The Wizard of Lies: Bernie Madoff and the Death of Trust (54 page)

Or maybe the answer is to require individual investors to be licensed, the way drivers are licensed—after they’ve passed tests on all the basic rules of the road. They could be quizzed on how to recognize a fraud, how to choose the best investment out of a multiple-choice test, and how to pick the Ponzi schemer out of a lineup. Running a do-it-yourself pension fund (which is what each of us is doing with our IRAs and 401(k) plans) is far more difficult than driving a car, so perhaps we should make investors study and pass a test before they steer their life savings off a cliff.

Or perhaps the answer is to make the penalties for even the smallest fraud infractions so draconian that Wall Street will actually police itself, blowing the whistle on those it suspects of chicanery and protecting investors from their worst instincts. Fines are just money—Wall Street makes money like clouds make rain. Serious penalties, such as a serious loss of liberty or a meaningful career setback, might be more effective than a few more emphatic rules enforced by a few more inexperienced inspectors.

The point here is not to advocate one particular reform or another, but to look for out-of-the-box solutions that actually address what went wrong in the Madoff scandal and that are not simply improvements to the “fine print” regime. Without training, we all wildly overestimate our capacity to detect risks and recognize criminals in the marketplace. This is the hard lesson of the Madoff case that none of us wants to accept. We all invest on faith. We all believe that trust is all we need—indeed, most of us don’t have enough time or information to rely on anything but trust. If regulators and policymakers don’t acknowledge this, their approach to the chronic problem of market fraud will be limited and ineffective.

On February 15, 2011, Bernie Madoff sits for a second interview at the prison in Butner. The security maze is the same, the associate warden as gracious as before, and the visiting room still clean, dimly lit, and slightly shabby. But the man waiting there alone is shockingly changed. He is thin, almost fragile. His loose-fitting khaki uniform is a little rumpled, its collar oddly pressed. The excess length of the webbed belt at his waist is folded under to keep it from flapping at his side. Halfway through the conversation, he notices that one shirt button is undone and quickly buttons it. What had been confident magnetism has weakened into a troubled intensity.

He still believes that Jeffry Picower was the only investor who might have suspected his fraud, he says. But he also believes that the big banks and funds who dealt with him were somehow “complicit” in his crime. Pressed to square the contradiction, he accuses the banks and funds of “willful blindness” for failing to investigate the discrepancies between his regulatory filings and other information available to them.

“They were deliberately ignoring the red flags,” he says. “They had to know. But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’” As in the August interview, he claims he has tried to help the trustee recover assets for his victims from those giant institutions.

He again insists that his family knew nothing about his crime, but he dodges any discussion of his son’s suicide, saying only that he never expected his arrest would cause so much personal devastation. For the first time, he discloses that he is working with a therapist to dig into the psychological roots of his life of lies.

“I always wanted to please people; that was a weakness that I had,” he says. “I had been successful in a business, taking on the New York Stock Exchange—so, I figured, why can’t I manage money? Why can’t I do this, too?” He shakes his head and gazes down at the bare floor. “How did I live with myself? My counselor says people ‘compartmentalize.’ I never believed that I was stealing. I thought I was taking a business risk, like I did all the time. I thought it was a temporary situation.”

He adds: “It starts as a very simple thing and then becomes complicated.”

When the associate warden calls time, Madoff stands and moves toward the courtyard door. He pauses to comment bleakly on a recent
People
magazine article about his wife. “I was sorry to see they used that photo of her with Mark when he was a boy,” he says, shaking his head. Then he bids an awkward good-bye and follows a uniformed guard out of the room.

The Madoff case demonstrated with brutal clarity another truth that we simply do not want to face about the Ponzi schemer in our midst: He is not “other” than us, or “different” from us. He is just like us—
only more so
.

Even the lawyers at the SEC thought that an apparently trustworthy, apparently successful Wall Street statesman like Bernie Madoff did not fit the profile of a Ponzi schemer. But that is
exactly
the profile of a Ponzi schemer. Any number of crimes may be committed by a seedy-looking, shifty-eyed, inarticulate grifter in a cheap suit and scuffed shoes, but a Ponzi scheme is
never
going to be one of them. Yet almost every Madoff victim, including the SEC, trusted him precisely because he seemed so trustworthy, a mistake that Ponzi scheme victims make over and over again.

Why? Perhaps because they refuse to accept the exposed Ponzi schemer as fully human.

Of course it’s comforting to think that only a soulless, heartless monster could have inflicted such pain on those he knew and supposedly cared about, that no human being could construct a life of such brazen, destructive lies.

