November 24, 2020

How Bernard Madoff Did It

Finally the man himself and his family. Within days it became known that it was Madoff’s own sons who had turned him in to the F.B.I. From the start, therefore, it was evident that we were witnessing an almost Sophoclean family tragedy. As for Bernie Madoff, what sort of man lay behind that sphinxlike smile, and how had he coped for so many years with the psychological pressure of living with such a gigantic falsehood? “The Wizard of Lies,” by Diana B. Henriques, a senior financial writer for The New York Times, makes for riveting reading because it covers all these dimensions. And although there is much that we can never know, this book comes closer than others have to answering at least some of our questions.

Madoff’s story has by now been told and retold many times, in newspapers and magazines, on television and in several books. After starting on Wall Street in the early 1960s, he built an apparently successful broker-dealer firm. As a side business he began managing money for other people, at first informally, for friends and family. His results were good but not spectacular. Most important, he never lost money (or so it seemed). How he generated these returns was always a mystery — he claimed to be offsetting the downside risks of his stock purchases by selectively using options to hedge the portfolio. But the very secrecy added to his mystique. Through word of mouth he soon began attracting outside investors, spawning a cottage industry of various types of feeder funds that channeled assets his way.

At some point (no one is quite certain when; Madoff claims it was not until the early ’90s, while Henriques believes it to have been earlier), after losing money, rather than come clean to his clients, he fudged the numbers, hoping to recoup the losses later and get back on track. Instead he ended up digging himself into an ever deeper hole. After a while, the chasm between what he claimed to investors and what was actually in their accounts became so deep that he stopped even bothering to invest the cash, relying on money from new clients to pay out fictitious returns to older clients — the classic Ponzi scheme.

Henriques has been reporting on Madoff since he was initially exposed and was the first reporter to be granted on-­the-­record interviews with him after his arrest and incarceration. She probably knows more than anyone outside the F.B.I. and the Securities and Exchange Commission about the mechanics of the fraud. As a consequence, in “The Wizard of Lies” she is able to add significant detail to the story.

To fool his investors and any regulators who happened to come sniffing around, Madoff built a Potemkin-­like investment operation complete with traders at fake terminals pretending to buy and sell stocks and a bogus paper trail of transactions and accounting reports.

Ponzi schemes can survive only by growing — in fact by growing exponentially. Even a leveling off or a slight slowdown in the pace of money coming in can threaten the viability of the entire scam. Henriques reveals how the operation came close to falling apart on several occasions, first after the stock market collapse of 1987, then again during the recession of the early 1990s, and yet again after the tech bubble burst in 2000. Each time, just as Madoff’s fraudulent enterprise seemed to be on the verge of breaking down, a new source of money was found.

Liaquat Ahamed is the author of “Lords of Finance: The Bankers Who Broke the World,” which won the 2010 Pulitzer Prize for history.

Article source: http://feeds.nytimes.com/click.phdo?i=af862de83802400522285ed042ef31f6

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