Diana B. Henriques on Bernie Madoff, Wizard of Lies

June 2, 2011

The Wizard of Lies: Bernie Madoff and the Death of Trust

JULIA TAYLOR KENNEDY: Welcome to Just Business, a series of interviews on global business ethics. I'm Julia Taylor Kennedy, and today on the program we're talking about the enormous ethical questions raised by Bernie Madoff's Ponzi scheme, which unraveled in late 2008 when his sons reported his grave misconduct to the federal government.

Here to enter this murky territory with me is Diana Henriques, New York Times financial reporter and author of the best-seller The Wizard of Lies: Bernie Madoff and the Death of Trust.

Diana, thanks for joining me on Just Business.

DIANA HENRIQUES: Glad to be here, Julia.

JULIA TAYLOR KENNEDY: Before we begin, let me just make a quick note for our listeners, full disclosure. This story is especially interesting to us here at the Carnegie Council because our offices actually sit less than a block away from Madoff's former penthouse residence on East 64th Street and Lexington Avenue in Manhattan. So we certainly saw the media frenzy and watched that piece of the puzzle unravel.

DIANA HENRIQUES: Quite a circus, wasn't it?

JULIA TAYLOR KENNEDY: Yeah, it really was. We were kind of removed from it all and saw the circus. But in the process of writing this book you had unparalleled access to Bernie Madoff himself, talking with him directly while he was in jail, exchanging many emails, and really working with him through the $65 billion that he stole of investors' assets and asking him how that took place.

So what he is like as a person and is he as you expected him to be?

He really wasn't what I expected him to be, although I remembered him from the days before this whole crime surfaced. He was an approachable, accessible man, plain-spoken, a minor figure on Wall Street really. He was very important on the back scene of how stock markets operated and how automated they were, but not well-known to the retail investor or really to the journalism world at all.

When I saw him first in prison in August of 2010, he was an interesting man—If I had known nothing about his history, I'm not sure I would have stopped twice to chat with him.

He was not the typical Ponzi schemer at all. I've unfortunately covered many of these over the years, and they tend to be very charismatic people. They are mostly men. They are going to be the guy in the corner, everyone listening to them tell funny stories.

That's not Bernie Madoff. Bernie would be standing at the side listening, laughing at all the right places. He was never the most charming person in the room. He made you feel like you were the most charming person in the world. That was his fatal gift really. He held up a mirror to you that made you look so smart, sophisticated, and intelligent that you would never second-guess your decision to trust Bernie Madoff.

JULIA TAYLOR KENNEDY: How did you then interact with him and prepare for that interaction if he was such a slick operator? How did you make sure that you didn't fall into the trap of being charmed by him?

DIANA HENRIQUES: This is not the first time in my career I've had to interview someone of very diminished credibility. I cover white-collar crime, so I'd done this before. But, in a way, I was blessed by what I thought was my curse. I had tried to set up this interview with Madoff from the day he pleaded guilty. When he was here in jail in Manhattan, I sent the first letter to him in prison asking for an interview. Then, when he got to federal prison in North Carolina, I sent more letters, more requests. He ignored them all.

So I continued with my frantic research into every document, tracking down every person who knew him, had worked with him that I could find. More than a hundred interviews; hundreds of lawsuits and all the exhibits to them; many, many government documents—assuming I would not be allowed to talk with Bernie Madoff.

It took 18 months to organize that first interview. So by the time I sat down with him, I'd actually had an enormous amount of background knowledge and context to use to test the truth or the lies of what he was telling me.

While at the time I thought it was this enormous curse that I had not been able to interview him sooner, looking back on it, it was actually a godsend that I went into that interview as well-prepared as I did and was able to meet him more or less on his own turf. I could detect when he was spinning me, I could challenge him on his version of events, because I had so much background information at that point.

JULIA TAYLOR KENNEDY: Did you notice times when he was spinning you? Can you give me an example of a time when you picked up on it?

