By Carlos Lozada
Sunday, August 30, 2009
TOO GOOD TO BE TRUE
The Rise and Fall of Bernie Madoff
By Erin Arvedlund
Portfolio. 310 pp. $25.95
The Life and Lies of Bernie Madoff
By Andrew Kirtzman
Harper. 307 pp. $25.99
MADOFF WITH THE MONEY
By Jerry Oppenheimer
Wiley. 272 pp. $24.95
When Bernie Madoff was a sophomore in high school, he stood up in English class and lied.
Madoff and his classmates were each supposed to read a book and make an oral report in class, but Bernie, an average student at New York City's Far Rockaway High in the early 1950s, hadn't gotten around to it. So when the teacher called on him, Bernie announced that he would cover "Hunting and Fishing" by Peter Gunn and proceeded to fabricate a detailed account of the nonexistent book. When asked to produce the book, Madoff turned deceit into virtue. He didn't have it, he explained -- he'd already returned it to the library.
The anecdote, recounted in a trio of new books about Madoff, fits easily into the lore surrounding the biggest scam artist in Wall Street history, a man whose "extraordinarily evil" crimes, in the words of the judge who sentenced him in June, destroyed tens of billions of dollars in wealth for thousands of investors and landed the 71-year-old Madoff in prison for the rest of his life. The implication of the high school tale seems obvious: Even as a kid, Madoff played those around him for fools.
Most revealing about the episode, however, is not that a young Madoff got away with cheating but that those around him were not entirely taken in. According to Andrew Kirtzman's "Betrayal," Madoff's English teacher may have been duped by his performance, but his fellow students knew right away that it was a con. "After class," Kirtzman writes, Bernie's pals "all congratulated him." Erin Arvedlund's "Too Good to Be True" (the best book of the three) and Jerry Oppenheimer's "Madoff With the Money" offer a slightly different take. Both say the teacher probably knew Madoff was faking, too, but let him off the hook. "Nobody could really get mad at Bernie," one friend recalled. "His put-on persona carried him through."
Fast forward 50 years, and these varying interpretations neatly mirror one of the key mysteries of the Madoff saga: What did his investors, relatives and regulators really know, and when did they know it? There were plenty of warning signs that Madoff's secretive investment advisory business was murky, so why did so few people raise alarms? Or like those long-ago 10th-graders, were some just happy to be along for the ride?
These three books, rushed into print to capitalize on Madoff-mania, do not provide definitive answers. (Nor, alas, does Vanity Fair, which has obsessed over the affair with essays, tell-alls and profiles ever since Madoff was arrested in his Upper East Side penthouse on Dec. 11.) But the works do offer insights on a sort of mass denial that spread over the past decades, as Madoff's personal fortune grew along with his Ponzi scheme. They also show that Madoff, for all his notoriety, is far from the evil genius of our great financial crisis. Evil, yes. But a genius? Hardly. He just got everyone to think he was.
Start with Madoff's victims around the world -- illustrious and obscure, rich and middle class, royals and schoolteachers -- who enjoyed impossibly high returns for improbably long periods, only to see it all vanish overnight. Many had handed over their life savings (or those of their charities) to Madoff, either directly or through "feeder funds" that earned fat commissions for funneling investors his way.
"We thought he was a god; we trusted everything in his hands," said Elie Wiesel, the Holocaust survivor and Nobel laureate whose foundation lost $15 million when Madoff's scheme collapsed. In a panel discussion in Manhattan, Wiesel called Madoff a "liar" and a "swindler" and a "scoundrel," but explained that "there was a myth that he created around him, that everything was so special, so unique, that it had to be secret. It was like a mystical mythology that nobody could understand."
Madoff carefully nurtured that mythology, his "velvet rope" image: Not just anyone could invest with him. "Bernie was the Studio 54 of money managers," Oppenheimer quips. He constantly turned down eager investors. The fund was closed, he'd say, or he would insist on a $2 million minimum.
The irony is that Ponzi schemes live off a steady stream of cash; old investors are paid off with fresh funds from new investors. But playing hard-to-get worked. "There's nothing that sounds more exclusive than saying you don't need someone's money," a banker told Arvedlund. "That was his shtick. He would rope them in, taking a small amount of money at first, and then hundreds of millions."
Investors, who included relatives and employees, routinely ignored the red flags that in hindsight seem so evident: Madoff's insistence that no one disclose their business relationship with him; his less-than-top-notch accounting firm, a one-man operation working out of a strip mall 45 minutes outside New York; and most of all, those insane returns, consistently reaching double digits and sometimes hitting 18 to 20 percent, year after year. The regularity of those bogus returns made Madoff seem like a safe investment; some called him the "Jewish T-bill."
