Mad About Madoff

by Mr. Cheap

The Canadian Capitalist recently highlighted two terrific Vanity Fair articles about Bernie Madoff.  For those who weren’t watching CNN or reading papers in December 2008, Mr. Madoff operated an “asset management business” (hedge fund) that was actually the largest ponzi scheme of all time. He took massive amounts of money from rich people, famous people (like Steven Spielberg), and numerous charitable foundations.  Apparently people were desperate to invest in his fund.

The two articles, which details who Bernard Madoff is, as a man, from the perspective of his victims and his employees are great reads (normally the only part of Vanity Fair I’m interested in is the photographs of naked celebrities on the cover).  What surprised me most about him was that, according to these articles, he basically had no personality at all.  To his investors he was smiling, benevolent “uncle Bernie” and to his employees and family he was a bully.  He would be around clubs and organizations where rich people would beg him to take their money, but beyond living “the good life” the guy seems to be more of a shell than anything.  He wasn’t flirtati0us, didn’t take much interest in recreational pursuits (other than apparently cheating at golf according to Donald Trump), wasn’t a big drinker and wasn’t passionate about religion, politics or other topics of interest.  He basically existed to be a blank slate to keep money coming in, and hide what he was doing from regulators.

When this story first broke, I was visiting my parents and we were glued to the TV as more information kept coming out about it.  These articles paint a sadder story of people who have gone from being “ladies who lunch” to having to work (or move in with children) in their golden years.

Some are painting Madoff as a devil who set out to defraud his family, friends and community.  I don’t have anything to base this on, but my feeling is that the whole situation probably evolved gradually.  He might have been running investments profitably at one point (in the 80’s or 90’s is the speculation), got used to being viewed as a “market genius”, took a risk that didn’t pay off, then instead of being upfront, he hid the loss.  Perhaps he was hoping to get back “in the black” then move forward again, or maybe he just couldn’t take the blow to his ego that he’d messed up.  At a certain point he must have thought “I’m never going to be back in the black, but I’m not a young guy, maybe I can keep this under wraps until I die then leave it for other people to unravel”.  One Warren Buffett quote I like is “You only find out who is swimming naked when the tide goes out.”  The recent market drop was the tide that went out and showed that Bernie had been swimming naked.

Some people have compared Madoff to Hitler (many of his investors were rich Jewish families) which is insulting.  Comparing someone who defrauded a bunch of wealthy people to a man who attempted the systematic genocide of a race of people is offensive.  Godwin’s Law certainly applies.

There has been a number of racist perspectives on the whole deal as well.  Some anti-semites have apparently been happy that the whole situation occurred:  both for discrediting Madoff, who is Jewish, and his victims (many of whom are Jews as well and often very committed to philanthropy).  This is a blatantly ugly attitude, however some Jews have also made very racist statements claiming that “it’s especially bad that Madoff did this ‘to his own people'”.  Come on!  There are good people and bad people of all races, genders and religions.  Thinking that someone is going to be a good person because they’re Jewish, or not take advantage of the Jewish community because they’re a Jew is ridiculous and naive.  Madoff is a man who behaved badly.  His ethnic / religious identity has nothing to do with that.

Beyond being more sympathetic to Madoff than most (although I don’t think he’s Hitler or the devil, I do think life imprisonment is probably reasonable), I’m also less sympathetic to his victims than most.  Given, any time you’re robbed it’s bad.  And, it bothers me when people think it’s ok for bad things to happen to rich people because their rich.    A number of investors with Madoff lost EVERYTHING (they gave it all to him and were living off of the returns) and went from being rich to being poor.  Even if these are people who don’t have a lot of experience managing their money, it was pretty stupid of them to put 100% of their money into one investment (no matter how good they thought it was).  People did the same thing with Nortel and with income trusts.  They’re happy to cash the checks in the good times, but start howling when their luck turns.  Grow up!  If you’re retired and don’t have enough investments with ultra-safe, conservative investments (like fixed income) to get you by at a minimum standard of living, then you’re gambling with your future (and shouldn’t get much sympathy if your luck turns).  Madoff was giving consistent returns of 10-12%, which tells anyone with a brain that there’s significant risk there.

That being said, it’s remarkably easy (although crass) to tell people who have lost on investments that they were greedy.  However, Madoff investors who lost it all were being greedy (there, I said it).

What has been your feeling about the whole Madoff situation?  Do you think spending the rest of his life in prision is a reasonable punishment?  Do you believe that he was acting alone?  Should investors be required to return money they withdrew from Madoff before the news broke?

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{ 10 comments… read them below or add one }

1 Mike

That Vanity Fair article about the victims was quite interesting. It’s hard to feel sorry for super-rich people who lose money but in some cases his victims are close to penniless.

