Madoff’s arrest and the lesson behind his fall

Tim Mullaney, The Independent

What is there to say over the corpse of Bernie Madoff, maybe the least-mourned man this side of serial killers?

Well, he died alone, which he deserved, as harsh as it is to say on this, the day of his death. His son killed himself in 2010, two years after Madoff’s arrest, and his other son died of a cancer whose return he blamed on the stress from the scandal of Dad’s firm being revealed as Wall Street’s biggest fraud ever. His brother went to prison for his contributions to the scheme federal securities regulators uncovered amid the larger financial meltdown of 2008, an old-fashioned Ponzi setup in which new investors’ money was used to pay off any prior investors who wanted out, while both groups were given fake documents showing that everyone Madoff dealt with was getting rich. It fell apart when the mortgage crisis dried up the new money, and caused a $12 billion spike in requests for withdrawals that Madoff couldn’t meet.

No one had been getting rich, really. Even Madoff died broke, apparently, as his money was all seized to make restitution. And while the scheme was ongoing, his lifestyle was “not conspicuously ostentatious by Wall Street standards,” his biographer Diana Henriques wrote in The New York Times.

Madoff’s fraud wasn’t the most consequential Wall Street has ever produced, but it was one of the most clear-cut — certainly the most obvious crime I’ve seen in decades covering the finance beat. There’s a reason Madoff apologised, and cooperated with efforts to make restitution to his victims.

The larger financial crisis that unraveled Madoff’s scheme caused $7 trillion in lost housing value, both of which were eventually recovered. That dwarfs the impact of the $4 billion the US Justice Department said Madoff lured investors to place with him — and even the $64 billion that included fictitious paper profits he had claimed in falsified account statements sent to his victims, who included everyone from Brandeis University to the owners of the New York Mets, concentrated among tout le monde of rich New York and Palm Beach residents.

The bigger crisis was far more important than anything Madoff set in motion, even beyond the lost housing value. The stock market fell nearly 50 percent from the fall of Bear Stearns in March 2008, worth an estimated $8 trillion, months before Madoff’s December arrest, and its bottom in March of 2009. The collapse of American International Group alone — the insurance company pulverized by a group of less than 50 executives who completely botched the new market for derivatives called credit default swaps (one of them was in my high school math class sophomore year) — cost the federal government $85 billion to bail out.

Then there were the 3.8 million families the Chicago Federal Reserve Bank estimates lost homes to foreclosure as a decade-long orgy of subprime lending, teaser rates, bogus appraisals and general kidding of oneself and, ultimately, the bond market, fell apart beginning in 2006. And the 9 million lost jobs in the ensuing recession.

In terms of confidence in the markets, Madoff’s scandal was less consequential even than the other big blowups of the 2000s. I’m thinking specifically here of the collapses of the energy-trading giant Enron and the super-aggressive telecom startup Worldcom, which made itself a titan through acquisitions but mostly made itself look like one by booking its day-to-day expenses as capital spending to boost reported profits.

At both those companies and others, the scandals called into question whether public investors and ordinary homeowners and working stiffs — not just the relative handfuls of elites who placed money in Madoff’s firm — could trust in the common enterprises that support American business.

It’s not for nothing that both the dot-com bust and the financial crisis caused a multi-year drought in companies’ ability to launch initial public stock offerings. Burned investors punished the innocent alongside the guilty.

None of this excuses anything Madoff did. The sheer scale and audacity of his fraud was breathtaking. He’d been hiding in plain sight for years as critics insisted the profits from his index futures trading couldn’t possibly be as steady as he reported they were, especially since index futures are notoriously volatile.

The US Justice Department says about 80 percent of the money originally invested with Madoff has been recovered, mostly from JP Morgan Chase and from an early investor who had managed to withdraw $1.7 billion before the scheme collapsed.

Madoff went to prison, where executives of AIG and Bear Stearns didn’t, because his crimes were so clear, rather than because they were as consequential other Wall Street misdeeds. There was no way to cast his actions as mere mistakes, as AIG did, or as standard industry practice, like thousands of mortgage sales reps.

If there’s a lesson in Madoff’s fall, it’s that even if you’re supposedly a billionaire, the law will come for you when your crimes become very, very clear. It may not be enough, but it’s all we’ve got.