Kirtzman, author of a biography of Rudy Giuliani, suggests that greed blinded people to the risks: "People see what they want to see when money rolls in." But in investing, trust matters as much as greed. And investors trusted Madoff. They knew him, or his family, or his friends, or they trusted the intermediaries who sent their money to him.
On the day of Madoff's sentencing, Judge Denny Chin described a letter he received from a widow who went to see Madoff after her husband died of a heart attack. Bernie put his arms around her and said, "Don't worry, your money is safe with me." She lost everything and had to sell her home. It was such personal betrayals, as much as the financial losses, that transformed Madoff into one of the most vilified men in America.
His family has not been spared the backlash. In pleading guilty to 11 criminal counts in March, Madoff took sole responsibility for his crimes. But his wife and longtime bookkeeper, Ruth, his brother and business partner, Peter, his niece and "compliance officer," Shana, and his sons, Mark and Andy, who worked in the legitimate trading side of the Madoff enterprise -- surely they had to know or suspect what was going on all those years, just two flights down, on the 17th floor of Manhattan's Lipstick Building, right?
Here, the authors disagree. In the weeks before Bernie confessed to his family, Ruth pulled $15.5 million from her account in Cohmad Securities, a Madoff offshoot, including $10 million on the eve of his arrest. Oppenheimer, a serial biographer of various politicians and celebrities, echoes the inevitable suspicion: "Making those withdrawals . . . did Ruth Madoff know the roof was about to cave in?" He also writes that Andy and Mark embarked on a real estate spree in the months before their father's arrest, buying a $6.5 million Nantucket home and a $4.3 million Manhattan condo, respectively. Hardly definitive, but certainly suggestive.
Arvedlund, in an interview with the Associated Press, said that "it's very hard to believe that [Ruth] didn't know what was going on" but added that "the sons are really a tossup." Kirtzman, by contrast, asserts that close family members were blinded by their devotion to Bernie. "He was the center of their universe, tightly controlling the flow of information," he writes. "Yet all were capable of figuring out the scam if they had looked for it. Why they didn't is a question that may dog them forever."
Those who should be dogged forever are the regulators, in particular the Securities and Exchange Commission, which was tipped off multiple times by financial quant jock and onetime Madoff competitor Harry Markopolos but largely disregarded his warnings. (Markopolos's November 2005 memo to the SEC, a 21-page document titled "The World's Largest Hedge Fund is a Fraud," belongs in the Unheeded Warnings Hall of Fame, the financial world's answer to "Bin Laden Determined to Strike in U.S.") The SEC investigated Madoff around the edges over the years, even shutting down a feeder fund in the early 1990s, but the agency never grasped the enormity of his fraud.
Arvedlund, who in 2001 wrote one of the first news stories questioning Madoff's returns, offers a damning litany of reasons for the SEC's failure. The agency was staffed by lawyers -- many biding their time before taking Wall Street jobs -- rather than market professionals who would have seen that Madoff's mysterious "split-strike conversion" investment strategy could not produce such gaudy returns. SEC staffers also seemed enthralled by Madoff, who had served as an adviser to the agency on market structure issues. And his niece Shana married an SEC lawyer, Eric Swanson, in 2007 -- yet another "incestuous relationship that Madoff had with the SEC," Arvedlund laments.
Arvedlund's book is the most steeped in financial details, making it a slower but far more thorough account than the others. Kirtzman is faster paced but less probing, with set pieces and dramatic scenes ready for a film director's cut. Oppenheimer's work, though a breezy and conversational read, feels the most slapped together, with speculative tones that intrude on the facts.
Ultimately, none seems to fully capture the man behind the crime. Perhaps it is too soon to tell the full story. More clarity will emerge when the SEC's inspector general completes a report on the agency's mishandling of the affair, and when Frank DiPascali -- Madoff's former chief financial officer, who has pleaded guilty to fraud and conspiracy and is cooperating with investigators -- starts naming names.
Or maybe there is just not much to say about Bernie Madoff, no great depths to plumb. He may simply be a heartless man of middling intellect who felt no compunction in defrauding strangers and loved ones. His scam was not some devious piece of financial engineering and technical know-how; for years, he simply deposited investors' cash in a bank account, taking vast amounts for himself and hoping to pull enough in to keep the scheme going. Madoff does not embody the perils of a turbulent marketplace; in fact, the market did him in.
Last year, as the economy cratered and stocks fell, panicky investors flooded Bernard L. Madoff Investment Securities with billions of dollars in redemption orders, and Madoff couldn't raise enough cash to make good on them. It was over.
So perhaps there is some redemption, at least for the laws of economics, which caught up with Madoff before the laws of the land ever did. Arvedlund explains it with the words of the late economist John Kenneth Galbraith: "Recessions catch what the auditors miss."
Carlos Lozada is the deputy editor of The Washington Post's Outlook section.