So it appeared that Madoff had guessed correctly when he raised his rates, and his gamble paid off. Investors were still more interested in high profits than in safety. And, of course, his investors—whether hedge fund managers or heartland retirees, leading economists or lagging industrial unions—all privately convinced themselves that, with Bernie Madoff, they were somehow getting both.
Beneath the surface of public attention, things were already crumbling by late summer of 2007—for Madoff and for the global economy.
In Madoff’s own realm, bankers and hedge fund administrators were quietly growing more leery of his secrecy and consistent results. The proliferation of his hedge fund investors and the construction of all those complex derivatives had increased the amount of attention he was getting in banking circles. A number of bank due-diligence teams were growing increasingly worried by what they were learning—and not learning—on their visits with the managers of various Madoff feeder funds. By 2007, executives at one giant bank serving his hedge fund clients were looking for ways to immunize themselves legally from any responsibility if whatever Madoff was doing ended badly.
Even Madoff’s own longtime banker, JPMorgan Chase, was growing suspicious—or, at least, some of its high-level executives were. On June 15, 2007, the top risk-management officer at Chase’s investment bank sent a lunchtime e-mail to some colleagues. “For whatever its worth,” he wrote, “I am sitting at lunch with [another senior Chase executive] who just told me there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a ponzi scheme.” Luckily for the Ponzi scheme, Chase’s retail bankers had not increased either their scrutiny or their scepticism, so Madoff could still move billions of dollars in and out of his Chase accounts, no questions asked. But the whispered doubts about him were getting louder every day.
On the larger stage, the foundation under Wall Street’s house of cards was beginning to shudder. Mortgage defaults were rising, mortgage derivatives were weakening, and Wall Street banks and analysts were worrying about the debts of a host of insurance companies and hedge funds that were heavily invested in those crumbling mortgage-based derivatives.
Even if most civilian stock market investors still saw no cause for alarm, did Bernie Madoff, with his “feel for the market”, sense how fragile the situation had become? Did he catch wind of the increasingly sceptical whispers and suspect that his time was running out?
Perhaps. For whatever reason, 2007 was his year of living extravagantly, his year of living like the feeder fund kings whose lavish lifestyles and big-ticket shopping he had helped make possible. In March he took delivery of a custom Brazilian-made jet, decorated, like his office, in tones of black and grey. The plan was to put the jet up for charter to defray the cost—it had cost him and his co-owner at least $24 million—but it still made family travel luxurious. In June a new $7 million yacht was delivered to a mooring near his town house outside Cap d’Antibes, in the south of France. This gleaming white addition to the Madoff armada was a streamlined eighty-eight-foot Leopard “Superyacht” with three guest staterooms, each with a private lavatory, and three berths for the crew. In the spring, Madoff attended a series of expensive charity events—at a $50,000 table here and a $25,000 table there, he sat in his English-tailored tuxedo smiling a little and sipping Diet Coke.
He entertained a cosmopolitan parade of visitors at the Lipstick Building: Manuel Echevarria from Banco Santander’s Optimal funds; Patrick Littaye, from Access International; and Carlo Grosso, the Italian based in London who ran the Kingate funds, one of his earliest feeders. Things were still looking good; sales were strong.
In the spring, Madoff attended a Hofstra University benefit honouring Frank G. Zarb, a Wall Street veteran who had been recruited to pull the NASD out of its 1994 price-fixing scandal and who had crossed swords with Madoff a few times in regulatory battles.
Sponsors weren’t sure Madoff would even show up; although he was a Hofstra graduate, he had given very little to the school, focusing his philanthropy elsewhere. But he did attend the benefit and, at some point during the evening, approached Hofstra’s president and chatted about pledging $1 million to the school.
Madoff’s family also enjoyed the surging wealth, of course; why wouldn’t they expect to share in Bernie’s obvious success? Peter Madoff and Madoff’s sons may have known that the market-making business was down to tissue-thin profit margins. The proprietary trading desk’s profits were good but fluctuated with the markets. But, increasingly, those sources of revenue were dwarfed by the money supposedly being generated by Madoff’s hedge fund business. As they all knew, this was true at many Wall Street firms these days.
For years, as Madoff’s hedge fund business had grown, the firm had supported the family’s lifestyle in an ever-grander fashion. In the still-cloudless days of early 2007, it may have looked like it always would.
In 2007, Madoff doubled Frank DiPascali’s annual salary from more than $2 million to just over $4 million, a handsome payday for the helpful secondary school graduate from the New York borough of Queens. It wasn’t his sole source of income. Since 2002, DiPascali had taken about $5 million directly from the bank account Madoff maintained for the Ponzi scheme, falsifying the paperwork to make it look legitimate. He used some of the money to buy a new sixty-one-foot fishing boat and to fill his suburban New Jersey home with toys, ranging from a billiards table to a bright red popcorn cart. DiPascali neglected to share all his good news with the US Internal Revenue Service. He did not file his personal income tax returns for 2002 and 2006, perhaps because he was simply too busy with the paperwork for the Ponzi scheme. He wouldn’t file in 2007 either.
