A few days ago Bernard Madoff, a 71 year-old securities-fund manager and former chairman of the Nasdaq, was sentenced to 150 years in prison for investment fraud estimated at more than US$60 billion. When the sentence was announced in a federal courtroom in Manhattan, there were cheers from a handful of his 5,000 reported victims; others, too overcome by emotion, stared silently ahead or wept. Madoff’s scams cost dozens of investment firms substantial amounts of their clients’ money, but they also affected universities, charities, middle-class retirees, Holocaust victims, even his own sister. His victims bought into an illusion that he had carefully cultivated for more than 30 years.
Attempting to offset the emotional power of Victim Impact statements which had been read in court prior to the sentencing, Madoff’s lawyers argued that a 12-year sentence (effectively a life sentence, given their client’s age) would be punishment enough. Instead the court chose to broadcast its determination to punish financial scams to the full extent of the law.
This bold gesture is somewhat quixotic given the realities of financial regulation in the United States. The Securities and Exchange Commission (SEC), which is responsible for monitoring the vast financial networks which men like Madoff prowl so effectively, simply does not have the resources to do its job properly. With its current budget and staff, the agency can only look into around 10 per cent of investment advisers every three years. When it does investigate something as complex as a leading hedge fund, the labyrinthine nature of the information reviewed rarely discloses clear-cut evidence of fraud, however massive. As Enron, WorldCom and a host of other companies have shown, clever accountants have a variety of nearly untraceable schemes for hiding a company’s failing assets. And in the absence of smoking guns and successful prosecutions, it is foolish to expect an industry that thrives on ambition and greed to somehow regulate itself. With such long odds in their favour, it is therefore no surprise that snake-oil salesmen like Madoff are never in short supply.
On at least four occasions – in 1992, 1999, 2005 and 2006 – the Securities and Exchange Commission (SEC) was warned about Madoff’s fraudulent schemes. On one occasion, a complaint was submitted at the same time that Madoff was providing advice to then SEC Chairman Arthur Levitt Jr on how to regulate the very markets that he was scamming. According to the Economist, the SEC “gave short shrift to those who suspected him of wrongdoing [including a former rival who submitted a report] which listed 29 ‘red flags’ that, taken together, strongly suggested the Madoff’s operation’s returns were either fictitious or down to front-running (trading for one’s own account ahead of filling client orders).”
Part of Madoff’s seeming invulnerability was his high reputation among wealthy and well-educated Americans. Some of this was due to his social and cultural involvement with the world of Wall Street – he had at least three residences worth a total of US$21 million and Shana Madoff, his niece, was married to an SEC lawyer. But Madoff also knew how to ply his trade overseas, relying on a sophisticated network of ‘feeder funds’ which used his legendary reputation to recruit new believers. Credit Suisse is reported to have invested more than $950 million with Madoff’s firm; Banco Santander, according to the Economist, “helped to suck in billions from wealthy Spaniards and Latin Americans.” Madoff’s real genius, however, seems to have been the ability to sustain a personal myth which trumped the tawdry facts of his day-to-day chicanery, for more than thirty years. Enough people believed in his integrity long enough for him to keep passing the bill for earlier fraudulence on to eager newcomers.
Comparisons with other self-made men in American fiction are almost inevitable. Sherman McCoy in Tom Wolfe’s Bonfire of the Vanities, and Gordon Gekko in Oliver Stone’s Wall Street are close matches, but the best model for understanding Madoff is probably F. Scott Fitzgerald’s Jay Gatsby. Not only did Madoff make up his biography as required – he claimed to have attended Hofstra University’s law school and Oxford – but he repeatedly used his connections to the great and good to stifle doubts about the way he had acquired his wealth. This was the true source of his power. As Jonathan Freedman, a professor at the University of Michigan, has pointed out, “The fancy mumbo jumbo Madoff delivered to explain [his unlikely financial returns] may have taken some people in, but most, I suspect, were compelled by their own belief in America as a nation where economic growth was inevitable, prosperity an entitlement – and the stock market the surest index of ever-augmented riches.”
Madoff understood the power of this myth perfectly and tied his own fortunes to it. He also understood that no amount of doomsaying could really dent public confidence in a national myth of America’s inexorable progress towards peace and prosperity. Madoff’s illusion was too necessary to be let off easily, not only because of the usual fear and greed, but also because, in Freedman’s words, “it spoke to what is distinctive about America’s collective imagination, for better and for worse: our potted utopianism, our obsession with making a better material world for ourselves and, especially, our children; our uncanny and at times chilling predisposition toward the optimistic, facts be damned.”
Bernard Madoff is not the “terrorist” or “financial serial killer” some have made him out to be, nor a uniquely evil financier whose infamy will not ever be surpassed. He is simply a crook for our times, the creature of a lightly regulated, overly ambitious financial system fuelled by the hopes of a credulous culture.
