Almost every Manhattan Christmas party conversation drifted back to the same themes. Did he do it alone, or in concert with his family? How could so many sophisticated advisers have been duped by such a simple swindle? In Palm Beach, Florida, where many of Bernard Madoff’s ultra wealthy investor victims live, the standard greeting became, “Yes, I was with Madoff – but I’m okay”. Subtext: I still have sufficient millions left over.
Why the continued general public obsession with a crook whose activities mainly affected relatively few rich people? (True, charities have been hit too, with wider implications.) Although Madoff is alleged to have lost $50 billion (£34 billion), a tidy sum, the amount pales next to the trillions of wealth destroyed in the global financial tsunami. Why, even AIG has cost almost three times that much to keep on life support. We are still reckoning on a figure supplied by Bernie’s own back-of-the-envelope calculation, but the final numbers will be astronomical in any case.
Beyond the magnitude of the damage, and the unrelenting frenzy whipped up by the media, the Madoff tale serves another sociological function. He has enabled the public to put a name and a face to the financial upheavals that have engulfed the entire world. “It’s rare we can identify a single individual with the cause of so much calamity,” suggests Mitchell Zuckoff, author of Ponzi’s Scheme: True Story of a Financial Legend. The public was already reeling, and angry about unemployment, collapsing auto and financial industries, and falling retirement savings. They could finally vent their frustrations on someone.
Outside the financial community – and even within it – few thoroughly grasped the mechanics of the toxic structured products, SIVs, derivatives, credit default swaps, runaway leverage and inflated credit ratings. Most were barely familiar with the names of protagonists, such as executives at Citigroup, AIG, Bear Stearns or Lehman. It is easier to understand a classic Ponzi scheme, and to personalise Madoff, a lone figure.
He embodies all the fascination of the sociopath, captures the attention like a serial killer. Better yet, his celebrity victims included the rich and famous, like Steven Spielberg. Perhaps some schadenfreude even plays a role, to see them brought down like 18th century French aristocrats. From a less cynical angle, there is abundant sympathy for those who have lost their life savings, unlike the Palm Beach plutocrats who are still “okay”. Then, there is the revulsion for how he ravaged the charities.
A lesson to charities
The roster of swindled charities keeps growing, ranging from the Elie Wiesel Foundation, Gift of Life Bone Marrow Foundation, New York Law School, Tufts and Yeshiva Universities, to the Picower Foundation, which champions medical research, and will close, having lost over $1 billion. Many charities have not been eager to disclose losses, for fear of discouraging fresh contributions, and perhaps with some embarrassment at their own mishandling. “If I’d lost money, I wouldn’t make it public,” says Cathy Landyard, the director of American Friends of Alyn Hospital. She didn’t lose any.
Charities were perfect targets, Zuckoff explains. Ponzi schemes focus on two distinct money flows. On one hand, they must maintain growth through new investments to survive, as there are no market returns. The other side of the equation is to maintain stability, and prevent a run. Too many volatile withdrawals, from investors who wanted 40% or 50% back, would be a disaster. Non-profits, however, are designed for slow and steady withdrawals, and indeed required to disperse just 5% by law. While Madoff cultivated exclusivity among investors, he also welcomed an assortment of charities. “That raises suspicion he understood his ideal victim,” says Zuckoff.
“The morality lesson for the philanthropy world is to take seriously the rules, such as best practices and diversification,” says Richard Marker, who teaches philanthropy at New York University. Several organisations have sidestepped the rules, such as the ones that preclude putting more than 20% of funds into one investment. “Private foundations, in particular, are used to autonomy and seem to have dismissed some regulations as nuisances,” Marker warns.
A sad upshot is that charities will see a falloff in donations. Many generous supporters have been so badly hit in their own personal finances that they will have less available resources to direct to health, education and cultural causes.
Inside Bernie’s head
Since mid December, reporters have swarmed around the lobby of the luxury building at 64th street, where Madoff has been holed up in his penthouse under house arrest. Downstairs, a fancy bric-a-brac store, William-Wayne & Company, sells giant china dogs and frogs, fake fur cushions and pricey walking sticks. Employees have refused to allow Madoff to avoid the paparazzi by using their store for access to his building’s elevator. Upstairs, what is Madoff thinking?
Legal, financial, academic and psychological experts have surged forth to discuss the case, but few can truly imagine how it feels in Madoff’s shoes. Chuck Gallagher, a former accountant, embezzled from his own clients’ trust funds in the 1980s, for which he served an 18-month sentence in a federal prison.
How did he feel when his house of cards collapsed in 1990? “Terrible, and relieved at the same time,” he says. “Creating a Ponzi scheme creates an illusory life, where everything becomes part of the grand illusion.” Although Gallagher says he knew he was doing wrong, he always said he would be able to create the income to pay it back, so it would “go away”.
Gallagher, who now advises organisations on fraud prevention, says that Madoff was driven by an emotional need for power and respect. He may not even have intended to defraud his initial victims, Gallagher suggests, but Madoff’s ego could not let him admit he had lost clients’ money. Once the fund reached a gargantuan scale, people were less likely to question the illusion. The hardest ones to sell are the early investors. Then comes the point of no return. Says Gallagher, “Once you jump in the pool, you are wet.”