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Madoff the Magus

POSTED: 02:02 PM ET, 03/19/2009 by The Editors

Bernard Madoff
In this March 12, 2009 file photo, Bernard Madoff arrives at Manhattan federal court in New York on March 12. (Louis Lanzano / AP)

Who was Bernie Madoff? Will we ever get an answer to that question that is remotely satisfactory? Is the man behind the biggest fraud ever uncovered in the United States, $65 billion taken in a Ponzi scheme from close friends, charities and fellow financial sharpies, even knowable?

Now that the 70-year-old Madoff is in jail awaiting sentencing that will no doubt keep him in prison for the rest of his life, a plethora of in-depth magazine investigations into the man are joining the thousands of newspaper articles that have gone before them. They offer a prismatic view of a man that even his closest friends now say they didn't really know.

The first impression left by this pile of slick pages is Madoff as a Magus, a sorcerer who bewitched those who did business with him. But the deeper impression upon reflection is that Madoff was a kind of financial Chauncey Gardiner, the cipher-faced butler from Jerzy Kosinski's "Being There" who allowed the powerful to project their fantasies and preconceptions on the blank slate of his being. Like Gardiner, Madoff was extremely passive, saying little, letting people come to him, building a sense of mystery about how he operated that only made people want to pursue him even harder.


WHO'S TO BLAME? Funds Managers Who Trusted Madoff

Madoff and his enablers is the theme of a long piece in Bloomberg Markets magazine written by John Helyar, Katherine Burton and Vernon Silver, that limns a portrait of a man fed money by top-notch money managers from around the world who "wittingly or not, were part of the scam."

CASE THEORY: Madoff Associates Suspected Lesser Scam

These managers, the article states, knew there was something wrong with the way Madoff did business, but they suspected it was the lesser crime of front-running, using insider knowledge to trade ahead of clients.

"While front-running is illegal, it didn't horrify Madoff's champions," the article states. "' They were convinced that the risk was only that the Securities and Exchange Commission would do something about breaches in the Chinese wall in the Madoff organization," according to Swiss banker Werner Wolfer. "In the worst case, he says, 'what could be expected was that at a certain point the SEC could say stop.' "

Instead, led by their greed, the money managers walked into a giant Ponzi scheme "built on the respectability of others."

The article posits that government rules that cut the potential profitability of front-running in 1996 and 2000 might have driven Madoff out of front-running and into more riskier trading with the assets of his market-making firm. The article professes bafflement of what Madoff was doing with the funds from his separate asset-management firm, ground zero for the $65 billion fraud. So far, government investigators looking into the wreckage of the Madoff scandal have not found evidence that he made trades on behalf of his wealth-management clients dating back to at least 1993. Madoff himself said that his scheme began during the recession of the early 1990s when he was having trouble meeting the returns his clients expected.

FUN DETAIL: Credit Suisse Got Suspicious

In 2000, a delegation from Credit Suisse Group AG, whose bank clients had $500 million with Madoff, asked him about his auditor, the size of his fund and why he didn't have a third-party custodian to hold his clients' assets. "After the fifth or sixth query, people who were at the meeting say, Madoff ended the session. 'You guys,if you are not happy with the returns you are getting,' he said, 'you can take your money." Credit Suisse told clients to bail but about only half did.


A cool-cat skillful schemer who got by on his affability and sense of mystery. People didn't care if he cheated a little. "They want a genius to give them a shortcut."


WHO'S TO BLAME? Bernie Madoff and J. Ezra Merkin

The headline on New York magazine's cover story by Steve Fishman says it all: "Bernie Madoff, Monster." Madoff is photo-shopped in Joker-style white-face, looking like Heath Ledger at his most actorly deranged. But Madoff only became Madoff with the help of, in the words of the article's subtitle, "the people who enabled him." Fishman focuses on one of the very big fish among the enablers, J. Ezra Merkin, who sent Madoff some $2.5 billion through feeder funds whose clients were unaware of Madoff's role in managing their money. The 55-year-old Merkin, "an intellectual showman, a marvel of erudition, quoting Hamlet or Nathan Detroit, holding forth on Jewish law or the stylistic shifts of Mark Rothko," is portrayed as the polar opposite of the humble Bernie Madoff from Queens. From the rarefied air of the Upper East Side, Merkin had many talents but managing money was not one of them. Rather he was a world-class salesman who gave others the confidence to invest.

CASE THEORY: Merkin Made the Classic Upper Class Mistake of Underestimating the Help

"Merkin didn't exactly think of Bernie as a peer. Bernie was an auto mechanic, a blue-collar technician focused on what was under the hood...A man like that could bear down on the details so the Ezra Merkins of the world could concentrate on finer things."

FUN DETAILS: Neil Diamond and Curves

Madoff crooned Neil Diamond's "Sweet Caroline" on the beach at Cabo San Lucas during his 70th birthday celebration in May 2008. "Where it began, I can't begin to know."
And Bernie could not abide curves. He drank out of square glasses, put pencils in square holders and used a square trash can. Wonder if he ever visited the Guggenheim?


