But he couldn’t. “I got trapped in this hole. I never set out to just steal money,” he says.
But he was stealing money; he was running an enormous inescapable Ponzi scheme. If he didn’t plan to kill himself or go into hiding, how did he think it would end?
“It was almost like—it sounds horrible to say it now, but I just wanted the world to come to an end.” He pauses, glances at his lawyer, and shrugs. It does sound horrible to say it, but he continues, struggling to explain. “When 9/11 happened,” he went on, “I thought that would be the only way out—the world would come to an end, and I’d be dead and everyone would be gone.”
He knew that sort of oblivion wasn’t really possible, of course, unless he took his own life or fled, and either exit would have left his family to face the scandal alone. And he could not do that, he says. “It never entered my mind,” he adds.
Implausibly, against the weight of the available evidence, he claims that he could have kept his gigantic fraud going if he had wanted to. He insists he had not been beaten by the market maelstrom of the summer and autumn of 2008; he had simply decided to quit. “I could have covered everything,” he says. “I had commitments of cash that would have come in. So I could have—but I got tired. . . . I knew by Thanksgiving that I was going to give it up. I was going to stop.”
He backs up. “For sixteen years, I kept this secret from my wife, my brother, my sons. How I was able to do that and maintain any degree of sanity—well, that worries me, when I think about it,” he says, shaking his head slightly as if he is still baffled.
Even at the end, he says, “I always expected that the people who would take the big losses would be the hedge funds”—not the friends, relatives, foundation directors, university administrators, and trusting investors who fawned over him for years. He recalls all the fund-raising galas and charity dinners that were a common feature of his calendar: “I hated going to those events. I hated having everybody falling over me, telling me how wonderful I was, when I knew it was not true. It was all a charade.”
He adds, “It was like the emperor’s new clothes.”
The one time his control slips is when he is asked about the wisdom of Ruth’s decision to stay with him after his arrest, the one topic he cannot seem to tackle with any fluency.
“I never told Ruth that she couldn’t leave me. I said to her, ‘You could leave me.’ Friends advised her to [leave]. It’s hard to understand.” He pauses. “You have a relationship of fifty years,” he says, staring out the window and pausing again. “It would have been better for her if she’d left.” Their sons “are still furious with me,” he acknowledges. “They don’t understand why she doesn’t hate me, why she isn’t as angry as they are.”
She is fiercely angry, he says, his voice breaking. “But somehow she was still able to find some compassion for me.”
He wipes away his tears with some stiff paper napkins his lawyer finds somewhere and gradually regains a grip on his emotions.
Steadier now, he deflects a question about how he and his wife spent their last night together in their home, before he pleaded guilty in March 2009. “There was always the hope” that he would remain free on bail until he was sentenced, he says. They watched a little television, he thinks, or maybe she read something. “Ruth held herself together—and I tried to hold myself together for her.” That is what they do, apparently.
Despite his initial anger over the lawsuit the trustee filed against Ruth in 2009, Madoff has recently begun cooperating with the trustee’s efforts to compensate victims of his Ponzi scheme. He reports—and his lawyer confirms—that members of the trustee’s legal team interviewed him at the prison for almost sixteen hours during the summer. He thinks he was helpful, he says.
When the allowed interview time is over, Madoff stands, shakes hands, and thanks his visitor for listening and trying to understand—although his explanations have created as many questions as they have answered. The guard waiting in the corner unlocks the small door at the back of the visiting room; the associate warden who escorted him to the interview gestures for him to go ahead. He steps through the door into the courtyard and, in a moment, is out of sight.
With its global scope and its generational reach, the Madoff case gave the world some new and unsettling lessons about a very old crime. Throughout history, Ponzi schemes have always been profoundly ambiguous. Like a robbery, a Ponzi scheme is a transfer of wealth. But unlike a robbery, the transfer is not just from victim to villain; it is also from victim to victim. It is a crime that the past inflicts on the future; in the present, in the heyday of its success, a Ponzi scheme is amazingly painless.
Perhaps that has always made it easier to live with yourself when you’re running one. It’s not like sticking a knife in someone to steal a wallet, or bashing someone’s skull to grab a luxury car, or kidnapping someone’s child at gunpoint. You don’t see the terrified faces, the blood, the horror, the loss. At first, you just see gratitude.
It seems to be such a gentle crime—until the awful day when the music stops. Until then, anyone who needs to withdraw money for necessary comforts or philanthropy can do so. And the others, those who don’t take their money out, nevertheless feel secure in their wealth, safe from the financial anxieties of the world. Until the money runs out, people love the Ponzi schemer; they are grateful to him. Why should that cause him any pain?
No doubt that is how Bernie Madoff lived with his crime every day. He did not see any “victims”; he saw only “beneficiaries”. It’s easy to see how seductive that would be. Who has not fantasized about winning the lottery and playing God by giving vast sums away—the delicious rush, the sense of joyful power that this would produce? Until the end, there was only the possibility that, someday, others would be hurt. He might die before he had to face that, after all. Or the world might end, as he imagined.