I don't think he ever told me the truth about when this whole fraud started. It's interesting. When I asked people, "If you had one question you could ask Bernie Madoff," when I was hoping for this interview, "what would it be?" You know, everyone wanted me to ask him, "Why did you do it, Bernie?" That was not on my list of top ten questions. He's a very unreflective man. I wasn't sure if even he would know truly why he did it.

My first question was: "When did it start?" I believe he lied to me about that. He insisted it did not start until the early 1990s. I challenged him. I pointed to evidence that suggested it started sooner. He insisted, "Oh, no, no, no."

Then he told me a story about 1987, the market crash. Several of his big investors, who had hundreds of millions of dollars invested with him, were frightened by that crash and decided they wanted to take some profits out. Madoff got angry even just telling me about this story many years later and said, "They turned the tables on me. They changed the deal. They left me hanging out there to dry by taking all this money out." He really had to scramble to cover those withdrawals.

"Well," I said, "but if you had legitimate investments, why would that have been a problem?"


He bobbed and weaved.

Then I said, "That was about when all of this hedge fund money started to pour in. You're telling me it wasn't a little bit tempting when people are trying to take money out, that you're having trouble getting, and other people were pouring money into your hands, it wasn't a little tempting to take some of that and cover those withdrawals?"

"Oh no." He insisted that he did not begin the Ponzi scheme in 1987.

We went back and forth on that, not just in that interview but in emails as recently as two weeks ago. He is sticking to his story that the fraud did not start until after 1992. I just don't find it credible.

JULIA TAYLOR KENNEDY: You started to explain it a little bit, but just for listeners who haven't been following this for a couple of years, if you could remind them, as you've uncovered more about it in all this research you've been doing, how exactly Madoff's Ponzi scheme worked, because it was a traditional Ponzi scheme but with some embellishments of his own.

Enormous embellishments. A Ponzi scheme is basically a very elemental crime. It's a liar with a bank account. Checks come in at one end; checks go out at the other end. It's very simple and very primitive.

But what Madoff did was camouflage it with this near-Potemkin village of software and stationery records. He actually kept old stationery so that he could back-date documents and stick them into the files if he needed them to show to regulators.


He developed software programs that made it look like an investor who visited his office was looking on his computer screen into an independent third-party clearinghouse—and, sure enough, there were all the stocks and bonds, safe and sound. It was all fake.

So he had a very elaborate scheme to hide this very simple crime. What he did was take money from new investors and use it to cover the withdrawals that other investors were making. Some were taking out whole amounts. Some were simply withdrawing what they thought were their legitimate profits over the years.

He never promised people the sun, moon, and stars. In fact, the profits on your Madoff account many, many years were less than you could have made investing in a legitimate mutual fund like the Magellan Fund at Fidelity. He didn't pay huge returns, but he paid wonderfully comforting, consistent returns. That both allowed his cash to go further and attracted, tragically, the most conservative of investors, who valued safety more than they did big profits.

JULIA TAYLOR KENNEDY: Iin order to keep this going over, he says, a period of 15 years, others say it's more like 20-25, you have to keep money coming in in order to pay those disbursements and those withdrawals. So what role did feeder funds play in keeping that cash flow coming in to Bernie Madoff?

Well, Julia, you're absolutely right that fresh cash is the life blood of a Ponzi scheme, that feeder funds were the irrigation system that kept that cash flow going.

They extended Madoff's reach literally around the world. There were feeder funds that specialized in the retirement market. There were other feeder funds that marketed themselves to exclusive Swiss bankers. There were some that reached as far as the Persian Gulf. So the different networks of feeder funds allowed Madoff to tap into an enormously diverse community of investors—Latin America, Europe, Asia, all over the United States, Canada. They extended his reach to a really astonishing degree, and this was in fact the first truly global Ponzi scheme.

JULIA TAYLOR KENNEDY: Is it possible that these feeder funds would have no idea that there was any foul play when they were getting such steady returns through turbulent times?

