The weather is hot and humid, but a soft west wind is making the Long Island shore a little more comfortable. Bernie Madoff’s calendar shows that his son Andrew and Andrew’s children are to spend this weekend with him and Ruth at the beachfront home in Montauk.
Anyone who leaves the beach and switches on the television today will find the news almost unthinkable: the federal government is seizing control of Fannie Mae and Freddie Mac, the two largest mortgage finance companies in America. The bailout is the brainchild of US Secretary of the Treasury Henry Paulson, and its price tag is rumoured to be in excess of $25 billion.
The alternative could be far more costly. Fannie Mae and Freddie Mac have issued billions of dollars in publicly traded debt backed by home mortgages. Fears about the quality of those loans is driving investors out of the credit markets; money to finance new mortgages is drying up.
Andrew Madoff surely knows this news will roil the markets tomorrow, and he and the other traders at his father’s firm will probably have a gruelling day.
Privately, Bernie Madoff knows this news will further alarm his institutional investors, especially the overseas hedge funds he is fleecing through his Ponzi scheme.
But no one without a crystal ball could know that this epic bail-out—detailed under outsize headlines in all the next day’s newspapers and debated on television talk shows as an unwarranted and dangerous intrusion of the federal government into the private sector—will soon look like a mere footnote to the calamity bearing down on Wall Street.
MONDAY, SEPTEMBER 15, 2008
September is the perfect time to visit the south of France. The air is sweet and fresh, the vineyards are glowing, the sea is vivid and clear. Bernie and Ruth Madoff and some friends had come over on the company jet before the weekend. They plan to fly on to Italy after a few days here at the Madoffs’ small stucco town house, tucked into the rear corner of a modest complex called Château des Pins.
But the news from New York is so alarming that the Madoffs and their guests probably just hover inside around the television, ignoring the sunshine on the hills above Cap d’Antibes.
Lehman Brothers, one of the most fabled names on Wall Street, filed for bankruptcy this morning, after a frantic weekend of failed negotiations with bank regulators and government officials. US Treasury officials refused to throw the firm a lifeline; the Fed did not offer financial backing to attract a willing buyer. This time—after Bear Stearns, Fannie Mae, and Freddie Mac—there was no bailout. It is the largest bankruptcy in American history.
Within hours there are dire predictions that another Wall Street giant, the insurance firm American International Group, is sinking under the weight of its derivative losses. Beset by fear and seeking capital, executives at Merrill Lynch are rushing into a shotgun wedding with Bank of America. The stock market seems to be in a death spiral, and even seasoned Wall Street veterans are shaken by the faint trace of panic they hear in the voices of customers, regulators, and television commentators.
“Let’s go home.”
It is the group’s decision, really, not just Bernie’s. Something deep in the bedrock of Wall Street is cracking, and the tremors can be felt even here. There are calls to the airport to ready the jet. Bags are quickly packed. As the aircraft streaks up to its cruising altitude, perhaps Madoff takes one last look at the charming landscape dropping away beneath him.
He is flying into the financial storm of the century; he will not fly out again.
TUESDAY, SEPTEMBER 16, 2008
The financial world is reeling.
Lehman Brothers is in bankruptcy. The sale of Merrill Lynch to Bank of America is seen as a fire sale, and the stock prices of all the brokerage houses and banks are tumbling. The overall market was down a stunning 5 percent yesterday as regulators grappled with whether, and how, to rescue AIG, which was on the brink of defaulting on its derivative-based obligations to other giant institutional investors around the world.
The Treasury announced a rescue package for AIG this morning, but unexpected cracks from the impact of Lehman Brothers’ collapse are showing up elsewhere. Today, The Reserve fund, the nation’s oldest money market fund, “breaks the buck” by reporting a net asset value of less than a dollar a share. The news feeds the growing panic. If this financial crisis can infect even supposedly secure money funds, for decades the middle-class substitute for a bank account, there is no safe haven.
At Fairfield Greenwich Group, whose wealthy investors have long thought of Madoff as a sort of plutocratic money market fund, clients are seeking clarity and comfort.