Or, better still, he might figure a way out. Elie Wiesel spoke of the criminal’s capacity to imagine crimes that are unthinkable to his victims. True—but perhaps he can also imagine an escape from the consequences of his acts. If Madoff had the imagination to sustain his historic crime, he certainly had the imagination to dream of getting away with it; every Ponzi schemer does. “Everyone here always asks me why I never ran,” he wrote in an e-mail from prison. “I certainly had the opportunity over the last few years to stash money somewhere with all the connections I had. . . . The truth is that it never was something I ever gave any thought to. I never wanted to think of what I was doing as stealing, I guess. Somewhere in my head I allowed myself to believe that I was going to make things work out, as crazy as that seems now.” Criminals are not tethered to logic; if they were, there would be no Ponzi schemes, whose only logical outcomes for the schemer are suicide, prison, or life as a fearful fugitive.
If Bernie Madoff could be admired everywhere and still see only a crook when he looked in the mirror, he would have been much more honest with himself than most of us are—much more honest with himself than he was with anyone else. Like every Ponzi schemer, he was able to face his victims every day because they didn’t look like victims, not until the final days and weeks—and the evidence is that, in those days, he was as tormented by fear and grief as any guilty, cornered human being would have been.
Such is the Ponzi scheme. It is the crime of the egotist, not the sadist. One need not enjoy others’ pain to run a Ponzi scheme. Until the final moments, there is no pain. One is helping, not hurting. That delusion, based on a lie, is reinforced every day by every thankful customer who says, “Bless you, Bernie!”
But Madoff’s Ponzi scheme didn’t simply reinforce what we always knew about this sort of crime. It etched new lessons into our hearts.
All Ponzi schemes transfer wealth from victim to victim. But because of the nature of so many of Madoff’s victims—charities, endowments, major philanthropists, generous people on all rungs of the economic ladder—this Ponzi scheme transferred wealth from victims to the larger community, too. In
effect, Madoff robbed Peter to pay Paul, and Paul gave the stolen money away to help the rest of us.
The problematical role of Jeffry Picower is extreme but telling.
Like so many of Madoff’s investors, Picower built up enormous wealth, at least partly with Madoff’s help. And then he used some of that wealth to support hospitals, scientific research, education—in short, to make the world better.
So did Carl Shapiro, the Palm Beach philanthropist. Like the early investors in every Ponzi scheme, he received money that was taken from later victims and he used that money to endow hospitals, art museums, charitable services for needy people.
Norman Levy died leaving a fortune in fictional profits in Madoff’s hands, and his daughter used some of that phoney fortune to create a foundation dedicated to the fight for human justice and equality. The family foundations of Madoff victims such as the New York Mets owner Fred Wilpon and the famed Hollywood director Steven Spielberg supported a host of worthy causes. Even Madoff’s family foundation contributed to leukemia research.
A common thread in the hundreds of individual stories about Madoff’s victims at every socioeconomic level is their generosity to others. A typical example is Gordon Bennett, the natural foods entrepreneur who retired on his Madoff savings; with his modest nest egg generating a comfortable income, he was able to devote the second half of his life to conservation causes and making a notable difference in his community. Modest family foundations in towns and cities all across America are scattered through the Madoff victim list, and each one of them made small, precious improvements in the lives of those they touched.
Rich and possibly selfish hedge fund managers invested with Madoff—and he paid out their money as investment income for Hadassah, which dedicated it to charity and good works. Rich Arab sovereign wealth funds invested with Madoff—and he paid their money out as profits and management fees to Stanley Chais, who gave it away to educational institutions in Israel. Rich investors living lavishly gave money to Madoff—and he used it to make reassuring, steady payments to modest investors who consequently lived in greater comfort and died with greater dignity than they might have enjoyed otherwise.
These generous ends do not remotely justify the viciously criminal means that empowered them, of course. But they add a new facet to our understanding of how Ponzi schemes work in society and why they gain such traction in people’s lives and dreams.
This particular Ponzi scheme delivered another new and unwelcome message to those wise enough to see it. With his ability to disarm even the most sophisticated institutional investors, Bernie Madoff revealed how diabolically difficult it is for regulators to protect the public in the twenty-first century.
If the Madoff story proves nothing else, it proves that regulators are living in a dream world, one that is very different from the dream world populated by investors. Indeed, if any gap in perception justifies dusting off the tired old dichotomies between Mars and Venus, it is this one. Regulators, even very good ones, are from Mars; investors, even very rich ones, are from Venus.
Good regulators believe in scepticism, but most investors crave simplicity. If regulators run across someone claiming to have a safe, high-yield investment that always goes up even when everything else goes down, they want to take him to court. Investors want to take him to dinner. They are desperate for an easy answer to the immensely difficult problems that have confronted them since the slow demise of the “gold watch” company pensions and the rise of do-it-yourself retirement plans. That need for something simple always seems to strangle scepticism before it can speak up.