It is possible. Madoff's selling point was that he aimed for consistency, so obviously the fact that you were getting consistency would simply prove that he was superlatively good at what he was doing.

But many of these sophisticated investors bent their own rules and cut their own corners to overlook some of the things about Madoff's operations that in hindsight ought to have raised enormous red flags. He was not transparent. He wouldn't let people come in and inspect what he was doing.

He basically had an attitude that said: "If you have questions, you're suspicious, take your money. I don't need it. I don't want it." It was kind of a "take it or leave it" attitude.

So many people wanted to invest with him that they just turned a blind eye to the possible consequences of ignoring these quirks. "You know, Madoff was eccentric," they said, "he was prickly, he was a little touchy," and they would tolerate that because of his astounding track record and his reputation.

JULIA TAYLOR KENNEDY: Even that sort of low-key, non-desperate attitude would be disarming in a way, right?

Yes, very much so. He was the goose that was laying their golden eggs. If they couldn't invest with Bernie Madoff, they would not have the lifestyles that they were building around these hedge funds that they were running. So they very much wanted him to be real. They wanted to believe in him.

The Madoff story, Julia, is really an enormous tale of the power of self-deception, the people who deceived themselves about Madoff—and, of course, chief among them was Madoff himself.

JULIA TAYLOR KENNEDY: Why do you think it's so hard for him to admit failure?

I've tried to avoid the amateur armchair psychology and simply provide the readers of The Wizard of Lies with enough information about his early life, his character, and his behavior so that they can play that game themselves.

But certainly, he was traumatized by his life as the son of a serial business failure. His father, Ralph Madoff, had started a sporting goods manufacturing company, called Dodger Sporting Goods Corporation, that Madoff loved. It manufactured the Joe Palooka punching bags and all kinds of other wonderful sporting equipment. Madoff had expected to spend his summers working for his dad and then ultimately take over that business. It failed spectacularly and filed for bankruptcy.

A second effort in the same business also failed. Then, Madoff's father tried to go into the financing business, set up a brokerage firm to do that, but hid his own ownership and put the brokerage firm in his wife's name because his own credit was ruined by now. There was a lien on the family house.

So Madoff's childhood, from the time he was about 13 until he got out of high school, was a turbulent period of financial anxiety and very public failure on his father's part.

We could speculate that that made it very hard for a kid determined to be better than his father and more successful than his father to admit failure. Madoff himself said that he just found it very hard to admit failure. He was always trying to please people, and people expected great things of him. He was almost physically incapable of accepting humiliation.

JULIA TAYLOR KENNEDY: Something else that has come up in the aftermath of the financial crisis, as well as coverage of Bernie Madoff, is that there is something within the Wall Street community that buffers accountability between brokers or bankers and investors, that they are moving such huge sums of money that they lose sight of the impact that their decisions make. Do you think that also had a role in creating Bernie Madoff and making him think this was acceptable, this kind of practice? Or do you think it was more than that?

DIANA HENRIQUES: I don't think Madoff himself ever thought that what he was doing was acceptable.He originally thought he would be able to get out of it. He felt the Ponzi scheme was a temporary measure and he would be able to work his way out. All Ponzi schemers believe that. But there is no doubt that he knew he was breaking the law, that he was committing a crime.

But the Wall Street environment is culpable in this way, Julia, I agree: it's a very unusual environment, in that it has always equated wealth with intelligence. The assumption on Wall Street is if you're rich, you're smart.

And this isn't true in most of the other realms of life. You and I both know brilliant academics on campus who don't care a bit about money. They're not rich, but they're certainly smart.

I know people in retailing who certainly would never win a Nobel Prize for intellect, but they've got a wonderful, shrewd eye for what people will buy, and they are very successful and rich, but we don't equate that they're automatically geniuses.

