Bernie Madoff died today, and he leaves behind a legacy of financial wreckage that stretched around the globe. His Ponzi scheme was the largest in history, wiping out some $65 billion in gains, albeit paper gains. The longevity of his scheme — decades — was breathtaking. He was without a doubt one of the most accomplished liars in history. Yet perhaps it takes a con man to know how the system cons us all. And Madoff understood the financial system as only a financial crook can. One thing he was certain of: They all knew.
Those who invested in his scheme were financially devastated immediately. In a second wave of devastation, some had to disgorge money they’d “earned” decades earlier, ruining even more people. Madoff’s downfall damage crashed a bank in Italy, led to suicide in France, and bankrupted small investors, too, as far away as taxi drivers in Latin America and as close as his immediate family. His sister-in-law went broke and ended up driving a car service to and from the airport to make ends meet. His oldest son hanged himself in shame in his Soho apartment. His other son died of a recurrence of cancer, which he blamed on the stress caused by his father.
I spent hours talking to Madoff during his years behind bars, and more hours listening to tape of his depositions from prison, exclusive material which offered insight into his crimes for my podcast. To the extent one can get into the mind of the greatest con artist of the age, I felt I knew him, or at least certain things about him. And I came to believe that Bernie Madoff was, in his way, a truth-teller. Madoff understood the workings of the financial system as few others did. Clearly he used that knowledge to sustain his con. The financial system’s attitude toward him was “willful blindness,” he said in one deposition.
When he was caught in 2008, as the financial crisis gripped America ever tighter, Madoff became a poster child for the misdeeds of that entire universe. The banks had pushed us to the brink of national ruin. But theirs was a complicated fraud, including such arcana as securitized bonds and overleverage. Their crimes weren’t easy to understand. Madoff, on the other hand, looked you in the eye, shook your hand, and then cut the shirt off your back. That was straightforward.
And so a narrative evolved. The systems, financial and to some extent judicial, cast Madoff as a rogue operator, a lone bad apple in an otherwise forthright arrangement. We were all hoodwinked, was the going line. He was that good.
Nonsense. The financial system enabled, weaponized, and profited handsomely from Madoff. Some hedge funds he did business with were nothing more than sales operations. They lured in clients with promises of due diligence and exclusive access. “I made them hundreds of millions,” Madoff said. It was true. And for doing what? Some simply took money from investors and handed it to him. For their trouble, they took a percentage off the top. They promised that they examined the details, but that simply wasn’t true.
I talked to people who pointed out that simple arithmetic could prove that his claims about returns on investment were impossible.There weren’t enough options in the world to do what he said he was doing. Had they been true, the size of his investments would have been like a hurricane in the markets. But the markets didn’t show a ripple.
This math was pointed out to financial experts, and they turned their backs. Don’t forget that eventually JPMorgan Chase, Madoff’s primary bank, coughed up a couple billion dollars and admitted that it was guilty of doing nothing despite suspecting his returns were fake. Fairfield Greenwich Group, a hedge fund, made hundreds of millions, feeding clients’ money to Madoff without due diligence. Later in his run, when no one could get into Madoff’s fund, financial insiders created their own funds that they said were indexed to Madoff’s otherworldly gains. Madoff didn’t make huge returns, but they were consistent no matter how the market performed, with the same returns reported year after year. J. Ezra Merkin, a hedge-fund owner who bought in, eventually had to sell his Rothkos. He had peddled Madoff’s wonders even after his lead fund manager told him that the gains were impossible. I recall that his verdict was something along these lines: “Madoff might have a ten-inch dick, but he couldn’t keep hard that long.”
Did the small investors know? Most of them didn’t. They trusted their financial advisors, those connected with institutions such as Banco Santander, who promised to keep an eye on Madoff’s operations.
Of course, Madoff wouldn’t let them in to see it. Once or twice he did, and at least one of those times, he set up a fake trade. He claimed he was trading with Europe while hiding the trading partner in a closet down the hall. There were so many red flags. He used outdated dot-matrix computer paper. When privileged customers complained of losses, he “corrected” them. He backdated returns to offer tax advantages. A prosecutor told me that in the earliest days of the scheme, Madoff’s “back office” included a grandmother without a college degree and the boy she used to babysit. They spread copies of The Wall Street Journal on the floor. They sat in rolling chairs, wheeled back and forth picking out historic trades that would explain his gains. They also made mistakes, citing trades on days when the market was closed, for instance. It was a creaky Rube Goldberg operation. No wonder Madoff would let hardly any of the financial overseers see it. They apparently didn’t care. After all, the risk was for the most part shoveled off to customers.
Madoff had started as an outsider, a Jewish kid from the outer boroughs hawking penny stocks. Snobbish Wall Street insiders refused him entrée. But he was enterprising and ingenious, legitimately shrewd. He computerized trading before it was popular. He reduced the spreads benefiting the small investor. His legitimate business brought in hundreds of millions — but he also had a wealth-management arm and that was a fraud. Madoff admitted later that the celebrity was irresistible. He was suddenly lauded. He became chairman of the NASDAQ. Investors clamored “to be with Bernie.” (Madoff was picky, part of his allure.)
Of course, he bears a large share of the responsibility for defrauding investors, although he liked to shrug that off. No doubt the notion of Madoff as another victim of the system is repulsive. But without the cold-blooded support of large financial players, Madoff would have been a local phenomenon, a tragedy limited in time and scope.
In the end, a few people went to prison, including the grandmother without the college degree, as well as Madoff himself. There, he was a rock star. Criminals were in awe of his “accomplishments.” A few financial institutions suffered financially, but as I said to Preet Bharara, the U.S. Attorney in Manhattan who prosecuted Madoff at the time, nobody with an MBA went to prison. “You hold accountable, criminally, people you can prove had knowledge and violated the law beyond a reasonable doubt in front of a jury,” Bharara told me when I pressed him about why the Feds only picked low-hanging fruit. It would seem that the financial institutions did perform some due diligence, mainly on themselves. They never got caught.