DiPascali’s colleague Annette Bongiorno, who had been working largely from Florida for the past decade and had handled administrative chores for Madoff for nearly thirty years, saw her salary and bonus triple in 2007, from $200,200 to $624,000. Prosecutors would later accuse her of playing a longtime role in the fraud, asserting that she handled the creation of phoney account statements for Madoff’s largest individual investors. She emphatically denied the charge and was scheduled for trial in 2011.
In mid-May, Bernie and Ruth left for southern France, where they would relax in their small villa for nearly two months. They played golf at various clubs and courses near the Mediterranean, enjoyed exhilarating excursions on the new yacht, and settled into the gracious rhythm of a French summer.
In the autumn, Madoff attended his niece Shana’s wedding to Eric Swanson, a former lawyer for the SEC. While Swanson was at the SEC—but before he started dating Madoff’s niece—he supervised one of the bungled Madoff examinations. An investigation later by the SEC’s inspector general concluded that, while the relationship looked like a conflict of interest, there is no evidence it had any impact on the unwise decisions that derailed that exam. For what it’s worth, Madoff would say later that he hadn’t even known Shana was dating an SEC lawyer until shortly before the wedding—Peter had not wanted to tell him, he said.
As always, Madoff was the “bank” for family and staff. He made loans to Shana to invest in an energy company that she and Andrew were putting together. He made loans to his sons and several employees. He agreed to loan his still-grieving brother $9 million and started planning a special gift for him: a vintage Aston-Martin automobile, like the one featured in the early James Bond films, to be delivered in the spring of 2008.
And on October 20, 2007, Madoff did a favour for Frank Levy, the son of the late Norman Levy, by appearing on a panel at the Philoctetes Center, which the younger Levy cofounded in 2003. The topic was “The Future of the Stock Market”, and Madoff gave a bravura performance.
“You have to understand, Wall Street is one big turf war,” Madoff said. “. . . By benefiting one person you’re disadvantaging another person.”
And don’t forget that it’s a for-profit business—a fact “which sometimes the regulators lose sight of, as do the academics,” he continued. “In every aspect
of it, the person that is buying the share of stock is convinced he knows something that the other person, who’s selling it to him, does not know.”
Madoff cogently explained the forces that automation had unleashed on the Street. “Wall Street—just so you understand the scale of it—is one of the few industries where the cost of doing business for the consumer has gone down dramatically, from a commission standpoint. Yet the expense of doing business, from the industry’s perspective, has dramatically increased. The cost of regulation has dramatically increased.”
He laughed and shrugged. “Now, no one is going to run a benefit for Wall Street,” he continued. “So whenever I go down to Washington and meet with the SEC and complain to them that the industry is either over-regulated or the burdens are too great, they all start to roll their eyes—just like all of our children do whenever we talk about the good old days.”
Responding to a question about how firms were surviving, he said, “Today, basically the big money on Wall Street is made by taking risks. Firms were driven into that business, including us, because you couldn’t make money charging commissions.” Trading for their own accounts—“that’s where the money is made.”
He also discussed the question of criminality on Wall Street. “By and large, in today’s regulatory environment, it’s virtually impossible to violate rules,” he said. “This is something that the public really doesn’t understand. If you read things in the newspaper and you see somebody violate a rule, you say, ‘Well, they’re always doing this.’ But it’s impossible for a violation to go undetected, certainly not for a considerable period of time.”
As he spoke, almost exactly two years after his Ponzi scheme had been on the brink of exposure, he was at the apex of one of the most staggering crimes in financial history. By one estimate, more than $12 billion from all over the world had poured into his Ponzi scheme in just the previous twenty-four months—and in the next twelve months, almost all of it would pour out again, finally shattering the façade he had maintained so successfully for so long.
10
THE YEAR OF LIVING DANGEROUSLY
WEDNESDAY, DECEMBER 12, 2007
Today is the first day of the last year of Bernie Madoff’s epic fraud.
The paperwork has been completed for a $9 million unsecured loan from the company to Peter Madoff, whose titles at the firm now include senior managing director, chief compliance officer, head of the options department, and (since a few years ago) chief compliance officer for the private money management business Bernie runs on the seventeenth floor.
Still, the Madoff firm is casual about titles—Bernie almost seems to make them up as he goes along. Peter’s primary title has always been “Bernie’s brother”. And this latest loan, to finance a real property investment, reflects this reality. Due in five years, it carries an annual interest rate of 4.13 percent, a very low rate given the uneasiness currently gripping the credit markets.
At most big firms these days, an executive’s request for a $9 million insider loan with a gentle interest rate would be coldly and firmly denied as “inappropriate”. While the stock market seems healthy, the credit markets have been deteriorating since late summer. The US housing market is starting to turn sour. Risks ignored just a year ago are starting to loom larger in the market’s mind. Even so, longtime employees of Bernie Madoff’s firm have no trouble borrowing cash when they need it. Bernie rarely says no.
But this loan to Peter—like all the insider loans that have come before and will follow in the months ahead—is sucking out cash that Bernie Madoff will need when the unprecedented turmoil bearing down on Wall Street finally hits.