For regulators, the most important attributes of an investment are clarity and liquidity, and they believe that any attractive investment should have both. For investors, the only important attributes of an investment are safety and yield—and they stubbornly insist, against all logic, that any attractive investment should have both. Somewhere out there, they are certain, there is a wizard who can produce a totally safe investment yielding at least 8 percent a year.
Regulators believe in the fine print. Investors never, ever read the fine print—never.
Because of this culture clash, the Madoff scandal prompted almost everyone in Washington to ask the wrong questions: How can we improve the world that regulators live in? How can we make a regulatory regime based on fine print work better? The questions that should have been asked are: How can we improve the world that investors live in? What kind of regime will work in a world where nobody reads the fine print, where investing is almost always a blind leap of faith?
The Madoff lesson is crystal clear: The “full-disclosure” regime that had been generating fine print for investors for more than seventy-five years didn’t work—and not just because the US Securities and Exchange Commission failed to act on the credible tips it received. It didn’t work because it doesn’t reflect the way today’s investors make their decisions.
Inadequate disclosure was not what inflicted the catastrophic losses that so many of Madoff’s victims sustained. What inflicted those losses was their failure even to ask for some fine print, much less read it. What went wrong was their rejection of basic bedrock principles of investing—that high returns are leg-shackled to high risks; that you should never put all your eggs in one basket; that you should never invest in something you cannot understand. They failed to see that no one should hand all their money over to anyone simply because they trust him, or because someone they admire trusts him.
Yet that is what so many millions of people do. We do not consult the fine print to decide if we can trust someone. We consult our friends, our relatives, our coworkers, our sons, our fathers, our richest acquaintances, our past experiences, and, ultimately, our gut. And as Bernie Madoff learned, once trust is earned, it will protect a con man from every red flag. After all, “con man” is short for “confidence man”, someone who inspires enough confidence to blind his victims to his crime.
More rules and more fine print aren’t going to do much to stop the next Bernie Madoff. What would? That could be a creative “parlor game” for future generations, to design a regulatory scheme that works on Venus, not just on Mars. Perhaps someone will propose borrowing a lesson from the medical world and developing a “formulary”, a roster of approved investments that are the only ones the public can buy with any official assurance of safety. Regulators could designate several large, well-regulated categories of investments as safe for investors—mutual funds, annuities, bank certificates, property investment trusts—and then watch those categories like hawks to ensure that no con artists slip in. Investors would still be free to invest in everything else, of course, but purely on a “caveat emptor” basis. If it wasn’t on the protected list when you bought it, don’t go running to the regulators if it turns out to be a fraud.
Or maybe the answer is to require individual investors to be licenced, the way drivers are licensed—after they’ve passed tests on all the basic rules of the road. They could be quizzed on how to recognize a fraud, how to choose the best investment out of a multiple-choice test, and how to pick the Ponzi schemer out of a lineup. Running a do-it-yourself pension fund (which is what a person is doing with private retirement investments) is far more difficult than driving a car, so perhaps we should make investors study and pass a test before they steer their life savings off a cliff.
Or perhaps the answer is to make the penalties for even the smallest fraud infractions so draconian that the big investors will actually police themselves, blowing the whistle on those they suspect of chicanery and protecting investors from their worst instincts. Fines are just money—Wall Street makes money like clouds make rain. Serious penalties, such as a serious loss of liberty or a meaningful career setback, might be more effective than a few more emphatic rules enforced by a few more inexperienced inspectors.
The point here is not to advocate one particular reform or another, but to look for out-of-the-box solutions that actually address what went wrong in the Madoff scandal and that
are not simply improvements to the “fine print” regime. Without training, we all wildly overestimate our capacity to detect risks and recognize criminals in the marketplace. This is the hard lesson of the Madoff case that none of us wants to accept. We all invest on faith. We all believe that trust is all we need—indeed, most of us don’t have enough time or information to rely on anything but trust. If regulators and policymakers don’t acknowledge this, their approach to the chronic problem of market fraud will be limited and ineffective.
On February 15, 2011, Bernie Madoff sits for a second interview at the prison in Butner. The security maze is the same, the associate warden as gracious as before, and the visiting room still clean, dimly lit, and slightly shabby. But the man waiting there alone is shockingly changed. He is thin, almost fragile. His loose-fitting khaki uniform is a little rumpled, its collar oddly pressed. The excess length of the webbed belt at his waist is folded under to keep it from flapping at his side. Halfway through the conversation, he notices that one shirt button is undone and quickly buttons it. What had been confident magnetism has weakened into a troubled intensity.
He still believes that Jeffry Picower was the only investor who might have suspected his fraud, he says. But he also believes that the big banks and funds who dealt with him were somehow “complicit” in his crime. Pressed to square the contradiction, he accuses the banks and funds of “wilful blindness” for failing to investigate the discrepancies between his regulatory filings and other information available to them.
“They were deliberately ignoring the red flags,” he says. “They had to know. But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ” As in the August interview, he claims he has tried to help the trustee recover assets for his victims from those giant institutions.
Bernie Madoff, The Wizard of Lies Page 43