Madoff: Biggest Financial Scam in History

On Thursday, investment advisor Bernard L. Madoff (chairman of Bernard L. Madoff Investment Securities) has been arrested and charged in what may be the biggest fraud case in history.

Not just “big.” “Epic” would be more like it. We’re talking about a possible $50 billion fraud, here. As with the recent Blagojevich case, it’s hard not to marvel at the sheer audacity of the man at the centre of this case.

Here’s the story from the NYT: “Now Accused of Fraud, Wall St. Wizard Had His Skeptics”

For years, investors, rivals and regulators all wondered how Bernard L. Madoff worked his magic.

But on Friday, less than 24 hours after this prominent Wall Street figure was arrested on charges connected with what authorities portrayed as the biggest Ponzi scheme in financial history, hard questions began to be raised about whether Mr. Madoff acted alone and why his suspected con game was not uncovered sooner.

(For those not familiar with what a “Ponzi scheme” is, the Times explains that it’s “a type of fraud in which earlier investors are paid off with money raised from later victims — until no money can be raised and the scheme collapses.”)

How on earth did this happen? And what on earth made him think he could get away with it indefinitely?

As the title of the Times story suggests, there were those who had doubted Madoff for years. One financial advisor quoted by the Times suggested that it was “highly likely that the account statements themselves were just pieces of paper that were generated in connection with some sort of fraudulent activity.” Quoth another expert: “There were no smoking guns, but too many things that didn’t add up.” But, as is so often the case with successful cons, it seems like enough people were taken in by Madoff’s reassuring smile and his reassuring claims about past achievements for the thing to snowball into something far bigger than it ever should have.

It goes without saying that Madoff did a bad thing, here. Very bad. But I think interesting questions arise about what morally-significant forces made or allowed him to do it. One hypothesis, of course, is that he’s simply a very, very bad man, whose own greed and lack of concern for others allowed him to tell a long series of lies that ended in the ruin of people who trusted him. That would be the boring, “money-is-the-root-of-all-evil” hypothesis. But the many-years duration of the scam, and the robbing-Peter-to-pay-Paul nature of a Ponzi scheme, suggests the possibility, at least, of something more complicated.

I took a look at the Wikipedia page about Charles Ponzi, the guy who lent his name, back in the 1920’s, to this particular brand of scam. (Wikipedia is not always reliable (see Wiki-warning here), but certainly suggestive in this case.) The biographical sketch offered hints that at least part of Ponzi’s story was that his own entrepreneurial zeal got the better of him: at some level, he really thought his scheme could work, and that he & his investors really could all get rich.

So, Madoff may have been suckered by his own years of success: it’s not clear how early his Ponzi phase began, but it almost certainly didn’t encompass his entire career as a stock market guru. For his first couple of decades, at least, Madoff seems to have garnered a pretty decent return on his clients’ investments. Maybe, at some level, he thought he could keep doing it. And maybe each time he lied about it, he convinced himself it was only a slightly bigger lie than the last time, or maybe not really a lie at all.

None of this hypothesizing about moral psychology is intended, in any way, to exonerate the man or even to mitigate culpability. But when the scale of the wrong is so vast, and when eventually getting caught ought so clearly to have been foreseeable, it seems worth enquiring what it is that could have made a widely-respected, and apparently smart, man do something like this.
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See also: The Rise and Fall of Bernard L. Madoff, from Business Week
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Relevant Books:
Ponzi’s Scheme: The True Story of a Financial Legend .

2 comments so far

  1. Suresh Kumar G on

    A case of Fiduciary responsibility gone awry? What is the world coming into?This man could have become another Warren Buffet, but has chosen to be infamous instead. The forbidden apple has its charms, then.

  2. Anonymous on

    Something needs to be done, but what? Right on the heels of the Bernie Madoff scandal, another fraudster is revealed in India: the chairman of Satyam Computer Services, an outsourcing giant. Article here: http://www.nysscpa.org/blog/2009/1/9/oh-irony-satyam-sanskrit-truthIt notes that “satyam” is “truth” in Sanskrit, lol.


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