It is difficult to estimate how many lives Bernie Madoff ruined. His Ponzi scheme created paper losses of $64.8 billion and cash losses of $18 billion. Those affected included friends, family members, offshore hedge funds, thousands of middle-income investors and university endowments. Charities that Madoff donated to had to close. When he was arrested in December 2008, his sons Mark and Andrew were accused of participating in the scam. Two years later, Mark hanged himself from a pipe by a dog leash in his New York apartment. His two-year-old son was asleep in the next room.
This Wednesday, the Madoff scandal hit the headlines again when his wife, Ruth, told reporters that she and her husband had attempted suicide on Christmas Eve, 2008. Her account is disputed by a security guard who left the couple at seven o’clock that evening and says he can’t remember “anything unusual” in their behaviour. Either way, the suicide attempt failed. Ruth said she was “glad to wake up” from a long sleep the next day. “I’m not sure how I felt about [Bernie] waking up,” she added.
Historians might dub Bernie Madoff “the face” of the Credit Crunch. His private Ponzi scheme was a metaphor for the appalling abuses that the financial institutions carried out before their bubble burst in 2007: lending money to people who couldn’t afford the repayments and burying bad debt in clever accounting. During his career, Madoff helped popularise hedge fund investments, computerise NASDAQ trading and encourage specious derivatives. But Madoff was neither an Ivy League sophisticate nor a gangster. His crimes were committed with a touch of everyday banality. He got away with them for so long because his victims wanted to believe in him and he never failed to deliver a return. His scam was less a damning indictment of the absence of regulation than of a culture obsessed with easy money.
In her excellent book Wizard of Lies: Bernie Madoff and the Death of Trust, Diana B Henriques dates the Ponzi scheme back to the 1970s. Madoff, the son of a plumber, got himself a law degree and set up a securities firm in 1960. His father-in-law referred wealthy friends to him and, over time, the firm developed an unpublicised “investment management and advisory division”. Madoff promised competitive returns on all investments regardless of market fluctuations. To the non-economist, that’s the equivalent of promising someone that it’ll never rain. Throughout the 1970s, when the stock market crashed and soared, every investor in Madoff’s firm saw a steady, above-average return on the money they put in. Some returns were calculated and promised before the investment was made. What is astonishing is that no one publicly asked how this was possible until 1999, when financial analyst Harry Markopolos informed the US Securities and Exchange Commission that it was mathematically impossible to achieve the gains Madoff claimed to deliver. He said that it took him “five minutes” to work this out.
According to Henriques, Bernie got away with it not because he was a good salesman but because he was a bad salesman. His technique applied the rule of reverse psychology. He never chased clients and never pitched. His manner was quiet and unimpressive. Disappointingly, for one of the greatest thieves in history, Bernie was apparently quite dull. Henriques infers that investors thought Madoff didn’t need their money. He maintained that appearance by swearing them to secrecy and avoiding investments from people who were directly related to one another. No one ever realised how many people were pouring money into Bernie’s big pot. Nor, from his modest style, did they notice how absurdly wealthy he was. The family owned a yacht, four homes and $9.9 million in art.
This is not to deny that Madoff’s victims were victims, or that they were expertly conned. But the con took place in a cultural environment wherein people had come to believe that it was possible to get a never-ending return with no real sweat and effort. That was partly the fault of unfettered capitalism and greedy Republicans. But what is interesting is that Madoff liked the Democrats more. Beneficiaries of his philanthropy included the Democratic Senatorial Campaign Committee, Senator Charles E Schumer (Dem) and Senator Chris Dodd (Dem). That’s appropriate considering the Democratic Party’s role in the deregulation of financial industries in the 1990s. It was also the Democrats who blocked attempts to better regulate Fannie Mae and Freddie Mac in 2005. We now know that Obama got more than $125,000 in campaign contributions from Fannie and Freddie employees and political action committees. Dodd, the former Senate Banking Committee chairman, received more than $165,000.
In 1973, the British Prime Minister Edward Heath denounced the tycoon Tiny Rowland as the “unacceptable face of Capitalism”. Rowland’s specific crime was investing in the racist regime in Rhodesia, but the phrase stuck as a description of businessmen who embody the essential amorality of the profit motive gone wild. In the case of Madoff, it is equally apt. He flourished in a culture of fraud, lubricated by self-deception and lavish lobbying. It wasn’t limited to private enterprise, but was inculcated in social programs and corporate welfare. Our tragedy is that this culture is still very much with us. Obama’s bailout and big spending has done nothing to challenge the post-1960s attitude that wealth can be manipulated or redistributed rather than honestly made. That’s what both the Tea Party and the Wall Street protesters are angry about.
