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Financier Bernie Madoff, who perpetrated one of the biggest Ponzi schemes in history, died ignominiously in prison aged 82 this week after suffering from kidney failure and other ailments.

It is said that he bilked some US$20 billion from a US$65-billion Ponzi- scheme, leading to a 150-year prison sentence. Many people lost their life savings to a man who they trusted with their investments.

The once lauded ‘King of Wall Street’ brought shame and disgrace on his family and the name Madoff will forever be associated with fraud, larceny and financial misdemeanors – that is the legacy he left to his grandchildren.

Madoff projected an image of the quintessential banker – conservative, confident, polished, informed and a man steeped in his profession. People bought into it and trusted him.

Many of us buy into an image and projected persona and neglect to further examine vaunted accomplishments. This is what marketers bank on.

Madoff exploited greed and the need to acquire more. When he began to produce annual double-digit growth on investments, his methods were not questioned – everyone focused on the results.

The global financial crisis of 2008 was a reckoning and led to questions being asked of just how does the financial system work? Exactly what are these exotic financial instruments – mortgage-back securities, asset-back securities, collateralised debt obligations, credit-default swaps?

We really didn’t understand what they all were or how they worked but simply deferred to the likes of Bernie Madoff and reaped the returns, asking no questions.

LEFT IN TEARS

When the party was over and those who were left in tears with their money unaccounted for and lives upended, their anger and resentment turned on Madoff. How could he do this to us? We want justice! He needs to go to prison! We want our money back!

We all hail and cheer for the winner, that person who accomplishes unfathomable feats. It draws us in, and we expect our time in the sunshine by mere association. Madoff knew this and kept the illusion going for years, reeling in ever-increasing bigger fish.

The Story of Madoff draws parallels with Goethe’s tale of Faust and Mephistopheles and the latter’s promise of alchemy, turning paper into money for the Emperor of the Holy Roman Empire.

Madoff created a myth  people bought into primarily because he conjured up a reality that could not be explained-the rabbit out of the white hat.
Investors thought, “My gosh! This is incredible! What fantastic returns! Sign me up!”.

DUTIFUL SONS

Like dutiful sons, Mark and Andrew Madoff hitched their wagon to their esteemed father in what was essentially a family firm. It took them a long time to question the patriarch and seek an explanation to the unexplainable.

Amassing a net worth of some US$850 million together with his wife Ruth, Bernie Madoff was the living embodiment of the American dream. The company prospered and so too did the family. The sons no doubt considered themselves blessed and in their eyes their father could do no wrong.

Madoff’s wife Ruth felt no need and had no inclination to inquire as to how her lifestyle had come to be and the source of the riches bestowed upon her family.

When her husband’s misdeeds were uncovered she claimed ignorance, denied culpability and professed to have no idea how her husband’s business worked.

Because of his well-crafted image and reputation, banking giants such as JP Morgan, HSBC, BNP Paribas, pension and hedge funds, individuals of high net worth were all duped by Madoff.

Asked to explain his investment methods, he put it down to employing “a split-strike conversion strategy”.

CREDIT TO MEDIA

Now that’s a head scratcher if ever there was one! This technique is supposed to minimise risk by diversifying an investor’s portfolio. In Madoff’s case, this did not occur.

The media, in particular Barron’s, must be given credit for asking questions about Madoff’s practices and bringing his shenanighans to the attention of the public. This underscores the importance of having a potent media capable of holding people to account.

A lot of credit has to be given to fund manager and CPA Harry Markopolos who began his investigations into Madoff as far back as 1999. His concerns and warnings were constantly ignored, but he persisted.

“My team and I tried our best to get the Securities and Exchange Commission (SEC) to investigate and shut down Madoff’s Ponzi scheme with repeated warnings,” he ruefully recalls.

The SEC failed to take him seriously until the biggest financial fraud in American history came to light. Madoff’s perceived respectability and credibility provided a cloak that no one dared look under. Markopolos on the other hand looks geeky, unkempt, had no connections and his plausability was questioned but he asked all the right questions.

One of Madoff’s victims, Jonathan Davis, sums it up best – “Who would have ever imagined that the former chairman of the Nasdaq was running a Ponzi scheme? The number of people and institutions involved gave it a patina of credibility that persuaded many of us to suspend disbelief.”

“I believed when I started this problem, this crime, that it would be something I would be able to work my way out of but that became impossible.”

Bernie Madoff

Madoff set up fake accounts, squandered people’s money and lied to his investors. He thought he could somehow make right what he knew to be clearly wrong. In the end he was unable to fulfill redemption requests for US$7 billion. His fraudulent actions were exposed.

“I believed when I started this problem, this crime, that it would be something I would be able to work my way out of but that became impossible,” explained Madoff after he was sent to jail.

Assessing Madoff’s duplicitous, deceitful and beguiling approach to money management, Markopolos said: “The main emotion he appealed to was human greed, but he was smart enough to address investors’ fears by showing them a strategy that owned stock market index put options [option contracts that give the owners the right, but not the obligation, to sell specified amounts of underlying securities at a specified price within a specified time] such that if the stock market ever crashed they would be protected.

“He created the illusion of an investment strategy that never hit home runs but instead earned a steady one per cent a month and also couldn’t lose much money because he owned protective stock market put options. If such a product had really existed it would be the Holy Grail of investment products. But Madoff was smart enough to show modest returns that didn’t seem overly high so as to avoid suspicion.”

The fate of Bernie Madoff readily brings to mind those words from the BIble, “For what shall it profit a man, if he shall gain the whole world, but lose his soul (Mark 8.36)?

Madoff ended his days in jail, disgraced, despised, a thief and a liar. His eldest son committed suicide and his younger son died from cancer. His wife Ruth turned her back on him and for the rest of her life has to answer questions on whether she was complicit in his fraud.

His brother, Peter Madoff was sentenced to 10 years in jail for his part in the Ponzi scheme. Bernie Madoff grandchildren will have to live with the shame and disgrace of bearing the Madoff name. It will be a generational curse.

The destruction Madoff wrought on his family is truly Mephistophelian and you can imagine the Prince of Darkness clutching Bernie Madoff’s soul with a cackle as he makes his way back to hell.

“The important thing you have to know about Madoff is that he is a brilliant con artist,” recalls Markopolos.

Money is not the root of all evil.

“The love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness and pierced themselves through with many sorrows” (I Timothy 6:10)