2 guinness416

As far as I’m concerned he can rot, although I’m more annoyed at this point by the fact that his wife (originally a broker too, I think?) still has the penthouse and many millions.

I do feel bad for the victims, especially the older widows who had basically never managed money their whole lives and then found this nice local guy there to “help”. It’s hard to imagine myself being in that situation but I’m sure there’s quite a few 80 year old ladies of every net worth as vulnerable as that. Anyway TBFTGOGGI applies – if my whole social circle was raving about this money manager and making fortunes off him, and I saw hedge funds putting full trust in him, would I be strong enough to sit tight and keep with my ETFs? I doubt it!

3 DividendMan

Wow, Mr. Cheap! Life imprisonment for theft? I don’t think so. Equating large scale theft with murder and rape doesn’t seem right to me.

He “ruined” lives, will undoubtedly be the retort. Did he really “ruin” them? So your life savings are gone. Or, as with a large number of his victims, you’re only a multi-millionaire instead of a bagillionaire.

I guess I just think that worse things can happen. A drunk driver running into a car a paralyzing several people won’t get 10 years! For all Madoff did to these people, they still have their legs don’t they?

Sure he should go to jail for a while. I don’t think the deterrent factor of 10 years in jail compared to life is going to change anyones mind from doing something similar.

Also, when he gets out of prison (if he doesn’t get a life sentence) he won’t be a threat to anybody.

4 Mr. Cheap

DM: I definitely get where you’re coming from. I guess the counter-argument would be giving Madoff the same punishment as some punk who stole a TV doesn’t seem right either. There’s the magnitude of the crime as well as the nature. A number of white collar thieves would be in big trouble if the punishment increased for every $1,000 they stole…

Beyond the theft, he also perpetrated fraud and securities violations.

Regardless, as an old man, whatever sentence he gets will be be pretty close to a life sentence.

5 Mr. Cheap

RB: As a clarification, I don’t think people who invested with Madoff were being greedy, I think people who invested EVERY CENT THEY HAD (and have now lost everything) with Madoff were being greedy.

The only compensation I think investors should get is what is a portion of what is recovered from Madoff (and his family). I don’t think taxpayers should provide anything (his fund certainly wasn’t FDIC insured ;-).

6 Potato

To be fair, they were greedy: Madoff wasn’t advertising on TV, he was working at selling himself at parties via reverse psychology AFAIK (not like I was invited to those parties)… he created a mystique around himself and his returns and made people seek him out. People begged him to take their money so they could get in on the action.

Some people at least were suspicious of his consistently great returns, and that he might be a crook — but that he was their crook. I read one story around the time the ponzi scheme first came to light about how someone thought that his time at the NASDAQ had let him discover some exploit in the trading platform or in the market-making process. Here’s a similar one from a web search.

7 Thicken My Wallet

It was interesting that Madoff simply plead guilty to all charges rather than plead out which either means he’s really sorry and knows he got caught or he refuses to drag anyone else with him down. If its the latter, there may be honor among theives after all.

I am not sure he should get life in jail. If he was a regular guy, he probably would not given he had a clean record, his age, its a white collar crime, he co-operated with the authorites etc. etc. But, who knows, the public is looking for blood in this entire meltdown and he may be the metaphorical bloody post-script to this entire economic mess.

The really sad part of this story is that in a couple of years everyone will have forgotten about him and another Madoff will do the same thing. Madoff is simply an enabler for our collective greed. I am not sure how many of us could have resisted if given the same opportunity to invest.

8 Leslie

As someone who worked in high networth wealth management, calling people greedy who put ALL their money into Madoff’s investments would be incorrect. Seriously, sometimes people with money are completely naive about it and are relieved to have someone take it all and manage it for them. I’ve worked with multi-millionaires who inherited a wad of money and sadly burned through it within 18 months–and others who knew they knew nothing and desperately wanted someone to trust to manage it. Bernie Madoff’s most serious crime is betrayal of the trust people gave to him. My dad always used to tell me, you can lock up a thief but what do you do with a liar? It was the worst insult you can give someone to call them a liar. Bernie Madoff was a liar. That he chose to use his deception on rich people is beside the point. Money is ‘stuff’ like anything else, and to lose it is a bad thing, but not as bad as losing faith in your judgment and trust in people. That’s what hurts these ‘rich’ people more than anything, and it’s where everyman can empathize.

9 Dividend Growth Investor

I agree with you about the whole diversification thing. But you know, when you are retired and you haven’t saved enough , you end up chasing highest yielding stocks.

10 Basil2

I think you’re confusing legit risky business with a fraud. It’s not that people are upset with money lost because the business was risky and therefore they lost. It’s that the guy is a crook, misrepresented his books, lied about how he delt with people’s money. You totally missed the point.

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