The death of Bernie Madoff reminds me that I never understood why he was so vilified. He ran a Ponzi scheme. All of his investors knew it was a Ponzi scheme. They chose to get in, and gambled that they could time their exits just right. Some succeeded, some failed. So Madoff was the moral equivalent of a bookmaker (and not the kind of bookmaker who employs violence to enforce collections). He catered to a preference that some might call a vice. Where’s the problem?
There would be a problem if anybody had believed Madoff’s claim that he could earn a consistent 10% in any kind of market conditions, but it’s hard for me to imagine who that “anybody” might be — and if he or she does exist, then I don’t think it’s incumbent on the rest of us to protect an investor who is so willfully naive. The fact that he not only claimed to return 10% in every kind of market condition but actually did so constituted something like proof postive that he was running a Ponzi scheme, for anyone who cared to take notice.
So I think Madoff’s “lies” go into the same category as the alleged “lies” of Barack Obama when he said that under Obamacare, anybody who liked his/her old health insurance policy would be able to keep it. Nobody capable of arithmetic could have believed such an outlandish statement — unless they gave it no thought whatsoever, in which case even if they were fooled, they were fooled about something they apparently didn’t care about.
In other words: It’s not a lie if nobody believes it.
The scandal, I think, is that public resources were used to recover the losses of those who took the Madoff gamble and lost.
We have laws against securities fraud. Are you saying we should only prosecute small lies, and not big lies?
Who else gets a free pass under this logic? Was Enron okay because no one should have believed its claims?
Since you excuse Obama, then I assume you also excuse Trump’s supposed lies. Nearly all of them were just exaggerations that no one would take literally.
In Madoff’s case, I am pretty sure most of his investors did not realize that it was a ponzi scheme.
This raises the question as to why then did Bernie make the claim in the first place if investors who took the gamble knew it was a lie? From what I can see, your only defense would be that Bernie didn’t know that investors would know, but that’s incredibly far fetched.
Z (#2): Why did Bernie make the claims he did in the first place? Presumably for the same reason that General Mills implies that eating Wheaties will make you a champion, or that we were promised that drinking Red Bull could make you grow wings, or that a car manufacturer once adverstised that each of its SUVs had more seats than the Astrodome.
If somebody bought one of those SUVs and then tried to return it because it turned out to actually have fewer seats than the Astrodome, I’d have little sympathy. These were clearly not claims that any reasonable person could have taken seriously — just like Madoff’s claims about his consistent 10% returns.
Roger (#1):
You asked: “Who else gets a free pass under this logic?” I think that Red Bull should get a free pass for promising in ads that if you drink it, you’ll grow wings. It seems to me that Madoff’s claims were in that category.
You wrote “In Madoff’s case, I am pretty sure most of his investors did not realize that it was a ponzi scheme.”. This is as plausible to me as someone going to Las Vegas, losing money at roulette, and then complaining that he had no idea the odds were in the casino’s favor. If you hadn’t already known this, then the very existence of the casino should have alerted you. A consistent annual return of 10% through every kind of market conditions should have been every bit as loud an alert.
“Why did Bernie make the claims he did in the first place?”
The most obvious explanation is that he started out with a legitimate fund. One year he failed to make his goal, and he fudged his numbers thinking that he would make it up the next year. As time went on, that became impossible.
Do investors in Bitcoin know that it is a scam? In Tesla Motors? In GameStop? In NFTs? In the Coinbase IPO?
Steve(#3)
You’re being a bit ridiculous. General Mill’s logo for Wheaties is “Breakfast of Champions”, not that it will make you one. The Joe Isuzu character’s whole gimmick was that he was a pathological liar, and the commercials clearly point this out. And Red Bull has cartoon advertisements with talking cows. All these claims are clearly figurative because the advertisers are going out of their way to make them silly but memorable.
