Madoff's Money:A Shakespearean drama of betrayal and strife

Madoff's Money
Philip Delves Broughton, 12.14.08, 01:30 PM EST
A Shakespearean drama of betrayal and strife.

The Bernard Madoff Ponzi scheme is the greatest financial shock so far in a year full of them. We still have a couple of weeks to go, but barring Warren Buffett being caught in Vegas thrusting Berkshire Hathaway stock at strippers, it is hard to imagine anything worse.

I don't say this lightly. How can Madoff be worse than Lehman Brothers (nyse: LEHMQ - news - people ) or AIG (nyse: AIG - news - people ) or the travails of Detroit's Big Three? It's because what he did was so simple. And he duped so many smart, conservative people for so long. And he did it in plain sight.

Look at the list of those who lost money. Swiss private banks. Jewish family foundations. Retirees in Palm Beach. Not exactly the Fast Eddies of finance. But therein lay the brilliance of Madoff's scheme. He didn't promise the usual Ponzi manna from heaven--double or triple your money with Bernie Madoff's surefire, get-rich quick scheme! No, he promised and delivered 10% returns. So consistent were his returns in good times or bad, an investment in Madoff came to be called the "Jewish Bond." His investment strategy was a "black-box" model, one to which no one but him had access. And yet when the returns were good, no one bothered to ask how he was making them.

Madoff also moved easily in the familiar power networks of New York. He was chairman of the co-op board at his fancy Upper East Side building. He was chairman of the board of Yeshiva University's Business School. A member of exclusive country clubs in the Hamptons and Palm Beach. Strange as it may seem to people beyond this claustrophobic social world, these are not positions assigned lightly.

Madoff had earned the trust of individuals forged in the fires of New York finance, law and government, supposedly some of the toughest, smartest, savviest people in the world. He fooled them all over many years, and his reputation among them probably protected him from scrutiny.

Perhaps it was because of his social standing that, ultimately, it had to be members of his own family who turned him in. It was his two sons, Mark and Andrew, who contacted authorities on the evening of Dec.10, after their father admitted to the fraud. Both worked for their father's brokerage business but had no role in the asset management business, which Bernard ran secretively himself. But again, who is the one to trust in this unfolding Shakespearean drama of betrayal and family strife?

The details are already rich and in some ways hilarious. Madoff's auditor was a tiny firm in Rockland County, which consisted of three employees: a 78-year-old living in Florida, a secretary and a 47-year-old accountant operating out of an office the size of a small bedroom. When skeptics warned the Securities and Exchange Commission about Madoff, they were repeatedly brushed off. The SEC investigated Madoff in 2005 and 2007 but came up with nothing, which tells you much about the quality of SEC investigations in these heady hedge fund years.

And now we are to believe that Madoff's sons acted out of principle by shopping their father to the Feds. Is it possible, that once Madoff saw the end was nigh, he began orchestrating his own demise? That he decided the timing? It wouldn't surprise me in the least if the lawyers sorting through this debacle find that in the days leading up to this, Madoff's remaining wealth headed out to safe havens, untouchable either by his investors or the authorities--but perhaps one day accessible to his family. It's just speculation, but Madoff is clearly a man who knows how to work a system.