Bernie Madoff died last week (April 14) closing a chapter on one part of his historical fraud and massive manipulation of the financial system.
As a refresher: The former Nasdaq chairman turned investment fund manager oversaw a Ponzi scheme for more than a decade until the financial crisis of 2008 caused a run on investors demanding their money. But the money was never there. At the time of Madoff’s arrest on Dec. 11, 2008, account statements said his client base had holdings of $60 billion. When the scheme was uncovered, his high-end, celebrity clients lost all their money but had the resources to recover. Other investors were drained of their entire life savings and were set back to zero. More than $13 billion of an estimated $17.5 billion that investors put into Madoff’s business has been recovered.
His life took many forms. There was Bernie the swindler, the con man, and later in life, Bernie the inmate. As the inmate, he told his story in stunning detail and brutal honesty. He said his scam ran more than five decades, beginning in the 1960s. His final account statements, which include millions of pages of sham trades and creative accounting, showed that the firm had $47 billion in “profit.”
In the process of his confessions, he became Bernie the Myth — a symbol of fraud personified. His story was captured in a best-selling book in 2011, “The Wizard of Lies: Bernie Madoff and the Death of Trust.” It was later made into an HBO mini-series starring Robert DeNiro as Madoff and Michelle Pfeiffer as his wife, Ruth. The driving force behind both projects, and the woman who spent countless hours interviewing Madoff in person and via email from his confinement at the federal penitentiary in Butner, North Carolina, is Pulitzer-Prize winning author Diana Henriques. Henriques is the woman who fielded Madoff’s most famous question: “Let me ask you something. Do you think I’m a sociopath?”
As Henriques told PYMNTS in a conversation the day after Madoff’s death, she had stopped following Madoff and his case and was relaxing and doing The New York Times crossword puzzle without her phone on the 14th. By the time she finished the puzzle, she said, her phone was “melting down” with messages of his death. It took her most of the day to process the news.
“You might have always felt a sense of tragic waste in the Madoff story,” she said. “I knew him for so long before anyone else knew him. I knew the Bernie Madoff he was proud to be before he was arrested. And when he was arrested, it was like Dr. Jekyll had died. Now he’s gone and Mr. Hyde has died with him. Bernie’s crime was a significant pivot point in the vector of my career. I mean, it was just astonishing stuff, so there’s an ambivalence about how I feel about it. That’s just inevitable to any journalist and source relationship.”
Henriques said she always saw Madoff in the bigger context of financial regulation, which she is concerned about as the publicity around Madoff’s death fades. Her book was not titled “The Bernie Madoff Story.” She never saw it as a celebrity tell-all. She published two other books before Wizard of Lies, which showed her command of the darker side of Wall Street, “Fidelity’s World: The Secret Life and Public Power of the Mutual Fund Giant” and “The White Sharks of Wall Street: Thomas Mellon Evans and the Original Corporate Raiders.” Her most recent book is a history of the 2008 crash, “A First Class Catastrophe.”
In the wake of Madoff’s death, Henriques told PYMNTS she is concerned about the current climate on Wall Street, its lack of transparency, lack of regulation and the return of a speculative atmosphere. Specifically, she addressed special purpose acquisition companies (SPACs) and the cryptocurrency rage.
“I’m dismayed,” she said. “There’s just no other word for it. I’m dismayed at the failure to address the systemic fault in our regulatory bedrock. The refusal to address the investor protection issues that are glaringly obvious in the market landscape right now is just inexplicable to me. I just feel like it’s going to take another crisis, God forbid, or may another exposed crime to jolt people into any kind of reaction.”
One of her key takeaways from the Madoff episode, and one that resonates right now, is Henriques’ argument that there is no such thing as a sophisticated investor. Hedge fund superstars as well as 20-year-old Robinhood investors are primarily taking a leap of faith that no amount of fine print or nuanced regulation can fix. What died with Madoff’s conviction, she said, was trust in the financial system. The only sure immunity from a Ponzi scheme is clinical paranoia.
As she told an audience at the Wharton School after the book was published, “I can create a world for you where a Ponzi scheme is impossible, but I guarantee you, you will not want to live in it because not only is modern commerce impossible without trust — all that direct deposit, all that online retail, all that trusting one another — but so are a few other priceless things like marriage and loyalty and leadership.”
What to do now? First, Henriques said, regulators, as well as investors, need to be suspicious of market manipulation in crypto. Second, crypto exchanges, as well as individual banks, need to prove that a default in crypto, Bitcoin in particular, would not bankrupt their companies. Third, regulators need to step up.
“I don’t see a lot of good coordination happening on that front,” she said. “So, I could be overly pessimistic — it won’t be the first time. But I just feel like we’ve got some strong personnel involved in the government, and that’s an advantage. But we also have some really, really deep structural disadvantages.”
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