Madoff madness is our ownBy John F. Wasik (Reuters)
Bernie Madoff’s failings are not the mark of some isolated monster, although his crimes are heinous. He is so much like every one of us that failing to recognize this fact will imperil us at every financial turn.
This is one of many revelations in Diana Henriques’s stunning new book The Wizard of Lies: Bernie Madoff and the Death of Trust.
The man who bilked $65 billion from friends, family, institutional investors and charities knew what he was doing. As far as we know, he wasn’t incapacitated from bipolar disorder, substance abuse, schizophrenia or some gargantuan chip on his shoulder to prey upon the wealthy. He stole and lied consistently to all and told Henriques he was fully aware of his mammoth deceit every step of the way.
Madoff was not a man conspiring in a bunker. He went to countless high-society parties, gave to charities and was admired by most who encountered him. Yet when he finally admitted his fraud, it was a surprise that ruined individuals and charitable foundations. His own son, trying to escape the shadow of his father’s foul deeds, committed suicide.
The scale of his crime can’t be overstated. As the serial falsifier of whole portfolios, Madoff claimed to manage twice as much money as Goldman Sachs, Henriques states.
“He was faking everything,” Henriques writes, “from customer account statements to regulatory filings, on a scale that dwarfed every other Ponzi scheme in history.”
Next to the mavens of the 2008 meltdown, Madoff may be the Stalin of Ponzi villains (there are always other scamsters out there). Yet any attempts to personify him as a three-headed hydra will miss the main point of Henriques’s masterful narrative. Here’s the clincher, which Henriques saves for page 345:
“The Madoff case demonstrated with brutal clarity another truth that we simply do not want to face about the Ponzi schemer in our midst: He is not “other” than us, or “different” from us. He is just like us — only more so.”
This chilling revelation illuminates human nature itself. We want to believe that someone like Madoff is “taking care” of us — and our money. When some negative vibe buzzes in our ear like Jiminy Cricket, we compartmentalize it in the part of our brain that is like a dead-letter file. We don’t question the reality of outlandish claims and can’t own up to our avarice.
I’ve seen so much investor denial in the past three decades of covering finance that I could spend the rest of my life writing about it. Some of it flies beneath the radar like high-yielding structured products that are loaded with risky and complex derivatives.
Most of the deception, though, lies in banal investments like variable annuities or overpriced 401(k)s. We’re fleeced every day, but may not know it because of our trust in our advisers, a brand name or simply a bold promise.
Here’s a short list of what we need to know about investing, but routinely fail to ask ourselves with any skepticism:
- If an adviser is pitching a six percent yield when most one-year certificates of deposits are returning one percent, what kinds of risks will you be taking to achieve that return? How much can you lose if the promise doesn’t pan out?
- Can the adviser beat a broad-market index like the S&P 500 on a regular basis? Most can’t. If they have a few good years, they are lucky, not skillful, and luck doesn’t last long in investing. Most lag the market averages over time after management expenses, taxes and inflation. It’s a fact of life.
- Is your principal really protected? Outside of low-yielding FDIC-insured product, you will pay dearly for any guarantees. How much will it eat into your principal? What are the commissions and internal fees?
How do we avoid the Madoffs of the world when we consistently trust people we shouldn’t and fail to ask the right questions?
Henriques suggests that we need mandatory financial education in school and be required to get a license after we are tested on basic money skills.
While I agree that everyone needs this skill set — and it should be taught beginning in middle school — I’m not sure if licensing is the way to go. Plain-language, gob-smacking tobacco-like warnings on investments that state “this is hazardous to your wealth” are another alternative, although crooks always manage a way around disclosure.
Ultimately, we need to turn off our brain’s belief and trust circuits to avoid hazardous investing. The truth is often not in our heads, but in our guts.
“That is the most enduring lesson of the Madoff scandal,” Henriques concludes, “in a world full of lies, the most dangerous ones are the ones we tell ourselves.”