Bernie Madoff Is Actually Quite Boring

It almost sounds like a joke: Bernie Madoff is so boring he had to smoke pot before he had sex with his mistress. Except that’s one of the real revelations from Sheryl Weinstein, the former Hadassah executive who was also his victim and lover.

The truth about Bernie Madoff is beginning to come out thanks to a slew of revelations from books published this month (with yet another still to come) and a series of guilty pleas. As prosecutors appear to be closing in on Madoff’s family members, we now know what was going on behind that sly, smug smile that incensed the world: nothing of any interest.

Indeed, as a person Madoff is so boring that even news of an extramarital affair with one of his victims, unleashed by the New York Times last week, does little to help him live up to his billing as the evil genius of the market collapse. Even his financial deviancy was overblown. Edward Jay Epstein noted in his multi-book review in the Wall Street Journal that the often-repeated figure of a $65 billion fraud is a canard. Epstein cites the court-appointed trustee’s interim report for a figure of $13.7 billion lost from 1995 to 2008.

So why is it that these books can’t ever seem to make Madoff live up to the hype? Two of the three Madoff books—Jerry Oppenheimer’s unfortunately titled Madoff With the Money and Andrew Kirtzman’s Betrayal—try every trick to generate interest in the criminal mastermind and turn the Madoff story into a melodrama. But the man himself disappoints. A tendency toward clean-freak behavior and parents who had their own run-in with the SEC are about all we get for color and motivation. Madoff the man remains every bit the cipher that his iconic, enigmatic smirk implied.

Unfortunately for the authors of these books, the Madoff story is moving too fast for their meager scoops to keep up. So let’s see if we can weave together a fuller picture using everything that’s come available. The feds continue to make progress (indictments are imminent after Labor Day, we’re told), but in the process we’re also discovering that Madoff’s fraud was horrifyingly simple—billions of dollars flowed through just two JPMorgan (JPM) accounts—but the world of hedge funds and money managers that enabled the fraud is dizzyng in its complexity.

“It was all a fake,” said Frank DiPascali Jr., the 52-year-old enforcer who started working for Madoff right out of high school and eventually became the brusque contact man for many of the families who believed they had managed accounts with Madoff. DiPascali pleaded guilty to 10 charges in federal court last week, his every utterance repeated in all the papers.

“It was all fictitious,” DiPascali repeated before vowing to cooperate with the prosecution and possibly bring a larger circle of accomplices to justice—which might include family members Madoff is seeking to shield. DiPascali confirmed for the first time that Madoff was already fudging accounts in the 1980s.

Indeed, as the prosecutors and authors sift through what little information they have, it would appear that the money Madoff managed was never actually managed. His stash started as millions of dollars from friends and family members. Madoff may or may not have been using the money to fund the expansion of his broker-dealer business—the business that made his reputation as a pillar of the stock trading community and a pioneer of democratizing capital markets. But all the funds eventually became billions of dollars sitting in an enormous slush fund. It ended when one of the accounts held only $5.5 billion against $6 billion in redemptions.

No matter. The real story behind the Madoff fraud lies not with Madoff or even his family. The money manager’s genius was to shield himself behind intermediaries like Ezra Merkin, Walter Noel, Sandra Manzke, and Sonja Kohn—the so-called feeder funds. They are the meat here, as Erin Arvelund’s Too Good To Be True shows us.

The feeder funds cultivated clients and managed expectations and relationships. As far as most of Madoff’s victims were concerned, they were invested with the Fund of Funds. Madoff insisted on remaining anonymous—for reasons that are obvious now—and most of the feeder funds were happy to oblige.

Several observers in Arvelund’s book remind us that the feeder funds weren’t selling get-rich-quick schemes like the usual Ponzi operations. Madoff’s victims were already rich. They had access to a variety of volatile hedge funds with spectacular returns and violent risk profiles. But that’s not what they wanted; Madoff provided an alternative.

Madoff’s father-in-law helped Bernie break into the asset management business by promising a steady 20 percent return. But that eventually declined to an unspectacular 8 percent to 12 percent as Madoff reeled in more feeder funds. Bernie didn’t need the fireworks. You don’t have to play home-run ball to attract the no-questions-asked money. You just have keep hitting doubles in any weather. No hedge fund markets itself with that kind of return. It’s just too low. As long as Madoff could keep the lower returns consistent, more money than he could have hoped for came to him.

Madoff’s preternaturally consistent returns were the magic ticket for wealthy people—especially the rich Europeans and South Americans targeted by Sandra Manzke’s Tremont Capital, Walter Noel’s Fairfield Greenwich, and Sonja Kohn’s Bank Medici. Had Madoff stuck with his friends-and-family scam, there would have been little to distinguish him from a handful of other rogue money managers exposed by the market’s crash because he could never raise the billions the feeder funds produced. Madoff went from no-name shmendrick to a symbol of the age, though, when he went global.

In almost every case, the feeder funds were run by upstart money managers using Madoff’s magical returns as a way to break into the business of lucrative fees. Each firm had inflated its expertise and sought out either very old money or the newest of new money. Where older, more established firms were involved, like Safra Banking Group or Edgar de Picciotto’s Union Bancaire Privée, special circumstances overruled the company’s safeguards.

UBP lost less than $1 billion. Fairfield Greenwich and Bank Medici lost everything. Tremont’s assets were just auctioned to cover some small portion of the $3 billion it lost for investors. What once elevated the feeder funds now made them pariahs. Of course, Thierry de la Villehuchet, who ran the now tragically named Access fund, lost so much more than the $1.4 billion he managed through Madoff.

De la Villehuchet had the odd distinction of marketing erstwhile Madoff whistleblower Harry Markopolos’ own options-based strategy in 2002. As Markopolos traveled with the French aristrocrat, he cringed at the Madoff parallel but finally came to understand the secret of Madoff’s fraud. De la Villehuchet and dozens of other money managers were convinced that they had special access to Madoff’s magic steady touch.

De la Villehuchet could not bear the shame of having brought the scam to the heart of Europe’s establishment. Proud of his access and aristocratic heritage, but ashamed of his complicity with Madoff, he took the only Old World remedy left to him: suicide. That, it turns out, is the only real pathos and drama that this story has produced.

Marion Maneker is the former publisher of HarperCollins’s business imprint.

Bernie Madoff Is Actually Quite Boring