Wednesday, June 27, 2012


This book on the massive, soul-destroying Ponzi scheme engineered by Bernard L. Madoff that  tore the life savings away from thousands of trusting investors is likely to be the chief reference text for one of financial history's most sordid chapters. I'm always fascinated when otherwise smart people do really dumb things - like trust all of their money to one man, a man who was able to conjure mystically steady quarterly profits over and over again, even during times when the rest of the market was plunging. There's no schadenfreude here on my part. Wall Street is deliberately non-transparent, and derives much of its power by remaining so. When good people are cheated out of their long-held earnings by one man's greed and lies, it's sad, frustrating and ugly - as well as being a great morality tale for how the human psyche gets itself into Ponzi scheme-like messes such as this over and over again. 

"THE WIZARD OF LIES" opens with a day-by-day, blow-by-blow account of the days leading up to Bernie Madoff's 2008 surrender and arrest, as the fallout from that year's Wall Street meltdown had finally forced a reckoning for him. No longer able to rob the proverbial Peter to pay the proverbial Paul, Madoff finally had to give up and turn himself in. It's riveting stuff, frankly - how a lie that had been maintained for nearly 20 years (the exact dates are fuzzy) came toppling down in a matter of days - ruining the lives of thousands of people, including Madoff's own family. The book then shifts back to look at how Madoff came to build his mystique on Wall Street, and takes us through the 1950s, 60s, 70s and 80s - decades in which there was definitely some financial chicanery on his part, but nothing quite like the billion-dollar ponzi scheme that he got running in what looks like about 1992.

Bernard L. Madoff Investment Securities had a "legit" trading business that was fairly well-run and profitable. Much of this was eventually managed by Madoff's brother Peter and later by his sons Andrew and Mark. Then there was the far larger hedge fund racket he was running, which included Enron-like phony trading desks on another highly-secure floor. This is the one into which billions of dollars flowed, from wealthy Jewish donors that Madoff hobnobbed with on the charity circuit, as well as from Hollywood celebrities like Kevin Bacon and "feeder funds" set up around the world to funnel money into Madoff's scheme, likely not knowing that it was 100% bogus.The genius of this crook is that he was an exceptionally smart man who used innate Wall Street knowledge, advanced technology, reputation, exclusivity, charisma and an alarmingly strong use of deception and cunning to get people to give him their money to manage.

Madoff would then send his clients and feeder funds quarterly statements - on paper only, with no ability for online research - showing modest gains. For wealthy, risk-averse clients, watching their money grow solidly and predictably was like catnip, and they would shovel more and more his way. He'd then use this new money to cover withdrawals of old money, and statements would reference "trades" that were being made in their accounts, even though not so much as one real trade was ever executed during the entire life of the ponzi scheme.

The Securities & Exchange Commission (SEC) gets absolutely raked in this book. They had multiple skeptics and intelligent folks petitioning them to investigate Madoff, whose returns were simply too good to be true. They did investigate him, several times, and the book recounts how Madoff lied, goaded and bluffed his way into not being caught several times. The SEC investigations were unmitigated disasters, and their failure led to even more people getting burned in the 2008 unraveling of the scheme.

Author Diana Henriques then takes us up again to Madoff's arrest, and spends the last third of the book in a way I was initially unsure of yet then later was very glad she spent her time documenting. Henriques walks us through the various lawsuits that flowed like waterfalls in the wake of Madoff's arrest, and the herculean efforts made by the victims' trustee to ensure that victims got as much of their lost money back as possible. Since most of the profits were phantom profits, there was many, many angry people who still believed they deserved this bogus money. She also talks about the media crucifixion of Madoff's innocent and shocked wife Ruth and children Andrew and Mark, the latter of whom committed suicide after wallowing in his new life as a tarred-and-feathered, disgraced Madoff. Other ruined investors committed suicide as well, leaving the lying, thieving Bernie Madoff on the hook for much more than lost life savings.

I said earlier that the book, which is excellent, is a morality tale, and it is. It exposes several aspects of humanity. There's the willingness to trust, and its flip side - the willingness to deceive: both deceive others, and deceive ourselves. Many people blew past the warning signs surrounding Bernie Madoff and decided to trust him while deceiving themselves - including government regulators, investment professionals and ordinary retirees. While the book tackles some Wall Street arcana, it never becomes bogged down in it and is quite thrilling in parts. Subplots are still unraveling in this tale since this book was published in 2011, and I look forward to the postscript and newly-updated chapters that will shed more light on how this happened and what Madoff was hiding as he dodged the SEC, his customers and his conscience.