Okay, let's unpack this. We talk about scandals
on this show all the time. We talk about corporate
fraud. We talk about people cooking the books.
We talk about the little lies that spiral out
of control. Sure. Usually there's a ceiling,
right? There is a limit to how big a lie can
actually get before gravity takes over and the
whole thing just comes crashing down on top of
you. Right. There's a point of no return where
it just becomes unsustainable. But today, today
we are looking at a story that completely defies
gravity. We are talking about a number that is
honestly almost impossible to wrap your head
around. $65 billion. It is a staggering figure.
It really is. I mean, to put that in perspective,
$65 billion is larger than the GDP of a mid -sized
country. Wow. It's more wealth than entire industries
generate in a year. And the terrifying thing
is that it wasn't generated by, you know. a massive
corporation with thousands of employees or a
government printing press, it was effectively
a lie told by one man. Exactly. We are, of course,
doing a deep dive today into Bernard Bernie Madoff,
the architect of the largest Ponzi scheme in
history. The largest ever recorded. And what
drives me crazy about this story, what I really
want to get into today, isn't just the money.
I mean... Sure, $65 billion in paper wealth without
$18 billion in actual hard cash lost? That is
mind -blowing. But it's the who. Yes. We aren't
talking about some shady guy in a trench coat
selling fake Rolexes on a street corner. We are
talking about a pillar of Wall Street. We are
talking about the chairman of the Nasdaq. That
is the central tension of this entire story.
It's the paradox that allowed the fraud to last
as long as it did. How does a man who started
out as a lifeguard in Queens. A lifeguard. A
man who literally helped build the modern electronic
stock market. The plumbing of our financial system.
How does he manage to run an industrial scale
fraud for decades right under the nose of the
regulators? And that's the question we're going
to answer. Because the headlines, and we all
remember the headlines from 2008. focused on
the fall. They focused on the angry victims in
the perp walk. Of course. That's the dramatic
part. But the rise, the mechanics, that's where
it gets really interesting. Precisely. Our mission
today is to move past the caricature of the monster
and really look at the machine he built. We have
a massive stack of source material here. I mean,
biographical details, internal SEC emails, court
transcripts, the investigation reports. Everything
you need. We need to understand the mechanics
of the fraud, the psychology of what we call
affinity fraud, and the absolute catastrophic
systemic failure that allowed this to happen.
So let's start at the very beginning. Because
if you were casting a movie about the biggest
financial criminal of all time, you'd probably
write him as a blue blood. Oh, you're right.
You'd think so. Someone born into a banking dynasty.
But Madoff... He was a Queens kid through and
through. He was. Born in Brooklyn in 1938. Grew
up in Laurelton, Queens. It was a very middle
class upbringing. Right. And his start in finance
was incredibly humble. He founded his firm, Bernard
L. Madoff Investment Securities, LLC, in 1960.
He was just 22 years old. Just a kid. And the
capital he used to start this future Wall Street
empire, $5 ,000. Five grand. Which, to be fair.
was worth a bit more back then, inflation and
all that. But we're still talking about the price
of a decent used car today. Oh, absolutely. That
is not exactly master of the universe money.
No, it's not. And where he got that money is
important for the narrative. He didn't get a
trust fund payout. He earned that money working
as a lifeguard at Rockaway Beach. I just can't
get over that. And installing underground irrigation
sprinklers. Wait, really? The guy who stole billions?
The guy who destroyed thousands of lives? started
by installing sprinklers. He did. It's the classic
American bootstrap story initially. It creates
this narrative of this self -made man that he
leveraged for the rest of his life. Sure, it's
a great story to tell at dinner parties. Now,
he also got a $50 ,000 loan from his father -in
-law, Saul Alpern, which was crucial. That gave
him the liquidity to actually trade. Okay, that
helps a little more than five grand. But the
trajectory is fascinating because he didn't start
on the floor of the New York Stock Exchange.
He wasn't one of the elite guys in the color
jackets. He started in what was called the pink
sheets. The pink sheets. That sounds, well, it
sounds less than prestigious. It was the Wild
West. It was the penny stock market. High risk,
low regulation. Companies that weren't big enough
to be listed on the NYSE ended up on the pink
sheets. Okay. But this is where Madoff showed
his brilliance. And I think we have to acknowledge
that he was brilliant, at least in terms of market
structure. In a certain way. In the 1960s, trading
was manual. It was inefficient. It was guys shouting
at each other or trading slips of paper. Right.