Today the group sends out a reassuring “Dear Investor” letter from Amit Vijayvergiya, the chief risk officer. He quickly mentions that the Sentry fund has no exposure to Lehman, Bank of America, or Merrill Lynch. “Currently,” he continues, the Sentry portfolio “is fully invested in short dated US Treasury bills.”
In this storm, you can’t get any safer than that. So this is great news for Fairfield Sentry investors and further proof of Madoff’s mastery of the markets.
Or it would be, if it were true. But it’s not; it is a half-truth based on a lie wrapped in a mistake.
The previous day, in an e-mail to colleagues at 10:55 AM, Vijayvergiya reported on a conversation he’d had with Frank DiPascali, who was manning the phones on Madoff’s mysterious seventeenth floor. DiPascali told him that almost 20 percent of the Sentry fund was still invested in stocks and options, the scene of the worst market carnage. And this wasn’t likely to change for a day or so because Madoff and DiPascali “do not want to sell into weakness today and are looking for an exit opportunity tomorrow morning or Wednesday.”
In a follow-up call later that Monday, DiPascali said he was “looking to do an orderly exit tomorrow,” Vijayvergiya told his partners. Tomorrow is here and the reassuring letter has been sent out, although it is not accurate: DiPascali has not confirmed his “orderly exit” from the highly disorderly market.
The entire notion of an “orderly exit” is a fantasy, of course. There is nothing to exit. There are no stocks to sell, no Treasury bills to buy, no strategies to unwind. It’s all a charade.
It is a lie that will not match the next set of lies from Madoff and DiPascali. A few days from now, Fairfield Greenwich will get the account statements for these harrowing days. They will show that Madoff will not reach the safe harbour of Treasury bills until Friday, three days from today. The account statements are all lies, too, but an increasingly frantic DiPascali apparently is losing track of which lie he’s telling to whom.
MONDAY, SEPTEMBER 22, 2008
Washington is one big war room, as regulators at the Federal Reserve, the Federal Deposit Insurance Corporation, the Treasury Department, and the SEC all try to fight the panic that is breaking out on a half-dozen fronts. Trying to stem the stock market sell-off, the SEC is reviving an emergency measure it temporarily imposed in July. It is a rule that would have impeded Madoff’s ability to carry out his complex split-strike conversion strategy—if he had actually been trying to do so. The rule bars short sales on financial stocks, some of which have long been included in the portfolios of Madoff’s feeder funds.
In an exchange of e-mails today at Fairfield Greenwich, a partner frets about the impact of the rule on Madoff and his counterparties, the big banks supposedly handling his options trades. Another partner asks a more fundamental question: Why are the banks willing to deal with Madoff at all right now, given how close to paralysis the markets are? His understanding is that banks are “not providing risk capital to anyone,” he adds.
Frank DiPascali will try to reassure the nervous partners that the financial stocks have been pruned from the strategy, so the short-sale ban isn’t a problem.
But the key question remains. In the midst of this spreading panic, why would any bank still be willing to trade billions of dollars’ worth of increasingly risky options with Madoff?
The most obvious answer is the most unthinkable one: they aren’t.
; TUESDAY, SEPTEMBER 23, 2008
Bernie Madoff’s calendar shows a visit today from Sonja Kohn, the founder and controlling shareholder of Bank Medici, her boutique bank and investment firm in Vienna. The vibrant Austrian usually sails into Bernie’s private realm like a grand duchess, beaming and delighted to see everyone—there’s almost a celebratory air to her visits. Kohn has known Madoff personally for more than twenty years, and the relationship has made her rich and respected all across Europe, a far cry from her pre-Madoff status as a simple Wall Street stockbroker.
So much has changed since Kohn’s last visit, in November 2007. Back then, the Bank Medici network of Madoff feeder funds was still reporting investment gains. By and large, the funds were still solid sources of cash for Madoff’s hidden Ponzi scheme. But the anxiety that has gripped the market since “the Lehman weekend” is undermining even his most unshakeable investors.