But Wall Street does. People who are rich are assumed to be smart. That disarmed people from suspecting their own decisions. If you're a very wealthy hedge fund manager, in the Wall Street world that means you're brilliant. So you're not going to second-guess your decisions about investing with Bernie Madoff. In a way Wall Street culture, which has many other tragic ramifications for the way we live our lives and the way that culture works, that culture helped empower Bernie Madoff because it disabled some of the tripwires that might otherwise have alerted people that there was something wrong here.

JULIA TAYLOR KENNEDY: So it sounds like you're saying that the responsibility and accountability—obviously that Bernie Madoff was a criminal and was knowingly committing these criminal acts—but that it lies with other actors in this saga as well.

A Ponzi scheme is a collective activity by its nature. Madoff could not have pulled it off alone. People had to trust him enough to participate unwittingly in this crime.

The environment on Wall Street in which he operated was certainly a world in which people tended to blink at cutting corners. There was widespread suspicion among institutional traders that Madoff may have been cheating some of his wholesale customers to benefit his investment customers through a form of insider trading known as front-running.

Madoff wasn't front-running. He wasn't trading at all, so he wasn't front-running. So he knew that that was a crime no one would ever be able to pin on him.

But there was a low-level suspicion among his favorite investors that maybe they were the beneficiaries of the corners Madoff was cutting somewhere else. But that kind of environment, where you look the other way at people who aren't dotting every I and crossing every T, becomes very common in boon times. When the good times are rolling, people are not watching carefully to see if everything is completely on the up-and-up. So that, in a way, assisted Madoff in keeping his crime going as long as he did.

And many people just wanted to believe this was true. They wanted these safe, steady, conservative returns from Madoff. They didn't want to have to manage the chaos of the market on their own. He promised to make it simple, safe, and consistent for them, and that was so seductive that people developed blind spots and just refused to see what now looks like glaring red flags in hindsight.

JULIA TAYLOR KENNEDY: I know that in the epilogue of your book you have some ideas for how the SEC, the regulatory body, which also looked at Madoff a few times and didn't look closely enough, how they can proceed, because you say investors need to keep a closer watch, but we now know they're not going to read the fine print. So what are regulatory ways that we can maintain trust between broker and investor but still keep a watch out for these kinds of criminal acts?

It's an imperative balancing act, Julia, you're absolutely right. I could create a world for you where you would be completely safe from Ponzi schemes and, I guarantee you, you would not want to live in it, because it would also be completely devoid of trust. We can't operate a modern economy without trust. And who wants to live in a world like that anyway?

So we have to find a way to accept that investors are going to make their decisions based on who they think they can trust. That has to be the starting point for our regulatory regime.

We can't say, "Oh, they're not going to decide who they'll trust until they read all the fine print." That's nonsense. That's fantasy.

Some of the ideas I suggest in the epilogue are a little bit outside the box. They're really offered more to get a conversation going.

Things like requiring investors to have a license, for example. We require drivers to have a license. We require young people to take driver's ed and learn how to navigate a car through traffic. Why not require them to take an investment course and get an investor's license before we turn them loose on your own 401(k)? That would be one way to do it.

Another thing might be to require Wall Street to police itself by imposing such draconian penalties for violations of fiduciary duty, for betrayals of trust, that Wall Street would start taking it seriously. And I mean not fines—money means nothing on Wall Street—but serious loss of freedom, serious incarceration, destructions of your career, so that Wall Street would say, "Gee, we better keep our guys honest before they blow up the firm." That might help too.

Or we could borrow an idea from the medical world and establish a formulary, where regulators would say, "Look, these are the approved investments: public mutual funds, bank CDs, REITs, and so forth. These are what middle-income investors can safely put their money in. We're going to watch those investments like a hawk. But if you are investing in something else, some hedge fund operated out of the Cayman Islands, don't come running to us and complain that it was a fraud, because we're only watching these safe investments and that's where you should be."