What Madoff did was not comparable to the above: He claimed to have a “beat the market” strategy that sounded just sophisticated/technical enough to inspire confidence from some investors. He then backed this up by doctoring financial statements that lied about the returns that the trades were making, which inspired more confidence from more investors, as well as their friends and family. What sounds more believable — that your average investor who’s not finance-savy is going to check the logic and math behind investment strategies that people like Madoff claim to perform, or that they’re going to take advice on where to place their money from people they trust who understand the financial system even a little, trust people like Madoff, and have the (doctored) returns to back it up? Even absent this, do you think the average investor thinks that a consistent 10% return is unbelievable, especially when the first google result that pops up that it IS 10%?
Z (#6):
He claimed to have a “beat the market” strategy that sounded just sophisticated/technical enough …
So do a lot of Nigerians who send me email. I know that some people respond to those emails. I am guessing that many of those responders have plans to attempt some kind of reverse scam, not that they expect a stranger to send them $300,000,000.
Occasionally, some terribly naive person probably does get taken in those scams. But Madoff was not catering to terribly naive people. He was catering to people who had been pretty successful in life. If you are the sort of person who believes in ten percent returns with a beta of zero (!!!) then you are probably not the sort of person who has accumulated the sort of capital that Madoff demanded as an initial investment.
So this whole thing looks to me like a voluntary Ponzi scheme, where everyone knows what’s happening, everyone knows that a lot of people are going to lose, and a lot of people are going to win, and that the odds are stacked against them, but they enjoy playing the game. Much like the folks who play blackjack or roulette in Las Vegas. I understand that it’s illegal to cater to those preferences, but this looks to me like a pretty victimless crime.
So his defense is that his lies were so ridiculous that nobody would actually believe them? I don’t think that defense will work for certain people in the news today so I doubt it would have worked for Bernie.
The problem is that intelligent educated people actually believe in things like flat earth, geocentrism, young earth, massive election fraud and Jews with space lasers. If you prey on those people you break the law.
Besides, Bernie falsified his books. Even if nobody believed him and everyone removed their money he still broke the law.
And I’m guessing you are wrong about many people trying to reverse scam the Nigerians. Such people would have to be stupider than the actual victims. One estimate I saw claimed $2.5 billion lost over the last decade to the prince. Most did not report it because they were so ashamed.
Victim blaming is not the way to go.
@Steve,
I don’t know how anyone would get the idea that people knew – or even should have known – that this was a Ponzi scheme. As I recall, Madoff promised a minimum of 8% and delivered around 10% consistently.
That’s not wholly unrealistic. Hell, if he’d put all the money in an index fund, used some leverage and smoothed over any bumps with accounting tricks, he could have gotten rich and delivered this performance easily, though with more risk than advertised.
And Madoff was a person with an impeccable pedigree, a former chairman of the NASDAQ and one of its co-founders.
As I recall, some people suspected that he was engaging in insider trading, but very few thought that he wasn’t actually doing any investing at all.
Steve (#7)
Even granting the pretty outrageous assertion that most people who are conned by Nigerian prince scammers are conned because they risked trying to outsmart the scammer, this is still a false equivalency because Madoff doctored financial statements. And that’s just one of the ways he and his sons went out of the way to hide what they were doing — there’s a plethora of examples of other shady things they did you can find out about online (which I’ll post later because I only have time for a quick reply now). The whole point of a con is to make an too good to be true story sound true. More importantly, it doesn’t require terribly naive people — it requires a con artists who’s smarter than the individuals he’s conning.
What next, Steve? Are you going to claim that Jim Simons of Renaissance is lying to people? (He’s not.) Or at least would you have said that back when he took outside investors?
And I think his returns are better than Bernie’s fake returns.
One of the arguments is that once Madoff’s scheme started bringing those kinds of returns, fund managers started buying into it for “competitive” reasons, which means individual investors ended up with their money invested in Madoff’s scheme without consenting to the risk. Arguably, this is an inevitable consequence of a Ponzi scheme fund like Madoff’s, which is why they’re illegal.