The classic image of the trading floor, chaos,
shouting, paper flying everywhere. Exactly. Madoff
looked at that and saw an opportunity. He realized
that computers could do it faster, cheaper and
more efficiently. His firm became a pioneer in
using computer technology to disseminate quotes.
So he was a tech guy before tech was really a
thing on Wall Street. He basically digitized
the process of matching buyers and sellers. So
before he was a crook, he was a genuine innovator.
He was bringing the market into the digital age.
He was a revolutionary. That technology his firm
helped develop, it eventually became the NASDAQ
stock market. Oh, wait. And Madoff wasn't just
a participant. He served as the chairman of the
NASDAQ. He was on the board of governors for
the FSD. He was the establishment. He was the
guy writing the rules. He was the guy writing
the rules. This is what makes it so scary to
me. He wasn't an outsider throwing rocks at the
castle walls. He was the guy sitting on the throne
inside the castle. He had this veneer of absolute
legitimacy. Absolutely. But there was this one
practice you highlighted in the notes, payment
for order flow. This seems like a pivotal moment
where he started bending the rules, or at least
the ethics of the game. It's a controversial
practice, and Madoff was one of the first prominent
practitioners of it. It's still around today,
by the way. Apps like Robinhood use it. But Madoff
pioneered it. Essentially, Madoff would pay brokers,
the people you or I might call to buy a stock.
he would pay them a penny a share to route that
order through his firm. Hold on, let me get this
straight. If I'm a broker, my job is to get my
client the best price right. Supposedly, yes.
Best execution. But Madoff is saying, hey, send
that order to me and I'll slip you a penny for
every share. That sounds a lot like a kickback.
Critics at the time called it exactly that, a
legal kickback. Academics questioned the ethics
immediately. They said it created a conflict
of interest. Of course it does. Why are you sending
the order to Bernie? Is it because he has the
best price or because he's paying you? But Madoff
defended it. Vigorously. And this is where you
see his ability to manipulate a narrative. He
had this quote that perfectly encapsulates his
ability to rationalize the unjustifiable. He
compared the complex machinery of the stock market
to... A supermarket. A supermarket. How? He said,
and I'm quoting here, if your girlfriend goes
to buy stockings at a supermarket, the racks
that display those stockings are usually paid
for by the company that manufactured the stockings.
Wow. OK, so he's comparing complex financial
derivatives and market making to pantyhose racks.
He had a gift for making the complex sound simple
and harmless. He argued that the customer didn't
lose money because he was so efficient. He could
still give them a good price. So what's the problem?
So his argument was no harm, no foul. I'm just
paying for the shelf space, basically. And people
bought that. They did. And this practice made
his firm incredibly powerful. By 2008, his...
firm the legitimate side of it was the sixth
largest market maker in s p 500 stocks so just
to clarify for everyone listening because this
is crucial he had a legitimate business yeah
a massive successful market making business that
was making millions of dollars a year legitimately
yes And that is the perfect cover. Right. If
you're running a Ponzi scheme out of a garage
or a P .O. box, people ask questions. But if
you're running it out of the lipstick building
in Manhattan while serving as the former chairman
of the Nasdaq, running a legitimate trading arm
that processes a huge chunk of the American economy.
Nobody questions you. Nobody questions you. The
legitimate business was the shield for the illegitimate
one. So let's talk about that building, the lipstick
building. It's that iconic oval -shaped red building
in Midtown. Because this split between the real
business and the fake business was physical,
wasn't it? It wasn't just on paper. It was starkly
physical. The operation was separated by floors.
The 19th floor of the lipstick building was the
legitimate brokerage. It was bright, modern,
filled with state -of -the -art computers, traders
shouting, Bloomberg terminals everywhere. That
was the public face. That's where he took the
tours. And the fraud. Where did the billions
of dollars of fake money live? That was down
on the 17th floor. The 17th floor. It sounds
like something out of a spy novel. It was known
internally as the cage. The atmosphere was completely
different. While the 19th floor was cutting edge,
the 17th floor was stuck in the past. How so?
It was filled with stacks of paper, old thought
matrix printers, and a small team of employees
who had very little financial training. Who was
running this show? It was overseen by Frank DiPascali,
Madoff's right -hand man. He was a guy from the
neighborhood, didn't have a college degree, but
he was fiercely loyal to Bernie. Okay. He and
this small team, mostly high school graduates
people Madoff had hired years ago, facilitated
the entire fraud. So let's get into the strategy.
I mean, when Madoff was pitching this to investors
or when people were begging to give him money,
what did he tell them he was actually doing?