One of the tragic things about the Madoff story was even if Madoff had been 1,000 percent honest—which he wasn't, but if he had been—what was he doing? He was running a secret unregistered hedge fund out of the backdoor of his wholesale stock-trading business that provided no prospectuses, no current public reports, it used a little bitty accounting firm, and it didn't use an independent custodian. So even if he had been honest, he was operating such a risky investment that no middle-income investor who couldn't afford to lose all of the money should ever have looked twice at him.

Part of what I hope The Wizard of Lies will get going is a conversation about how we protect ourselves, what we should expect of our regulators, and how we build a world that is both livable, in terms of the levels of trust, but does not leave us so vulnerable to people like Madoff, who are so gifted at exploiting our trust, to steal from us.

JULIA TAYLOR KENNEDY: I want to return a little bit to Bernie Madoff the man. Through the book you display signs that Madoff did feel certain obligations and responsibilities, and acted in a somewhat moral way.

For example, before he told his immediate family about the fraud that he had committed, he pushed his sons—and, in fact, this kind of pushed his confession—he pushed his sons to use his remaining millions to give early Christmas bonuses to employees and pay back some select investors from their accounts. He and his wife sent Christmas presents
of heirlooms to close relatives and friends after he was on house arrest, which was illegal but may have come from a place of generosity, a selfless act.

And you certainly wrote that you saw him shaken by his older son, Mark Madoff's suicide. Mark Madoff committed suicide in December of 2010, and then you saw Bernie Madoff in person in February of 2011 and describe him as a really changed man.

I'm curious if you think that Bernie Madoff had developed his own code of values or ethics that he was living by. Or was he just reacting moment to moment?

He remained very well-defended from the reality of what he was doing through the long life of his crime. That's the nature of a Ponzi scheme—there aren't really any victims until the music stops. So as he was looking into the faces of his friends, family, colleagues, coworkers, and all of his hedge fund clients, he didn't see victims, he didn't see people he was ripping off; he saw beneficiaries. These were people who were benefiting from what he was doing.

He was able to lie to himself successfully, thinking that he was not doing anything so dreadfully bad, and as soon as he was able to work his way out of it, he would fix it.

But then, when it all started to fall apart, that's when he really, as you said, began to confront some morality of the real world. That's where he started to realize what kind of pain he was going to cause for people.

Iinitially, as those checks and those gifts suggested, he was thinking in terms of trying to fix some of the financial pain that he was going to inflict on people.

He was completely blindsided by the emotional devastation that he inflicted on his own family and on other families too. There were two other investors who committed suicide within a few weeks of his arrest because they had lost everything that they had invested with him. There were beloved homes that had to be sold, college educations that had to be aborted. There were lives that were tragically and forever ruined by what he did, and no amount of money could put those back together again.

But his initial way of thinking about it—and it's not surprising when we go back to that Wall Street equation, "you're smart, you're rich"—his initial way of thinking about it was that "it's dollars and cents. Here's how much they might get from the bankruptcy. Here's how much they made from me over the years. Everyone's going to be more or less made whole somewhere down the line."

Then, with his son's suicide, I saw him in February completely shattered by that event. I began to think that maybe dealing with that had finally awakened him to the larger dimension of the damage he had done, the things that could never be fixed, that no amount of money could repair.

Whether he continues that journey and ultimately begins to recognize the pain he has caused, not just for his own family but for everyone who trusted him, it's probably too early to tell. But certainly, I did see a man with a very different perspective about what he had done when I saw him in February than I had when I interviewed him the previous summer.

JULIA TAYLOR KENNEDY: Now, of course, at that point he seemed very human and very fallible and reacting to emotion. Over the arc of his career as you've looked at it, what do you think about Madoff's humanity? Does he come off to you as monstrously human or a human monster, an exaggeration of a human or this exception to the rule?

I pressed hard against the arguments that Madoff was some kind of beast, psychopath, or non-human vicious creature, in part, because that leaves us so vulnerable to the next Bernie Madoff. It is the nature of Ponzi schemers to be charming, ingratiating, trustworthy and respectable.