Bernie was a smiling sociopath, but he was not callous or cruel. And Ezra Merkin paid more attention to his Rothkos (the largest private collection in the world, valued at $150 million) than to the money he had with Bernie. "The fact that Ezra had a blind spot for the way his money was being made--and in this he was not so different from many others during the boom years, even his own clients--functioned as a kind of soft corruption, which could enable the hard corruption of Bernie Madoff."



Madoff's scam swept the rich havens of Aspen and Palm Beach because the rich got greedy and fell for his consistent returns in down markets. Among those he fleeced were two father figures, Norman F. Levy, a New York real estate giant whose $244 million foundation fell victim to Madoff, and Carl J. Shapiro, a 95-year-old textiles magnate who served as Madoff's entre to the Jewish community in Palm Beach and sent him $500 million only weeks before his scam collapsed. Mark Seal, an Aspen resident who tried unsuccessfully to get into Madoff's fund, writes an epic account of the wreckage the man left behind among the rich and superrich. Carl Shapiro had started Madoff on his way by investing $100,000 with then 22-year-old broker in 1960. " 'Everyone had long whispered that Carl Shapiro went from rich to big rich because of investing early with Madoff,' " accountant Richard Rampell told the magazine. "Shapiro's wealth and ostentatious philanthropy provided an irrestible siren call for potential Madoff investors."


Rich people in Aspen borrowed against their free-and-clear houses to raise funds to invest with Madoff and play the spread between Madoff's return and the interest on their loans. Madoff set the minimum investment for entry into his fund, and there was never a fixed number. One group of eager investors was told, "Your minimum to me is $10 million." They balked, and there was no negotiation. Madoff also didn't allow people who worked in brokerage businesses to invest money with him.


Bernie's favorite restaurant in New York was Primola, "a friendly Italian place on Second Avenue near 64th Street." He always arrived at 6:30 with his wife, sat at a table in back and ordered the same thing: (small salad, chicken scarpiello and Diet Coke or red wine for him, fish and white wine for his wife. No dessert, no coffee. Out in 50 minutes leaving a 20 percent tip. Customers now come into the joint asking for the "Madoff Table," but the owner tells them, "The F.B.I. already has it."


Bernie was "pleasant, charming, but reclusive." He could be cold, imperial and arrogant. He was also quiet, abstemious and never flirtatious. He was a split personaliy, "pure Jekyll and Hyde," an anal-retentive neat freak with a major case of obsessive-compulsive disorder. "He loved his sons, but he never showed it," said a family friend. "Mostly tough love and fear. People were afraid of Bernie. He wielded this influence. They were afraid of his temper." Donald Trump, who said he turned down an opportunity to invest with Madoff, called him, "a Svengali for rich people." His scam was particularly devastating to the Jewish community of Palm Beach, destroying "a sense of superiority they had," according to author Laurence Leamer. "What Hitler didn't finish, he did!" a doyenne of Palm Beach Jewish society who lost double-digit millions told the magazine.

Shorter Takes

Esteemed financial historian Ron Chernow writes in the New Yorker that Madoff is merely the latest entrant into a long line of financial conmen dating back at least to Charles Ponzi, who lent his name to the scheme as known as robbing Peter to pay Paul. Chernow points out that Madoff made several improvements on the Ponzi method: Ponzi offered gargantuan returns, Madoff's were relatively modest but consisent enabling him to "appeal to avarice of a quiet, upper-crust sort;" Ponzi openly courted investors, Madoff pretended to fend them off, feigning reluctance at accepting people's money.

Chernow notes that Madoff has been dubbed a psycopath by forensic psychologists who liken him to Ted Bundy. But Chernow also asks if Madoff intended his scam from the beginning or merely got caught up in something. Chernow compares Madoff to another scammer, the Swedish match king Ivar Kreuger, who began operating a few years after Ponzi in the 1920s and "lasted ten times longer and invovled sums fifty times larger." Kreuger lent governments money at low rates in exchange for getting matchbox monopolies in their countries.

Kreuger's scheme is outlined in a new book, "The Match King" by University of San Diego law professor Frank Partnoy. The scheme eventually fell apart because Kreuger's company could not maintain the financial success necessary to power it. Instead, Kreuger turned to obtaining secret loans so he could pay dividends and maintain the illlusion of success. When things finally ran aground, Kreuger bought a 9-mm. pistol and shot himself.

Chernow ends his piece by noting that Madoff explained at his plea hearing that he thought his fraud would be short-lived.

"As Charles Baudelaire once said," Chernow notes, "we descend into hell by tiny steps."

— By Jeff Leen

By The Editors |  March 19, 2009; 2:02 PM ET In the News , Madoff Scandal
Previous: AIG Under Fire, The Fed's 'Stunning' Silence, Countrywide's Connections | Next: 'Forced Out' Exposed the Dark Side of D.C.'s Condo Boom. Have Property Owners Cleaned Up Their Act?


Please email us to report offensive comments.

Madoff is no worse than Dennis Nally at PricewaterhouseCoopers....
or Christopher Condron at AXA once a crook always a crook!

Posted by: rabshire | March 19, 2009 6:49 PM

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