Neither knows it, but today is Sonja Kohn’s last visit with Bernie Madoff. There is no independent account of what is being said inside his glass-walled office—indeed, according to the trustee, Madoff routinely directed that all records of his dealings with Kohn be destroyed—but the cheque book he uses for his Ponzi scheme suggests that the news is bad.
Nine days from now, Madoff will write a cheque for $113 million to cover redemptions from the Herald fund, a mainstay of the Bank Medici network. A month later, he will write the fund another cheque for a staggering $423 million. More than a half-billion dollars in cash is about to pour out of his bank account, at the worst possible time.
If this is the news that Sonja Kohn is delivering to her friend Bernie Madoff today, there is absolutely nothing for him to celebrate.
WEDNESDAY, SEPTEMBER 24, 2008
The cheque is for $10 million.
For a change, it is written to Bernie Madoff, not by him. It represents the assets of thirty-five trade union pension plans managed by a single trustee. These small pension plans have been ideal victims for his Ponzi scheme. The money flows in on a regular schedule, the claims for withdrawals are typically small and predictable. These funds are not as large as the ones he once coveted, but their money adds up.
It is extremely welcome today.
Next week, Cohmad Securities will expect its monthly cheque representing its commissions for introducing investors to Madoff—a precise payment of $214,722.03. Also, in his role as the family banker, he’s promised to help Andrew purchase a new Upper East Side apartment, one of just a dozen units in a modern seven-storey boutique building on East Seventy-fourth Street. The unit has a price tag of more than $4 million.
Of course, it would be safer for Bernie if he ignored Andrew’s loan request and simply added the entire $10 million to the Ponzi scheme’s bank account, which is being rapidly drained by jittery hedge fund withdrawals.
Perhaps Madoff is worried that it would create too much suspicion if he were suddenly to refuse his younger son after so many years of largesse—and after he loaned an even larger sum to Mark for the Nantucket home he and his wife purchased in June. Or perhaps Madoff just wants Andrew, the son who battled cancer and was spared, to have this sleekly beautiful apartment.
The one thing he has no intention of doing, however, is investing the $10 million cheque so that it can generate money to cover hardworking union members’ pensions in the years to come. He pours it into the river of cash that nourishes his fraud and benefits his family, as he has done so many times before.
But surely he can see that the river’s flood stage is long since past.
THURSDAY, OCTOBER 2, 2008
The Fairfield Greenwich offices, high in a forty-storey tower on East Fifty-second Street, are just a few blocks from Bernie Madoff’s suite in the Lipstick Building. It would be an easy walk on this cool, overcast day.
The three men making the journey—Jeffrey Tucker, Walter Noel, and their younger colleague, chief counsel Mark McKeefry—need to get some answers about an investment strategy that seems to be defying gravity. All the tools that Madoff relies on, from blue-chip stocks to privately negotiated options, are encased in the icy fear now gripping the markets. In this climate, who on earth is willing to trade with Madoff? The question has tortured some Fairfield Greenwich partners for weeks.
Tucker, Noel, and McKeefry file into Madoff’s offices. Frank DiPascali joins them from the seventeenth floor; Amit Vijayvergiya is hooked in by telephone, perhaps from his office in Hamilton, Bermuda.
Madoff starts applying his magic formula: exclusivity, confidence, masterful knowledge. He reminds them once again that he shouldn’t even have to submit to these due-diligence quizzes, given how much in demand he is among global investors. He mentions that a friend at JPMorgan Chase asked him to meet with some of that formidable bank’s due-diligence people from London and he simply refused. “Same thing one week later,” he says, sounding disgusted. He refused again. He doesn’t need to shake a few hands and show a bunch of people around his office.
He tells them confidently that his market-making business is getting more profitable than it’s been in several years. He still has “access to liquidity,” he says casually, as if the entire world were not frozen by panic. There’s a lot of liquidity out there for his “split-strike conversion” customers and his market-making business, too. He’s doing just great, despite all the turmoil.
