THE BELIEVERS
How America Fell for Bernard Madoff’s $65billion Investment Scam
by Adam LeBor
Phoenix, 288pp.
Reviewed: 20 November, 2010
Do you really know where your superannuation and other savings are stashed? Hundreds of wealthy Americans and Europeans, discovered on 10 December 2008 that they had lost billions of dollars to Bernard Madoff, whom they had trusted for years, even decades. They had considered themselves canny investors.
Madoff’s business partner, connected by marriage, tipped in an extra $250million only days before the crash. Thousands of others, who had invested their money through dozens of “feeder” fund managers, did not even know that their money had been given to Madoff until it disappeared.
Madoff’s swindle was the greatest Ponzi scheme ever recorded. New capital coming into the fund was used to pay regular and generous “dividends” to investors, and to pay out promptly any investors who occasionally sought return of their capital.
Investors received detailed monthly statements setting out which stocks and Treasury bonds had been traded on their behalf. The problem was, all of those trades were fictional. Madoff’s fund never invested anything on behalf of its clients. Any “dividends” were simply part of the client’s capital, as bait for further investment.
Adam Lebor traces, in often painful detail, how Madoff was able to sustain this monstrous confidence trick for over 25 years. The key ingredient was Madoff’s talent for exploiting the psychological weaknesses of others, principally by making them feel privy to a rare and special opportunity.
He played hard to get, and had his staff turn down all unsolicited requests to invest. Investors were felt that they were part of a closed group, privileged to benefit from complex and secret investment strategies that Madoff would never divulge. In hindsight, it had all the features of a classic confidence trick.
Madoff could pull this off because he had another public and legitimate career as a Wall Street stock trader. He was a founder and chairman of the NASDAQ secondary exchange, a pioneer in developing electronic share trading, and prominent in the industry negotiations with government and regulators. Far from being an aggressive Gordon Gecko type, he presented himself as modest, personable, and deeply engaged in philanthropy. Some of New York’s richest philanthropic trusts lost their capital to him.
Lebor, himself Jewish, delves deeply into why so many of New York’s prominent and successful Jewish figures trusted their funds with Madoff. He says Madoff was able to exploit clannishness and love of “beating the system” to defraud his own people more than any outsiders. Some admitted to believing that Madoff was using insider trading to generate his exceptional “profits”, and this added spice to the investment “opportunity”.
Lebor also sees Madoff as motivated, at least in part, by historical class differences among the Jewish community. Jewish Wall Street banking families of integrated German origin (the Lehmans, Goldmans, Warburgs and others) had been in America for generations and achieved Establishment status. Fearing to provoke American anti-Semitism, they did not welcome the later arrival of immigrants from East European shtetls, toughened by persecution and exclusion, who included many market-smart wheeler-dealers and their own share of gangsters.
Madoff was of the latter group, but determined to best those Wall Street princes who held him at arms’ length. The NASDAQ exchange was his base to attack the New York Stock Exchange elite, and the Ponzi scheme his vehicle to drain the community’s capital.
The players were by no means all Jewish. Many “feeder” funds were set up to tap into wealthy communities such as the WASP wealthy of Connecticut, or fast living South Americans. Jet-set figureheads for these “fund managers” were rewarded with enviable life-styles to attract investments from their peers and emulators.
One fund, headed by a minor French aristocrat, boasted investment from “nearly all the royal families of Europe”. That manager slit his own wrists when the fraud was revealed. The popular Jewish retirement community of Palm Beach, Florida, was hit harder than most places. Multi-billion dollar lawsuits continue against some of these feeder funds, but most of the money in individual accounts simply never existed.
At one level, this tale reads like a Reformation tableaux on the Fall of the Damned. Investors were sucked in not just by simple greed, but by a belief that they could beat the market odds, by entitlement, privilege, or cunning.
Who was innocent and who was complicit, even among Madoff’s immediate family and associates, remains opaque. Madoff has pled guilty and his chief administrator of the fraud has cooperated with prosecutors, but others closely involved in the business for decades still claim complete innocence and face no charges.
Even more chilling than the personal morality play is the abject failure of the US regulatory and criminal system to expose this fraud until Madoff, overwhelmed by investor panic during the GFC, confessed and turned himself in.
The Federal Securities and Exchange Commission had been receiving complaints over eight years, some of them extensively documented, accusing Madoff of running a Ponzi scheme. The SEC never investigated Madoff due to “lack of resources”.
This grim tale is a reminder that securities markets will never be “self-correcting” (as the fundamentalists and de-regulationists declaim) because information on the market will never be symmetrical. One of the Wall Street operators declares, “There are no smart trades on Wall Street, just better informed trades”. And less informed investors to fleece.
Richard Thwaites has modest investments in superannuation and keeps his fingers crossed.