Tonight is the firm’s annual office party, and employees are enjoying the margaritas and Mexican beer at Rosa Mexicano, a popular bistro on First Avenue, a few blocks from the office. This is the first time the firm has held its party here. Last year’s site was a trendy young-crowd nightclub called Au Bar, with loud music and dancing. This spot seems more compatible with the firm’s comfortable family-party style.
Ruth Madoff applauds the change in venue. “Book it for next year right now,” she says to one employee with a happy laugh.
The party might almost be a family reunion. Beyond his own family ties, Madoff’s employees work with their fathers, their cousins, their nephews, their stepsons, even their neighbours. Some of them—notably the staff on the seventeenth floor—were hired right out of secondary school and have never worked anywhere else.
The traders may joke about Madoff’s nearly obsessive demand that they keep their desks clear and tidy, and they may roll their eyes at his crude humour, but the firm still seems like a great place to work. Besides being generous with insider loans, Madoff also manages much of the money his relatives and other senior employees have saved: their deferred compensation and retirement savings. Although he is prickly and secretive about it, everyone knows that giant hedge funds and wealthy individuals are constantly jockeying to get Madoff to manage their money. Employees feel lucky that he is looking out for them, too.
There may be a hint of edginess in the air tonight. Madoff’s traders exchange jokes with the other traders at big Wall Street outfits, and lately, behind the laughter, they all are hearing faint rumbles from the approaching storm.
Perhaps it comforts them to reflect that Bernie Madoff has seen rough weather before—from the shaky markets right after the terrorist attacks in 2001 all the way back to the glut of unfinished paperwork that nearly choked Wall Street in the late 1960s. He’s seen it all and survived it all.
WEDNESDAY, JANUARY 23, 2008
On Madoff’s calendar, this evening belongs to New York City Center, the innovative cultural institution he and Ruth have supported for years and on whose board he has sat for more than a decade. The City Center is holding one of its crowd-pleasing performances, a tango tour de force perfectly suited to its distinctive Moorish-style auditorium on West Fifty-fifth Street in Manhattan. The faded facility, built as a Shriners fraternal society temple in 1923, needs an enormous amount of renovation work, and a major fund-raising campaign is already being planned.
As Ruth and Bernie slip into their seats, Wall Street’s growing anxiety about an approaching recession probably seems like a faint distraction. Madoff has at least $5 billion in the bank to sustain his Ponzi scheme, small bits of it contributed by people seated around him in this auditorium and giant slabs of it deposited by his global collection of hedge fund clients.
In theory, that cushion should see him through even a bad recession. But hedge funds hurtle into a trend, stampede out again, and swerve at unexpected moments like a herd of wild beasts. If they all panic at some clap of economic thunder, Madoff will be lucky to avoid getting trampled.
And if he goes down, many of the rich donors that City Center relies on will go down with him.
THURSDAY, FEBRUARY 14, 2008
Bernie Madoff catches a night flight to Palm Beach, where hundreds of his investors live. Among them is Carl Shapiro, the retired garment industry entrepreneur who has been a client since the 1960s. Shapiro is celebrating his ninety-fifth birthday with a gala organized by his daughters. The Madoffs are invited.
The party the next evening is a head-turning event, even for Palm Beach. There are armloads of orchids, towers of roses, and caviar and champagne in stunning abundance. The columnist Shannon Donnelly, the leading Palm Beach celebrity watcher, is on duty to collect the details, like the touching moment when Shapiro takes the microphone to serenade his wife of nearly seventy years.
Donnelly notices forty notable society names among the guests, including the owner of the New England Patriots football team and a well-known Chicago financier. She doesn’t mention Bernie and Ruth Madoff—their names are almost entirely absent from the local society archives in Palm Beach, even though they have owned a home on this thin, rich island for almost fifteen years.
Many of the guests who will be mentioned in Donnelly’s column are Madoff’s customers. It isn’t so much th
at they trust Madoff—if they know him at all, they probably sense the almost obsessive reserve that keeps most people at a distance. But they believe in Carl Shapiro, and Shapiro clearly believes in Madoff. How could you doubt Carl Shapiro’s judgement?
The birthday party is a great success. After some quiet conversation with the Shapiros, Bernie and Ruth Madoff say their farewells and slip into the soft Palm Beach night for the short drive through the Breakers Hotel golf course and along palm-lined Royal Poinciana Way to their home on North Lake Way.
An intricate banyan tree almost obscures the front of the house, throwing night shadows on the drive and scattering leaves on the narrow second-floor balcony. The home is deceptively large, stretching deep behind its modest façade. By local standards, it is not lavish—it certainly is less grand than Peter Madoff’s château-style home nearby, and it can’t hold a candle to the $33 million mansion owned by Bernie’s longtime client Jeffry Picower, on the ocean near the island’s southern tip.
As Palm Beach reckons such things, Bernie and Peter Madoff are newcomers. But Shapiro and his family have vouched for Madoff—Bernie listed Shapiro’s son-in-law Robert Jaffe as a reference on his successful application to the Palm Beach Country Club. Before long, dozens of multimillionaire club members would be fishing for a chance to meet Bernie, to invest with Bernie.
Bernie Madoff, The Wizard of Lies Page 24