Tapping his deep knowledge of the market’s history, he explains exactly how other Wall Street firms got into trouble: With the shift away from partnerships to publicly traded brokerage houses, managers had no incentive to stay on top of their business. All they cared about was hitting the next quarter’s earnings estimate. To do this, they dabbled in exotic products they never understood and took on too much debt. He knows to avoid those pitfalls, he says, because he’s built his business from the ground up.
It is vintage Bernie. But it doesn’t address the questions posed by the men from Fairfield Greenwich.
Madoff simply refuses to name the employees at the firm involved in executing the Sentry fund’s strategy. He won’t discuss the firm’s succession plan. He won’t identify the people whose signatures are required to move money out of client accounts. Most disappointingly, he will not identify even one of the “large institutions” who are the counterparties to his options trades—“for obvious reasons,” he says.
No one presses him or challenges him to explain why he can trade when no one else can. No one asks him about the improper options trades their consultant in Colorado discovered last spring. No one presses him on anything, really—even though e-mails were flying around their offices just a week ago fretting over how Madoff was managing to function when even the foreign currency market, one of the deepest and most active in the world, was almost at a standstill.
Nevertheless, Madoff and DiPascali both emphasize calmly that everything discussed today must be kept confidential.
In letters and e-mails to clients next week, the men from Fairfield Greenwich will put the best possible spin on this visit. But as they file out into the October chill, they still do not have the answers they need to stem the rising tide of anxiety among their investors—or the rising tide of cash flowing out of Fairfield Sentry.
WEDNESDAY, OCTOBER 8, 2008
Bernie Madoff’s client Stanley Chais is in town from Los Angeles, staying at his Fifth Avenue apartment overlooking the first splashes of autumn colour in Central Park.
In his early eighties, Chais is still an attractive man, tall and rugged with a deep tan, tidy white hair, and a dashing film-star moustache. But he is increasingly frail, battling a rare blood disorder, and in June he wrote investors in his partnerships that his son Mark is going to take over the administration of those accounts.
The Chais accounts have been draining cash from Madoff’s bank account all year, and Chais made another small withdrawal yesterday. They’ve had a long and apparently warm relationship, but Madoff privately wonders if Chais suspects his fraud. Is he toying with Madoff, figuring he’ll have to comply with any withdr
awal request rather than risk exposure?
Madoff isn’t sure, and he can hardly ask. Later, Stan Chais will deny vehemently that he knew anything about Madoff’s fraud when he made these withdrawals or, indeed, at any time during their long relationship.
To be sure, the cheque Madoff wrote for Chais yesterday is tiny compared with the hundreds of millions in assets that Chais’s accounts supposedly hold, wealth that will vanish when Madoff’s fraud collapses.
From Madoff’s perspective, the cash draining from Chais’s accounts is trivial compared with the amounts he has wired recently to the Kingate Euro fund, one of his oldest offshore feeder funds.
No, a client like Chais—whose phone number is the first one programmed into Madoff’s speed dial—can never do the kind of damage to his teetering Ponzi scheme that can be inflicted by a few skittish international hedge fund clients.
As a crisply clear day ebbs into a cloudy night, Bernie Madoff and Stanley Chais meet at Fred’s, the warmly lit restaurant on the ninth floor of the upscale Barney’s department store on Madison Avenue—just two old friends having dinner.
THURSDAY, OCTOBER 16, 2008
The day gets off to a bad start for Amit Vijayvergiya. It starts with a call from the derivatives desk at JPMorgan Chase, one of the global banks that have structured and sold complex derivatives designed to track the performance of the Fairfield Sentry fund.
Vijayvergiya listens as the bank staffer poses a series of questions about—what else?—Bernie Madoff. The bank’s questions have become more frequent and insistent, and nothing Fairfield Greenwich says about Madoff seems satisfactory.
Then the bank sends in its upcoming redemption requests, and they are a shock. An executive in Fairfield’s London office had been trading e-mails with a contact at the bank within the past week, but the redemption amounts discussed, a few million euros, were almost routine. Today’s request is much larger than its original estimate.
Bernie Madoff, The Wizard of Lies Page 26