Bernard Lawrence Madoff, or “that Bernie,” is a famous financier, formerly the chairman of the NASDAQ stock exchange. At the same time, he is a fraudster who deceived even seasoned financiers on Wall Street, crashed the US economy, and created the biggest pyramid scheme. He was called the greatest mind of his time.
Also, he was called the monster who caused the collapse of the US economy in 2008. The exacerbation of the 2008 economic crisis is Madoff’s fault. So who is he?
Genius or Monster?
Many years before this scandal, Bernie Madoff was admired and trusted. In 1960, Madoff founded the investment firm “Bernard L. Madoff Investment Securities LLC.” It gained the trust of millions of investors, and Bernie Madoff successfully led the company until December 11, 2008, when his business collapsed along with the $64 billion financial pyramid.
People familiar with Bernie Madoff’s story were divided into two camps. Some considered him as a villain. Others saw him as a genius. Both are true, as Bernie Madoff’s pyramid scheme collapsed and compromised the US stock market, leading to the 2008 financial crisis. In June 2009, Bernie Madoff was convicted of all his crimes and sentenced to 150 years in prison.
In a sense, Madoff is a unique character. He never denied that he knowingly committed the crime. In an interview with New York magazine, the financier said he actually “was not like everyone thinks.” However, he admitted to knowingly deceiving more than 37,000 people and suffered from a guilty conscience.
“How could I have done this? I was making a lot of money. I didn’t need the money. Am I a flawed character?” he asked the psychiatrist during sessions in federal prison.
Madoff suspected himself of being a sociopath, but he wasn’t. On the contrary, he was considered a family man. Bernie suffered greatly when his 42-year-old son Michael, unable to withstand public reprimand, hanged himself in the living room of his home with a dog leash. Many saw Madoff’s paternal grief as a just retribution. But that’s the end of the story. What was the beginning?
‘Business for $500’
Official sources and biographical books about Bernie Lawrence report that he started his career as a financier with $5,000, but he told journalists of the New York magazine about $500. Indeed, where did a 22-year-old guy get thousands of dollars in his bank account? In 1960, he rented an office in an accounting firm for this amount and founded his firm called “Bernard L. Madoff Investment Securities”.
“Nobody had never even heard of anybody going into business with $500. Securities and Exchange Commission had to have a special interview with me to make sure I wasn’t out of my mind,” recalls Madoff.
He started as a market-maker, a middleman between those who wanted to buy and sell small quantities of mostly bonds – odd lots. By secretly trading on the side, Madoff increased his profits. Already in the 1980s, within 20 years, he earned the nickname “The Unbelievable Trader”. People familiar with Bernard believed he had a knack and intuitive understanding of the stock market.
Bernie, with his ambitions, found it boring to simply trade stocks. He dreamed of challenging the New York Stock Exchange, changing the approach to stock trading. Bernie had a skill for gathering talented people around him and noticing what others didn’t. Madoff noticed that the system where traders give investment advice is flawed. In 1970, he brought in his brother Peter to automate the stock exchange. Automated trading systems worked faster and more accurately than human traders and could precisely analyze stock market data in real time. Automated trading systems began redirecting trading volume and profits from the New York Stock Exchange.
This drew the attention of the then-head of the New York Stock Exchange, Dick Grasso. Over the next eight years, Dick tried to strike a deal with Bernie. He wanted to learn the secret of an automated trading system and regain control of the securities market. It didn’t work out. Irritated, Grasso called Madoff his “arch-nemesis.”. Bernie didn’t react. By that time, he had already become rich, earning about $100 million a year.
From Trader to Criminal
At the peak of his legal business profitability, Bernie Madoff veered off course. He emphasized in interviews that he distinctly separated two periods of his life – legal and illegal.
The illegal path began innocently. At some point, Lawrence Madoff’s campaign expanded to the extent of providing various services. Among the services were:
- market making;
- brokerage;
- trading;
- financial consulting;
- establishment of investment funds.
Mediation in the purchase and sale of small volumes of securities, charity, financial consulting, and securities manipulation – this is a short list of what Bernard L. Madoff Investment Securities was engaged in.
From this moment began the story of “that Bernie”, the villain. Madoff’s funds consistently attracted investors. With the money received from depositors, Bernie buys government bonds yielding 1-2%. However, Madoff promised investors 10-15%. Even he could not explain why he acted this way.
At first, everything worked because Bernie paid out of his own pocket. Then the scheme of interest payments was funded by the investors themselves. This is how a financial pyramid was built, which according to official documents, was valued at $65 billion — more than 37,000 people from 136 countries invested in Bernie’s pyramid. The total amount of deposits was $17.5 billion.
Then, the situation changed. In September 2008, the value of securities plummeted. Frightened by the situation, investors hurried to withdraw their deposits. At this moment the truth came out, the returns on Madoff’s deposits were fiction. Turning $17.5 billion invested into $65 billion to be paid out was an impossible task even for an investment genius.
According to Madoff, some of his large clients were too frightened, and he had to enter into long-term hedges on unfavorable terms. This became the first nail in Bernie’s capital coffin:
“They [investors] betrayed me,” Madoff said. After the withdrawal of the first large investments, Bernie’s old schemes of covering debts with the profits of his own company no longer worked.
