For Bernard Madoff, the financial crisis has destroyed more than just his stock portfolio. The well-known Wall Street financier and former chairman of the Nasdaq Stock Market has been exposed as the operator of what may be the world’s largest Ponzi scheme. His asset management firm’s operations have seriously impacted financial futures and exiled Madoff from Wall Street. In total, Madoff allegedly stole about $50 billion from his investors — though that number is an estimate, as authorities cannot be sure how long Madoff has been working on the dark side of Wall Street. Madoff’s scheme proves the old saying: If it seems too good to be true, it probably is.
Ponzi schemes are investment operations that pay an investor returns from subsequent investors. The scheme has a rob-Peter-to-pay-Paul structure. Ponzi schemes trickle money down through their participants, rather than paying out profits, and are often referred to as “pyramid schemes” because the patterns of investment mimic the shape of a pyramid. The scheme’s success hinges on obtaining new investors to keep money flowing through the system because more investors are needed to keep the base of investment growing and to pay those already involved. To lure individuals to the scheme, high short-term returns are usually promised. Ponzi schemes give participants the dream of getting rich quickly without being up front about their personal costs.
Madoff’s Ponzi scheme differed slightly from the typical structure. He avoided the trap of high returns and instead offered modest, steady returns to specific clients. A promise of “safe” investing drew in many of his investors. He portrayed himself as an “insider” and convinced investors that his methods were too complex to divulge, and good returns stopped any questions clients might have had about the real character of Madoff and his hedge fund. Madoff used his social networks to drum up clientele, especially those of upper-class Jewish background. Perhaps one of the more troubling aspects of his scheme is its effect on nonprofit charities, many of which trusted Madoff personally. Madoff made charitable foundations the base for his scheme, furthering the lasting effects of his fraudulent business.
While a subject of talk on Wall Street for years, Madoff might never have been exposed without the problems of the recent economy. His hedge fund, though always suspiciously profitable, was not seriously questioned as illegal. During the past few months, however, investors attempted to pull about $7 billion out of the fund. Without the cash to pay investors, the true structure of Madoff’s business began to unfold. Limited liquidity in the economy began the spiral, and Madoff’s Ponzi scheme collapsed as the base of investment dried up. Investors immediately called for an investigation to determine exactly where their money had gone. Wall Street was stunned.
So who is the man who played with the lives of so many? He came across as a reclusive, industrious man to acquaintances. Those closest to him referred to him as “controlled” and concerned with perfection. It is unclear if those from his tight-knit community, Laurelton in New York City, ever suspected the financier to be a world-class manipulator. His almost flawless manipulation of personal and professional relationships has had devastating consequences. The New York Times’ account of the affair compares Madoff to Ted Bundy, citing similar sociopathic tendencies. The recession adds more pressure to find justice for investors, many of whom were Madoff’s employees, neighbors or friends; all things considered and with the economy in free-fall, Madoff would be hard-pressed to find a sympathetic light for his actions.
What is next for Mr. Madoff? His lawyer has expressed Madoff’s desire to plea bargain, and Madoff is currently at his Manhattan apartment on $10 million bail. Though the government has repeatedly asked for Madoff to be jailed until trial, the judge has ruled instead for Madoff to wear an electronic monitoring device and observe a curfew. And now without his firm, Madoff might finally have the time to pick up a biography of his precursor, Charles Ponzi.
Lauren’s column runs biweekly Thursdays. She can be reached at l.palmer@cavalierdaily.com.