No one doubts that Bernard L. Madoffis guilty.  He readily admits to running a decade-long Ponzi scheme in which, to quote the New York Times, “early investors are paid off with money from later victims, until no more money can be raised and the scheme collapses.”

Some commentators wonder what separates Madoff from 100,000 “legitimate” operators in the mortgage and investment business.  Paul Krugman gives one typical example of larcenous but technically legal behavior:

Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while – say, as long as a housing bubble continues to inflate – he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big – but he’ll keep those bonuses.

Krugman admits that Mr. Madoff’s scheme differed in a few particulars from the scam described in his hypothetical. “Still,” he says, “the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.”

We’re not talking about a few hustlers lining their pockets at the public’s expense; Krugman is describing an economic system rooted in illusion and deceit.  “In recent years,” he points out, “the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing – and it probably was – we’re talking about $400 billion a year in waste, fraud and abuse.”

The Securities and Exchange Commission (SEC) is trying to explain why ten years of allegations from a string of concerned citizens didn’t rouse them to action.  Despite repeated “investigations,” not a single witness received a subpoena. 

Maybe the federal government was too busy with the affairs of state to check up on Mr. Madoff.

Then how do we explain why the Department of Justice and the Federal Bureau of Investigation invested thousands of person-hours tying Alvin Clay to nickel-and-dime fraud in Little Rock, Arkansas?  

Ray Nealy and Donny McCuien manipulated the ignorance and greed of a few people for personal gain.  The documentary evidence is overwhleming.  Nor is there any question that Mr. Clay allowed Nealy and McCuien to use his contractors license to rehab five pieces of run-down property.  But here’s the big question: did Clay know that much of the rehab work on the invoices wasn’t being performed? 

Sure, Clay should have gone to the work sites and checked things out for himself, just as the good people bilked by Mr. Madoff should have asked themselves how the mega-profits were being produced.  Across America, millions of good people have been making bad decisions.   This is regrettable, but it isn’t illegal.

While the SEC was studiously ignoring Mr. Madoff, federal agents raided Alvin Clay’s office and seized his business records.  They researched hundreds of real estate deals.  Every one was legitimate.  

Which suggests that Alvin believed he was involved in a series of above-board, straight forward real transactions. 

Clay’s combined profit from five deals: $27,500.

Again, why did the federal government focus on such small potatoes while ignoring a fifty billion dollar (yes, that’s “billion” with a “b”) Ponzi scheme that was repeatedly brought to their attention by people with burning hair?

Simple, really.  The feds wanted to believe Alvin Clay was guilty and they wanted to believe that Bernard L. Madoff was a legitimate investor.

Clay was an aggressive attorney with a penchant for embarrassing federal prosecutors.  So of course he was guilty.  This explains why no one with the FBI or the DOJ made the slightest attempt to check out the grand jury testimony of Donny McCuien–the only witness linking Alvin Clay to illegal activity.  Had they done their homework, they would have learned, in a matter of hours, that every word proceeding from the mouth of their star witness was, to employ a seasonal expression, Humbug.

Alvin Clay and his attorneys have been making the phone calls that should have saved twelve white jurors from two weeks of tedium in June of 2008.  During the trial, McCuien testified that he never did rehab work, that he didn’t know how to do rehab work, that he had never hired anyone to do rehab work, that he had never owned the tools of the rehab trade, and that (the coup de grace) he had never owned any real estate property.

None of it was true.  In fact, it was grossly, fabulously, comically false.  McCuien was running real estate scams before he met Ray Nealy and he continued his low level Manoff impersonation even after he was indicted by the feds.

Federal agents didn’t check out McCuien’s story because they knew, deep down where it hurts, that he was feeding them pretty lies to avoid aggressive prosecution.  McCuien made his money telling people what they wanted to hear; this scam was no different than all the others.

The feds wanted to believe that Leonard L. Madoff was a straight-up investor because, like thousands of less adventurous investors across the nation, the New Yorker was making so much money for so many people.   

Is there any real difference between Madoff and your average investment banker? 

Sure.  Madoff knew he was trading in dreams; everyone else was hoping there might be some real value behind the funny paper they were peddling.

Either way, whether we’re talking about Clay or Madoff, we’re in the realm of magical thinking.  The collapse of the investment industry tells us that most people, even agents of the federal government, trade in greed and self-delusion unless someone is keeping tabs.

On January 6, 2009, Mr. Clay and his attorneys will be back in federal court with boxes of evidence showing that Donny McCuien lied to the federal government.  They will not attempt to prove, because it would hardly help their case, that the feds knew the true worth of McCuien’s testimony but gave it a AAA rating anyway.

Friends of Justice will be in the courtroom.  Will a hard-working Little Rock lawyer take the rap for the sins of a nation?   The question will soon rest in the capable hands of federal judge Leon Holmes.