot the alleged fraud, but here, surely, a good dose of caveat emptor applies.

One of the best takes on Madoff comes from Michael Ocrant, a former New York financial journalist who has written about the saga for us this weekend (see preceding page). In 2001, Ocrant wrote the first serious piece questioning Madoff and his returns, based on evidence he had received from respected industry figures - including some of the original traders who told the SEC what was going on nine years ago, and were ignored.

When I called him, he was over the moon. He also thought zealous regulation in response to the scandal was the last thing that was needed. The problem was not the regulation, Ocrant said, but the regulators, who needed to stop recruiting keen young things with no experience and get some serious market professionals on board, people who won’t just tick boxes, but delve into what is really going on. Unless that happens, the new rules will just be another set of barriers for the Madoffs of this world to dodge round.

Darling’s dilemma

ALISTAIR DARLING is taking a two-week break over Christmas, during which the chancellor will have a lot to mull over - in particular the state of the UK banking industry. The government is now the biggest player on the scene thanks to its ownership of Northern Rock and Bradford & Bingley, majority control of Royal Bank of Scotland and large minority stake in Lloyds TSB/HBOS.

Earlier this year Darling pumped billions into the banks to save them from collapse, and in return was put into a position of ownership. Now more ominous creaking and groaning is coming from the banking sector.

Charlie Bean, deputy governor of the Bank of England, let the cat out of the bag during the week when he said more government money would be needed to recapitalise British banks, a remark that was instantly slapped down by Darling. On Friday, however, Standard & Poor’s, the credit-rating agency, downgraded the creditworthiness of 11 of the world’s largest banks. In the UK, Barclays and RBS were marked down a notch.

Darling has a double headache. First, he doesn’t want to put in any more money, but desperately wants the banks to start lending again in order to stimulate the economy, something they may not do unless they are happy with their own financial strength, and that of rivals and counterparties.

Second, if he is forced to inject more state support, he doesn’t want the end result to be nationalisation. Yet if he simply buys more shares in the likes of Lloyds TSB/HBOS, that will be the outcome. It’s a tricky situation - how to bolster the banks without taking control? Ministers and their advisers have some hard thinking to do over Christmas.

Even if the capital levels are right, it won’t necessarily bring money flooding back into the economy. Last week I heard of a FTSE 100 company that went to its banks for a refinancing and was told it could have the money - if it paid interest of 6.5 percentage points over Bank rate. If this sort of lending climate continues, we are likely to see many more company collapses next year.

Steep descent

ONE industry that would have you believe it is cruising serenely above the clouds of the credit crunch is jets. There is no shortage of ra-ra executives in the industry, who talk about the large number of wealthy individuals who remain unscathed by recession, and continue to hire aircraft in the way you or I might hop on a bus.

I don’t buy it. Most of the companies making such blithe predictions are privately owned, so it is almost impossible to verify just how their businesses are doing. There is one company that is listed, however: Air Partner, one of the world’s largest corporate-aircraft charter businesses, which is quoted on the London exchange. Earlier this month it issued a profit warning, saying forward orders were 50% down on this time last year.

I know which of the two versions I believe. Not even the moneyed elite is untouched by the credit crunch, and another source of bookings, investment bankers, are grounded. The glitzy world of the private jet may be brought down to earth sooner than some think.

The year’s best

LAST night’s Strictly Come Dancing final was all very well, but what everyone wants to know is who will win our Businessperson of the Year award. We had a hard time coming up with 10 winners in a year of losers, and no doubt many will disagree with our choices.

Let us know what you think at businessperson2008@sunday-times.co.uk

John Waples is away

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