So the attitudes that I find so widespread about Madoff, that dehumanized him, that really talked about him as if he were some vicious creature, not only are off-base from the basic man himself, but it also is another comforting self-deception, because it leads people to believe, "I'll recognize the next Ponzi schemer because he's going to look like this psychopath, he's going to look like this monster."

No, he's not. He's going to look just like Bernie Madoff—an elegant, successful, respected statesman of Wall Street that everybody wants to invest in, that everybody wants to get close to. That's what the next Ponzi schemer will look like too.

So my effort in portraying him as monstrously human rather than an inhuman monster is to alert people to the fact that they cannot depend on some kind of phony Geiger counter to comfort themselves, to think, "I'll recognize this Ponzi schemer." No you won't, because that's the nature of Ponzi schemers. They are human just like us. They're better than us. That's what attracts our attention, our admiration, and our trust. They are just like us only more so, only a little better, a little shinier, a little smoother.

So I was trying to take people inside the world of a Ponzi schemer—not just because it is a timeless and enduring drama, but because you need to be there in order to protect yourself from the next Ponzi schemer in your life.

JULIA TAYLOR KENNEDY: One of the other scary parts of thinking of Bernie Madoff as his characteristics being exaggerated characteristics of our own is that then on smaller scales we can become Bernie Madoffs, or people we love can become him.

I think it does comfort us to think that there is some huge gulf between us and people who commit crimes. That isn't my experience. I've covered white-collar crime for decades now, and I am always struck by how mystified the criminal himself is about how he got in this fix.

It actually is really quite easy to slip over that line. You lie to yourself that you're going to make it up, you're going to put the money back, you're going to get out of this hole, and then you're on that slippery slope.

If people emerge from The Wizard of Lies with a better appreciation for the kind of vigilance that's necessary to live with integrity, then I will feel like I've accomplished something.

Madoff was not strong enough to accept failure as the price of honesty. Well, a lot of us don't like to admit failure. A lot of us would rather everyone thought well of us. How big a price are we willing to pay to maintain everyone's respect?

Madoff was willing to sell his soul. He was willing to rob everyone he knew and everyone who loved him, to betray them all, rather than admit failure.

Each of us has a price. That's all I'm trying to say with that analogy. I'm not trying to excuse anything that Madoff did. I am simply trying to introduce him as a human being who crossed the line into this vast, dreadful crime so that we can understand better how that kind of crime works in our society.

JULIA TAYLOR KENNEDY: One interesting contrast to that description of Bernie Madoff as human and someone that is likeable and someone that is enticing is the character of Harry Markopolos, whom you talk about in the book, who was a whistle-blower who was a little abrasive, didn't have a lot of social smarts about him, and got blown off when he tried to blow the whistle on Bernie Madoff.

It's one of those paradoxes that, if you were a novelist, your editor would say, "No, no, Diana, take this part out." Here is Harry Markopolos, who is absolutely right about Madoff being a fraud, but he was a total failure as a whistle-blower because he rubbed people the wrong way. He couldn't make his arguments in a coherent and easily accessible way. He got angry. He belittled the SEC lawyers that he ought to have been trying to recruit to help him.

And then here's Bernie Madoff, who is absolutely dishonest, absolutely a crook, and everybody likes him, everybody trusts him, everybody wants to be around him.

That contrast is one of the most heartbreaking and yet profoundly accurate portrayals of what happens in human relationships.

If you look at the whole story about how the SEC fumbled the multiple warnings it got and the multiple investigations it tried to do of Bernie Madoff, again you see that human equation.

We tend to forget how important it is. We look back and say, "The SEC should have gotten this," "They should have listened to Harry Markopolos." But then you look into the human dimension and you begin to understand how much those emotional reactions and those personality traits can steer the story.

JULIA TAYLOR KENNEDY: It is a fascinating story, and I appreciate your going through it with me. Diana Henriques, thanks so much for joining me on Just Business.

I'm so glad to be here, Julia. Thank you.

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