A temporary reprieve came from attracting new investors. But it couldn’t last long. On one hand, the first ones to drop out of the pyramid scheme were saved in time. On the other hand, they marked the beginning of the end for Bernie and his manipulations. Bernie simultaneously had too much of other people’s money and too little working capital to invest.
“It was a nightmare. Imagine going home every night not being able to tell your wife, living with this ax over your head, not telling your sons, my brother, seeing them every day,” Madoff recalled.
Beautiful reporting served as Bernie’s advertising. New money began to flow to him from various sources, not only from individuals, but also from bankers like representatives of Banco Santander, Credit Suisse, and UBS. This reassured Madoff and flattered his ego. Admitting his incompetence under such circumstances was something Madoff couldn’t do anymore.
“It wasn’t like I needed the money. It was just that I thought it was a temporary thing, and all of a sudden, everybody is throwing billions of dollars at you. Saying, ‘Listen, if you can do this stuff for us, we’ll be your clients forever.’ It was tempting.”
So Madoff continued to take money not only from people but also from banks. He invested billions from banks in treasuries earning 2% per year, while making statements claiming that investors were earning around 15%.
“I was too scared and couldn’t bring myself to tell everyone that I had failed,” he recalled. When investors suddenly doubted the legality of Bernie’s financial schemes, he would attack: refuse audits but confidently offer investors to withdraw their deposits. No one did any of it out of greed until it became too late.
And the Pyramid Scheme Collapsed
When the truth was revealed, the hardest part for Madoff was confessing to his wife and sons that everything — the millions, the cars, the luxury items — was all fiction, and in reality, the family was bankrupt. Bernie’s wife, like the sons of the financier, never forgave him for this lie.
The legal suspicion that family members were accomplices was the main reason for unforgiveness. The close attention of the law and the public enraged Madoff’s household. Previously, Bernie’s sons heard about their father’s Wall Street prowess. To people, their father was a Wall Street player, a magician, and a man who brought a lot of money to many people. But after Bernie’s exposure, he became a man who forever tarnished the attractiveness of the United States for foreign and local investors.
Later, the Madoff family began to wonder if they had become victims of Bernie’s manipulations. Perhaps even the image of a family man was used in carrying out the pyramid scheme.
…And the Money Was Still Returned
One of the unique features of Bernie’s pyramid scheme was that some initial investments were returned to the investors. This was taken care of by Irving Picard, a lawyer and trustee of Madoff’s funds. But it didn’t satisfy everyone.
To minimize the damage, Picard proposed a scheme: everyone who profited from Bernie’s pyramid should return the earned interest to the fund. Then those who lost their investments could recover them. For example, if an investor deposited $2 billion and withdrew $3.5 billion with interest, they were obligated to return $1.5 billion.
Irving Picard ruthlessly demanded profits even from charitable funds that had been earned from Bernie’s pyramid schemes. This partially mitigated the damage to the economy, but obviously, not everyone was pleased with it.
The Fate of the “Great Villain” and His Family
Both of Bernie’s sons worked in his company until their father’s arrest in 2008. They never managed to shake off the shame and suspicion. The younger son, Michael, committed suicide by hanging himself on a dog leash. The elder son, Andrew, died in 2014 from stress-related cancer.
Bernie Madoff’s wife forbade him from seeing the children, but they avoided meetings as they were both angry with their father. Bernie’s wife never forgave him either. Because of her husband, she became an outcast. She was recognized everywhere and chased from all sides. It was impossible even to get a haircut at the barbershop without a scandal. Eventually, she was forced to move to the wilderness, to a modest shack in northern Connecticut. All the family’s property was confiscated and sold off to pay debts.
Madoff died in the prison hospital on April 14, 2021. Fourteen months before his death, in February 2020, Bernie Lawrence Madoff filed an appeal. He requested early release because he suffered from a fatal kidney disease, but his plea for clemency was denied. Bernie Lawrence Madoff passed away at the age of 83, lonely, abandoned, and hated by all, even his wife and children.
In 2017, a movie was released about Bernie titled “The Wizard of Lies”. The film is an artistic interpretation of all the events and the pyramid scheme, with elements of Madoff’s biography. In the adaptation, the role of Madoff was played by Robert De Niro.
We don’t support fraudsters and don’t recommend you to follow the example of Bernie Madoff. Meanwhile, we have an article about the Top 10 Richest Affiliate Marketers in the World. Check it out and find out more about people who do honest work, not pyramid schemes.
What Bernie’s Story Teaches
Perhaps this is the first atypical story of creating a pyramid scheme, whether out of boredom or by accident. However, the impact of this pyramid scheme was global, resulting in an economic crisis, and many victims, who didn’t recover their full investments.
We should note that Mr. Madoff didn’t act like a typical fraudster, he didn’t promise sky-high returns but rather offered profits just slightly above market rates. However, if people eagerly fall for the classic pyramid scheme, they’ll fall for such implicit schemes. So, that is why this story highlights the importance of financial literacy and responsible investing.
