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The Believers: How America Fell for Bernard Madoff’s $65bn Investment Scam

This book brilliantly answers the "How?" question about Bernie Madoff and his giant Ponzi, or pyramid-selling, scheme. Madoff used a mixture of charm, arrogance and breathtaking cruelty. Adam LeBor does not, however, answer the "Why?" question. But, in fairness, I don't think anybody can.

Ponzi schemes, in which money from new investors is used to pay existing investors, must, in time, collapse; eventually they run out of new investors. Madoff knew this, but he ploughed on until his phantom fund had an apparent value of $65bn. He said he couldn't stop. But of course he could, and anyway, why did he start?

The scheme was primarily an "affinity fraud". Madoff, a Jew, targeted Jews. Many thought they were close friends; all thought he was charming and trustworthy. But as one wise Wall Street banker who saw through him advised, avoid anyone who uses his ethnicity as a sales pitch. Bernie played the Jew card at every opportunity and the Jews fell for it.

LeBor reconstructs the background that makes this at least partly understandable. On both sides, his parents' families arrived in the US - from Warsaw and Galicia - in the early 20th century. They were part of a huge wave of Jewish immigration that horrified the "Yekkes", the urban, professional Jews whose ancestry was at least a century more American.

At their worst, the despised newcomers formed a gangster class, now mythologised in literature and the movies. At their best, they were industrious, creative and determined to overcome both Jewish and Gentile anti-Semitism. Madoff was among the worst. "A financial criminal genius," LeBor calls him. I'm not sure about the genius bit, given that his greatest achievement, the mother of all Ponzis, was, in fact, plain stupid, a guaranteed loser. But "criminal" is indisputable and I'm not sure that "evil" should be left out of the equation.

Madoff's trick was, first, to be respectably successful. He created a huge trading business on two floors of the Lipstick Building in Manhattan. He was one of the pioneers of computerised trading and became chairman of the Nasdaq stock market. Wall Street old money still didn't like him. But his success meant they couldn't ignore him and, to the punters, he looked blue chip.

It was on another floor of the Lipstick that the Ponzi grew and grew. There, away from the eager secretaries and expensive suits, dwelled the remarkably uncouth Frank DiPascali and a remarkably ancient IBM computer in a glass case. This human-machine combination had one task: to invent millions of false share trades that would then appear on clients' statements. DiPascali treated customers like dirt, but when, offended, they rang Madoff, they were treated like royalty.

Word spread, first among the Jews of Manhattan, then among the Wasps of Connecticut, and finally down to the scented groves of Palm Beach, that Bernie's fund was delivering steady returns of 10-12 per cent, consistently beating the market. The entirely invented return figure was a neat touch. It was high enough to be tempting, but not so high as to be wholly implausible and, crucially, not so high as to bring the Ponzi crashing down in a few months.

But the fairly modest return was only the beginning of the scam. Madoff's next trick was to turn his fund into a cult. It was, people said, extremely difficult to join. He was either choosy about his customers or he simply was not accepting new business. Then, with a nod and a wink, people were magically accepted. In fact, in the most laughable - though pitiable - form of the scam, people were accepted in complete ignorance. The notorious "feeder" funds poured billions into Madoff without their investors knowing. Grand figures in Connecticut and Palm Beach, supposedly possessors of arcane knowledge, were simply financial thickos, taking money and handing it to Bernie.

The final piece of the jigsaw was official incompetence. The Securities and Exchange Commission could have nailed Madoff at almost any point in his final decade. Financial experts proved and documented beyond doubt the overwhelming likelihood that this was a Ponzi. One journalist, Erin Arvedlund of Barron's, pointed out that Madoff was running a gigantic hedge fund without charging fees or taking a cut of profits. He was forgoing, she worked out, $240m a year. Société Générale, the French bank, ran a "backtest" of his supposed investment strategy and found that it couldn't have worked. Fishy, no? The point is that greed, like sex, subverts rationality. Meanwhile, empty-headed snobbery - the desire to belong to the exclusive club - reinforces the illusion that there is some trick to life, some secret way of beating the odds.

It was the crash that destroyed Bernie's Ponzi. He lived by the market sword and died by it. Now he makes desk and door nameplates at a prison in South Carolina. The markets, meanwhile, have bounced back. House prices are rising, big bonuses are being paid and new scams are being hatched. I hate on principle to quote Brecht, but sometimes it's inevitable: "The bitch that bore him is in heat again."


The Believers: How America Fell for Bernard Madoff's $65bn Investment Scam
Adam LeBor
Weidenfeld & Nicolson, 304pp, £18.99

This article first appeared in the 07 December 2009 issue of the New Statesman, Boy George