We flatter ourselves. All human beings have the capacity for deceit. We all damage and disappoint people we love. We all delude ourselves about ourselves, every single day.
I’m not going to get cancer even though I smoke. I can drive better after a few drinks. I’ll pay off that credit card debt next month.
Most of us are born knowing how to tell lies. By definition, we cannot see our own blind spots.

So to insist, as so many of his victims have, that Bernie Madoff was not fully human, that he was a beast, a psychopath, is a facile cop-out, one last comforting delusion that will leave us forever vulnerable to the seductive spells that all Ponzi schemers cast.

Madoff was not inhumanly monstrous. He was monstrously human. He was greedy for money and praise, arrogantly sure of his own capacity to pull it off, smugly dismissive of skeptics—just like anyone who mortgaged the house to invest in tech stocks, or tapped the off-limits college fund to gamble on a new business, or put all the retirement savings into a hedge fund they didn’t understand, or cheated a little on the tax return or the expense account or the spouse.

Just like us—only more so. His imagination constructed a soaring scaffold of deceit that towered over the simple cover stories we occasionally hammer together. His lies were massively larger than ours, and they lasted longer, survived more scrutiny, were more ambitiously conceived and elaborately documented. As a result, tens of thousands of trusting victims believed that Madoff’s genius could defy markets, year in and year out.

And they sustained their belief in exactly the same way he sustained his belief that he could get away with it; the belief was reinforced by daily experience,
selectively observed
. He ignored the fact that he didn’t have any investment earnings to pay to his customers. His customers ignored the fact that his results were increasingly implausible and his operations were suspiciously secret. While the money was rolling in, the victims did not torture themselves daily, minute by minute, wondering if it was somehow possible that all their wealth and status would vanish in a puff of smoke on a single day. While the money was rolling in, Madoff probably didn’t either.

But this wizard behind the curtain—pumping the bellows and pushing the buttons and working the microphone to create his utterly convincing illusions, even after the prison doors had clicked shut behind him—was able to build his Emerald City only because such an extraordinary number of people decided to believe him. His accomplices believed they could go along for the ride and enjoy the wealth without facing a day of reckoning. Add in the friends and family members, the bureaucratic or inexperienced regulators, the smart accountants and lawyers, the sleek feeder fund salesmen, the international bankers, the charity investment committee members, the brilliant hedge fund due-diligence experts—they all told themselves that while it didn’t exactly make a lot of sense and was a little unusual and possibly even a little suspicious, it would turn out fine.

Time and again, people caught Madoff in an obvious lie and gave him the benefit of the doubt. They didn’t do this because he seemed so different from them, but because he seemed so much like them, only better: smarter, more experienced, more confident, more in control. Because he was fundamentally human and seemed to live in the same world they did, they could believe that somehow it would all work out, that they could ignore unpleasant realities without incurring unpleasant consequences.

So, like every philandering spouse, every opportunistic cheat, every impulsive risk-taker—like so many of us, only more so—Bernie Madoff thought he could avoid the implacable dead-end finale of the Ponzi scheme and somehow get away with it.

The next Bernie Madoff expects to get away with it, too.

No matter when you are reading this, the next Bernie Madoff is working in secret somewhere in the country, somewhere in the world. A world immune to Ponzi schemes is a world utterly devoid of trust, and no one wants to live in a world like that. Indeed, no healthy economic system can function in a world like that. So right now, some new Bernie Madoff is exploiting our need for trust to build another world of lies.

We will read about him next month or next year. Until then, his victims are telling themselves how generous and respected he is in the community. They are admiring his life of quiet luxury, they are flattered when he includes them, they are a little envious of the money he is making for their more successful friends, those sophisticated folks who speak so highly of him. They are telling themselves that he is an excellent person, a gentleman, a mensch.

Whatever their niggling doubts, they are reassuring themselves right this minute about how trustworthy he is, as he spins out his vibrant, beautiful web of fantasy.

Later, when that new world of lies is torn apart, they will rage at the pain and devastation he caused and brand him an evil, inhuman monster. But if they are honest with themselves, they will have to admit that he was recognizably, shamefully human every step of the way—just like the last Bernie Madoff and the first Bernie Madoff.

That is the most enduring lesson of the Madoff scandal: in a world full of lies, the most dangerous ones are those we tell ourselves.

The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders

Fidelity’s World: The Secret Life and Public Power of the Mutual Fund Giant

The Machinery of Greed: Public Authority Abuse and What to Do About It

D
IANA
B. H
ENRIQUES
is the author of The White Sharks of Wall Street and Fidelity’s World. She is a senior financial writer for The New York Times, having joined the Times staff in 1989. A Polk Award winner and Pulitzer Prize finalist, she has won several awards for her work on the Times’s coverage of the Madoff scandal and was part of the team recognized as a Pulitzer finalist for its coverage of the financial crisis of 2008. She lives in Hoboken, New Jersey.