He wasn't telling them, I'm putting it in a checking
account. No, no, of course not. He claimed to
be using a split -strike conversion strategy.
OK, let's unpack this split strike conversion.
It sounds incredibly technical, which I assume
is the point. That is absolutely the point. But
in plain English, what is it supposed to be?
So picture a collar. That's what traders often
call this type of setup. The goal is to participate
in the market, but protect yourself. Step one,
you buy a basket of blue chip stocks, big, stable
companies in the S &P 100 like IBM. Or Coca -Cola.
Okay, so you own the stock. If the stock goes
up, you make money. If it goes down, you lose
money. Standard stuff. Right. But Madoff told
clients he was hedging that risk. This is step
two. You buy put options. A put option is basically
an insurance policy. Insurance, okay. It gives
you the right to sell the stock at a certain
price even if the market crashes. So if the market
tanks, the put option gains value and offsets
your losses on the stock. You've created a floor.
You can't lose more than X. But insurance isn't
free. If I buy car insurance, I have to pay a
premium. If I buy put options, that costs money,
which eats into my profits. Exactly. And this
is the genius or the alleged genius of the strategy.
To pay for that insurance, step three, you sell
call options. And what's that? You sell someone
else the right to buy your stock if it shoots
up to the moon. By selling that option, you collect
a premium. You use that cash to pay for the put
options. So you're funding the protection by
capping your upside. You're saying, I won't make
a home run, but I'll never strike out. Precisely.
You are clipping the wings of the trade to build
a safety net. And here's the key takeaway. This
strategy is mathematically designed to be boring.
It chops off the highs and the lows. It should
produce flat, mediocre returns. But Madoff? He
was reporting 10, 12, 15 % returns every single
year, regardless of what the market did. Like
clockwork. No down years. Never. He took a strategy
designed for safety and pretended it was a magic
money printer. And just to be absolutely clear,
was he making these trades? Was he buying the
stocks and the options? He never made the trades
not for the asset management clients? Never.
Like not even once to keep up appearances? The
investigation showed that for decades he simply
took the client's money and deposited it into
a corporate checking account at Chase Manhattan
Bank. It was just sitting in a checking account.
Billions of dollars. Yes. It was a slush fund.
Unbelievable. When a client wanted to withdraw
money or redemption, he just wired them money
from that Chase account. It is the textbook definition
of a Ponzi scheme. New investors' money is used
to pay the old investors. So wait. These clients
were receiving monthly statements, right? I mean,
very detailed statements saying, bought IBM at
100, sold at 105. How did he generate those if
he wasn't trading? That was the job of the 17th
floor. It was a factory of fiction. Employees
like Annette Bongiorno and Joanne Krupe spent
their days creating false trading reports. And
how did they do it? The method was almost comically
simple. It was called backdating. How does that
work in practice? Imagine you have yesterday's
newspaper. You can look at the sports section
and see exactly who won the horse race. Right.
If you could place a bet on yesterday's race
today, you'd never lose. Right. I'd bet the house
on the winner every time. That's what they did
with stocks. They would look at the historical
prices of the S &P 100 over the past month. They
would see that, say, Microsoft hit a low on Tuesday
and a high on Friday. Okay. Then they would retroactively
generate a trade slip saying, We bought Microsoft
for you on Tuesday at the low and we sold it
on Friday at the high. So they were rigging the
game after the game was already played. They
were rewriting history. Exactly. They were picking
winners after the race was run. Bongiorno actually
wrote in a note to a manager in the early 90s.
It was recovered later. And she said, I need
the ability to give any settlement date I want.
Wow. She was explicitly asking for the tools
to fabricate the timeline. That's what she was
doing. But didn't they make mistakes? I mean,
if you're faking thousands of trades for thousands
of clients, surely you slip up. You can't be
perfect. They weren't perfect. They lacked sophistication.
Sometimes they would accidentally record a trade
as happening on a weekend or a federal holiday
when the markets were closed. You're kidding.
A trade on a Sunday. Or a trade on Christmas
Day. And yet nobody caught it. How? The auditors
were a tiny storefront firm, one active accountant
who basically rubber stamped the books without
looking. But the clients, they didn't look too
closely either. Why? The returns were too good.
The returns were too good. This brings us to
the why. Why did people trust him so blindly?
It wasn't just the returns, was it? There was
a psychological game being played here. Oh, absolutely.
