Photo: Wikimedia Commons
‘Bernie! Bernie! He’s our man, if he can’t do it, no-one can!’ But in the end the former lifeguard turned ‘investment broker to the right kind of people’ couldn’t even save himself. Perched on the upper floors of the Lipstick Building in Midtown Manhattan, Madoff, the son of a Polish plumber-turned-stockbroker from the outer reaches of the borough of Queens, built a revered reputation as the reigning wizard of investment. With year-after-year return rates of 10 to 12 per cent (sometimes soaring to 22 per cent) there were a lot of satisfied customers. It didn’t matter what the markets did, Bernie delivered the goods. The rich and famous bowed and scraped to have Madoff take care of their ill-gotten gains. Slum landlords and sweatshop owners in the rag trade joined Hollywood celebrities and pro-Israel charities as star clients. Major banks, like Spain’s Santander and the Anglo-Chinese HSBC Bank, added heft and respectability to the client list. Even hedge funds were impressed, with two of the biggest – Man Group and Clermont – getting in on the action. All sounded too good to be true? It was.
Madoff’s magical investment system – a flurry of periodic instant trades of futures, currencies and stocks guaranteed to produce quick ‘no risk’ profits – was all just a myth. In fact, what the Madoff organization did with all that money was pretty straightforward: what they did not spend they simply deposited in a business account in the Chase Manhattan Bank. As word of Madoff’s financial acumen grew, investment funds continued to pour in and statements were duly issued claiming returns that did not exist. The trick was a balancing act between paying off those who wanted to see some of their returns and ensuring that enough new money was coming in to cover the losses. This is called a Ponzi scheme, named after the early 20th century Italian-American swindler, Charles Ponzi. Madoff, having swindled $50-65 billion, is secure as the holder of the Guinness World Record for the biggest such scandal in financial history.
But by all accounts Bernie is a class act. Soft-spoken and supremely confident, Madoff ran his brokerage practice as a kind of exclusive club to which he was quick to deny entry to overly quarrelsome or questioning investors. He was politically well connected and lavish in donations to both Republicans and Democrats, although he favoured the latter (particularly the Israel-booster wing gathered around New York Senators Hillary Clinton and Charles Schumer). Madoff was a highly respected champion of such noble corporate practices as good governance, transparency and responsible regulation. He was generous in his donations, particularly to the cause of lymphoma research, inspired by his son Andrew, who suffered from the disease.
Championing industry regulation was an ironic Madoff preoccupation. Both he and his brother Peter were board members of the Securities Industry and Financial Markets Association (SIFMA) – the body charged with the self-regulation of the riskiest end of the financial industry. His niece Shana was active in SIFMA’s Compliance and Legal Division and is married to a compliance official of the federal Security Exchange Commission (SEC). It was ‘on the watch’ of the SEC that the whole US financial system has unravelled.
Bernie is a family man par excellence. His wife Ruth and both his sons and his nephew all worked for Bernard L Madoff Investment Securities LCC. But to his credit Bernie has taken the rap for the whole thing. If you believe him (and why not?) he was the only one to know about the multi-billion dollar fraud, pulling the wool over the eyes of both family and accountants. His sons, who have borrowed millions from the firm, were the ones who turned him in – ‘Heh, we couldn’t have known anything about it, we turned him in!’
But it has all gone now. The houses in Palm Beach and Cap d’Antibes on the French Riviera. The ranch house in Montauk, New York. The Leopard yacht and the fishing boat called Bull. So unfair! But it was good while it lasted.
Lessons to learn: next time some industry flack talks about self-regulation, roll your eyes. Next time some conservative politician tells you about the heavy hand of the state stifling private initiative, think of Bernie and laugh out loud. The old adage of ‘no honour among thieves’ continues to hold true.
But in the end, isn’t the whole hedge fund/derivatives market/futures trading scam just one big Ponzi scheme? Is Bernie just a scapegoat for a capitalism run amuck? Is he taking the rap not just for his family but for a whole class of financial wunderkinder who brought us the deregulated utopia in the first place?
Madoff's source of strength was also his undoing. His quiet confidence inspired trust in the rich and famous. But the rich and famous are not very forgiving. If only he’d just kept to ‘sticking it to’ poor subprime homeowners and laid-off workers he might still be able to put his feet up in that penthouse on East 64th Street.