The strange and sad story of Bernard Madoff -- the legendary Wall Street financier who appears to have been running the largest Ponzi scheme in history -- is yet another installment in a cautionary tale that can never be told often enough.
Madoff's victims seem to have been almost exclusively wealthy individuals and institutions, who in many cases made hundreds of thousands of dollars in charitable contributions merely for the purpose of convincing Madoff to grant them the privilege of "managing" their money.
(There is something particularly melancholy in the spectacle of people bribing someone to steal from them).
Madoff claimed to use a proprietary computer modeling system that produced above-market returns at an uncannily consistent rate of around 1 percent per month (in an industry known for its volatility, his funds almost never had a losing month, let alone a down year).
Madoff was markedly evasive about what this model actually involved -- and people who asked too many questions about how exactly it produced such extraordinary results would disqualify themselves from entering the magic circle of Madoff's investors.
What's clear in retrospect was that it should have been obvious the whole thing was a scam. So why did so many smart, educated, and generally privileged people get taken in by Madoff's scheme?
It should be noted that some market analysts had been raising questions about the legitimacy of Madoff's methods for a decade or more -- but their warning were ignored by the powers that be, including most notably the Securities and Exchange Commission.
Madoff's marks can more or less be sorted into three categories: the naive, the self-deluding, and the crooked.
--The naive: There's a certain kind of person who may have made or come into a lot of money, but still remains genuinely incapable of understanding that if something looks too good to be true, it almost certainly is. These are the people who keep grifters, con men, Nigerian scam artists, and supply side economists well fed. When such people are ripped off by the Bernard Madoffs of the world, the appropriate reaction is pity.
-- The self-deluded: These people understand, most of the time, that there's no free lunch, that Santa Claus doesn't come down the chimney, and that nobody can actually do what Madoff claimed to be able to do. Still, under certain circumstances they manage to forget all this because -- well because on some level everybody wants to believe in Santa Claus.
The self-deluded would like to believe there really are people who understand things at a deeper level than ordinary mortals, and that these people should be our leaders -- or at least make us huge piles of money if we just trust them with a faith the self-deluded know, deep down inside, they shouldn't actually have. The appropriate reaction to such people is exasperated bemusement.
-- The crooked. As Wall Street guru Henry Blodgett has speculated, it seems likely that a number of Madoff's richest and most prominent marks actually assumed he was running some sort of scam. Such people, after all, are generally neither naive nor prone to sentimental self-delusion.
Perhaps they thought he was trading illegally on inside information, and that his wealth and power would protect him from legal repercussions. Some of them probably even suspected the truth-- that the whole thing was a pyramid scheme -- but they thought they would be smart enough to get out when the getting was good (indeed some no doubt did). The appropriate attitude toward such people is unmitigated contempt.
In the end the moral of the Madoff saga is as old as the story itself: that there is no Santa Claus, that a sucker is in fact born every minute, and that our capacity to combine greed and self-delusion remains essentially unlimited.
(Paul Campos is a law professor at the University of Colorado and can be reached at Paul.Campos(at)Colorado.edu.)
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