After all, if what you want is high-risk, high-reward gambling, you can do that yourself without a lot of help, by investing in highly volatile stocks (or with smaller amounts of money, just going to Vegas outright).
Steve,
As you suggest it should have been, the Ponzi scheme was obvious to investigators like Harry Markopolos and others. But SEC investigations cleared Madoff repeatedly. I suppose it’s our “right” to invest in scams, but we have an SEC to “protect” us from doing so. Do you–or others here–understand what happened in those investigations? Were the SEC investigators simply incompetent or negligent, or was there a sinister motive within the SEC?
Because the SEC claimed to find none of the things Markopolos thought were obvious, he worried that his life was in danger from both the Madoff side and the government side. He might have had issues of his own, but if something is that obvious, and the SEC repeatedly says “nothing is wrong here, folks,” I could understand him wondering if SEC people were part of the scam too.
Z (#7): Okay, I concede the point about falsified records. And I concede that the point is significant.
But I continue to maintain that on the basis of Madoff’s performance record alone, his investors either did or should have strongly suspected a Ponzi scheme. And I remain squeamish about using public funds to recover the losses of people who either a) got in with their eyes wide open, choosing to gamble, or b) did not stop to think for more than a moment before getting in.
Coupon Clipper (#11):
Are you going to claim that Jim Simons of Renaissance is lying to people?
Why would I claim such a thing? Do the Renaissance funds show anything akin to the near-zero volatility of the Madoff funds? A very quick Googling failed to turn up the answer, but I will be very surprised if the answer is yes. Feel free to surprise me.
Thomas Bayes (#13): Regarding Markopolos, I think it’s important to note that what tipped Markopolos off was not some obscure falsified document someplace, but the pattern of returns — a pattern that was clearly visible to everyone who chose to invest.
PS: Very glad to see you back here.
Bernie’s returns were not really outlandish. The S&P was averaging 16% annually so all boats were floating. Bernie was only doing 10% or so. The consistency of that 10% is warning but not that big of a warning.
Bernie was able to hide the fraud because he targeted charities. Charities usually only remove 5% of their funds per year. For each 1 billion in private charity money Bernie was on hook for only 50 million in withdrawals. Individual investors are problematic because they tend to party when they win big cashing in large withdrawals. This makes it difficult to hide losses.
The reality of large numbers of charities shutting down is a stark contrast to your vision of greedy investors who knew what they were doing. One of the big losers was a charity run by a Nobel peace prize winner.
Victim blaming is an ugly thing man.
I mean… look, I have some sympathy for the view that his sentence was perhaps a bit too long. He had been punished pretty roughly with his son’s suicide especially. Can it get much worse in life when your kid commits suicide almost certainly as a result of your actions? I don’t think it can. And that’s my broader point: if this was just some random guy in a store selling you something, then I may be more sympathetic to this line of thinking of “buyer beware.” But this guy… he became friendly with people. Pretend for a moment, Steven, and we all know you would not likely be duped by a friend because you’re obviously highly intelligent, but pretend you were. Something about that makes it more painful for people I think, right or wrong, including for his poor son.
> Steve: Why would I claim such a thing? Do the Renaissance funds show anything akin to the near-zero volatility of the Madoff funds?
No, but then the top Renaissance fund has posted annualized returns of 66% over 20 years, more than 6 times the returns Madoff claimed.
The deepest drawdown was apparently on the order of 36% (in the early days, 1989).
It would be fairly straight-forward to restructure that fund to provide a return of 20% over that time period with minimal drawndowns, just by allocating 75% of its assets to treasuries, for example.
Steve wrote: “If you are the sort of person who believes in ten percent returns with a beta of zero (!!!) then you are probably not the sort of person who has accumulated the sort of capital that Madoff demanded as an initial investment.”
What if that person accumulated their sum as a baseball player, screenwriter, tv personality, or heiress (all real examples of Madoff clients)? Do you find it implausible that at least this subset of clients would fail to understand the nuances of investment returns well enough to spot the fraud? If you do find it plausible, then your argument must be that a person who defrauds unwitting victims should not be vilified so long as they counter this by defrauding a sufficiently large number of victims who should have known better. That is a bizarre argument.
My big question on this always was: what was his exit strategy? I understand stand Ponzi schemers who plan to fly the coup. But, what did he think he’d do when the math turned against him?
David #21
Bernie probably did not go in with the intent to run a ponzi scam. He lost money and covered it to try to win it back. From there it just spiraled out of control. Classic gamblers trap. His exit strategy was essentially to chew his own leg off. That leg was his family, friends, freedom and all the respect he was ever going to have.
@ppnl:
If Bernie had been investing rather than paper trading, he had a chance to recover by getting Renaissance-level returns in later years. With a vaporware Ponzi scheme a clean exit is impossible.
Was Bernie trading on the side in an attempt to gain enough to make good on the paper trades he showed clients? That would be more typical of a Ponzi operator.
I remember some bank somewhere paying a 0.01% annual interest rate on deposits—or some such round number. No scam was suspected.
A 10% guaranteed return can be interpreted as bundling investment services with insurance services. A fixed-rate mortgage is an example of such a contract.
Just my two cents… We had a neighbor who was “invested” in Madoff’s so-called fund. She was a fairly elderly widow who had zero investment and financial market experience. She talked about Madoff as if he were the smartest person on Wall Street (and in the same arrogant tone of “you’re not good enough for him to take your money”). I am absolutely certain she did not suspect it to be a Ponzi scheme, despite some gentle suggestions to the contrary.
#24. I am sure your comment has some significance, but can you spell it out for the less informed here? What point are you making?
On the general subject, this is an extreme example of “buyer beware” principle. How much should we interfere with private exchanges to protect the stupid, greedy and ignorant?
One extreme is “not at all”. This seems to be what SL is advocating for. It is up to the individual to see through the lies of anyone offering something.
Anything “too good to be true” is obviously not true, and therefore every reasonable person will reject it. Anyone accepting it is not reasonable, and therefore deserves any losses suffered.
I do not think this is a good standard. It is not reasonable to expect everybody to be informed about everything. Therefore, there is always some area where you could be lied to and you will have no reasonable way to detect that lie. It seems sensible to require people to tell the truth regarding investments.
It is interesting to compare this to the original Ponzi scheme, by Ponzi himself.
He discovered that postage coupons were valid all over the world, but had different prices. So there was arbitrage for buying coupons in one area and spending them in another where the cost of postage was different. This could have provided a small income by actually buying coupons in one place and shipping them elsewhere. Instead, he sold the idea rather than the coupons. He has a plausible mechanism for the gains, and people jumped on the bandwagon, investing millions. Were they stupid? Yes, probably. Did they know it was all a scam? Probably not. Should they have known? Maybe. If something seems too good to be true it probably is not true. The thing is, we know absolutely that people will behave this way. The argument is whether we should allow it to happen and leave them to reap the rewards of their own folly, or try to prevent such things.
SL seems to be a person who believes the market is the best way to allocate resources. That is fine, but the market has failures, which necessarily means that the allocation of resources is less than efficient. Asymmetric information is one of these failures. In the presence of asymmetric information, the allocation of resources must be less than efficient. I contend that Ponzi schemes are an example of asymmetric information. The scheme operator is providing information in the form of returns to existing investors that new investors have no way of verifying. The original Mr Ponzi claimed these were from arbitrage from postal coupons, but this was a lie. The investor has no way to verify this, so there is asymmetry of information. The investor sees returns, has a plausible mechanism to explain these returns but has no way to investigate if the seemingly plausible mechanism is true. Thus the market fails.
We have alternatives. We can accept the Ponzi scheme market failure, or we can make it illegal to operate such a scheme and accept this interference in the market. I favour the latter. So send Bernie down.