This is what we call affinity fraud. OK. It is
a predator exploiting the trust within a specific
group. Madoff was Jewish and he targeted the
wealthy Jewish community. He operated within
the in -group. Right, the country clubs, the
Palm Beach Country Club specifically. That seems
to be ground zero for a lot of this. That was
his hunting ground. But get this, he didn't run
around handing out business cards like a desperate
salesman. He used a velvet rope tactic. A velvet
rope. He made it seem like a privilege to invest
with him. He would turn people away. He would
tell investors, I'm closed to new capital or
don't talk about this. This is exclusive. That
is genius in a twisted, manipulative way. If
you tell someone, I can't take your money right
now. They want to give it to you even more. It
creates scarcity. It creates scarcity, right?
Exactly. It created a fear of missing out, but
also a fear of asking questions. Investors were
terrified that if they asked too many questions
about the strategy, if they said, hey, Bernie,
how does this option hedge work? He'd kick them
out. He would just get offended, cash them out
and kick them out of the fund. And nobody wanted
to be kicked out of the golden goose. So they
stayed silent. And the victims. This wasn't just
nameless hedge funds or faceless banks. These
were charities. These were foundations. The devastation
in the charitable world was profound. Hadassah,
the Women's Zionist Organization of America.
Huge organization. The Eli Wiesel Foundation.
Eli Wiesel, the Holocaust survivor and Nobel
laureate, lost nearly everything. Steven Spielberg's
Wunderkinder Foundation. It's heartbreaking.
These organizations rely on that money to do
good work, to save lives, to educate, and it
just... evaporated into thin air. And for some,
the betrayal was deeply personal. It wasn't just
business. Take Cheryl Weinstein. She was the
chief financial officer of Hadassah. Okay. She
revealed in a memoir later that she had an affair
with Madoff more than 20 years earlier. Whoa.
She had a romantic relationship with him. Yes.
And despite that intimacy, despite that connection,
he still defrauded her. He defrauded the organization
she helped run. At his sentencing, she stood
up and called him a beast. It shows the absolute
lack of empathy. To Madoff, everyone, lovers,
friends, family, was just a source of liquidity.
It really paints a picture of a sociopath. Someone
who can compartmentalize to a frightening degree.
But here's the thing that drives me crazy. With
a fraud this big, operating for this long, we're
talking decades, surely someone noticed the math
couldn't possibly work forever. And someone did
notice this is where the story introduces its
antagonist or hero, depending on how you look
at it. Harry Markopoulos. The math whiz. I love
this part of the story because it feels like
a thriller. You have this one guy shouting from
the rooftops and nobody listening. Harry Markopoulos
was a financial analyst working for a rival firm
called Rampart Investment Management. In 1999,
his bond came to him and said, hey, this Madoff
guy is killing it. Deconstruct his strategy so
we can replicate the returns. A reasonable request.
Reverse engineer the competition. Exactly. So
Markopoulos gets the data. He looks at the split
strike strategy. He looks at the returns. And
he later said it took him four minutes to suspect
it was a fraud. Four minutes. And four hours
to mathematically prove it. Four minutes. It
took the SEC decades. And this guy figures it
out in the time it takes to brew a pot of coffee.
The math simply didn't add up. The returns were
a straight line moving upward at a 45 -degree
angle. Real markets don't do that. No, they go
up and down. They're messy. Markets are volatile.
They wiggle. Madoff's chart looked like a ruler.
But the smoking gun, the thing that Markopoulos
really latched onto was the options volume. Right.
Let's go back to the strategy. To make it work,
Madoff had to buy and sell thousands of options
contracts. Markopoulos looked at the volume.
Madoff is managing, let's say, $10 or $15 billion
at this point. To hedge that much money using
the split strike strategy, you need to buy a
specific number of options contracts on the Chicago
Board Options Exchange, CBOE. It's a supply and
demand issue. Right. Markopoulos checked the
daily volume of the entire exchange. He realized
that if Madoff was actually doing what he said
he was doing, he wouldn't just be a big player.
He would have needed to buy more options contracts
than actually existed in the entire world. So
he would have had to buy the entire market and
then some. It's impossible. Exactly. It was a
physical impossibility. It's like saying you
ate a thousand burgers for lunch, but the McDonald's
only sold 50 all day. The inventory wasn't there.
Right. Marco Polo saw this and realized the trades
aren't happening. None of them. So he takes this
to the SEC. He hands it to them on a silver platter.
Here's the fraud, guys. He didn't just send a
tip. he sent detailed mathematical reports he
contacted them in 2000 then again in 2001 then
2005 then 2007 four times he titled one of his
submissions the world's largest hedge fund is
a fraud that is not ambiguous the world's largest
hedge fund is a fraud and they ignored him They
ignored him. They opened investigations, but
they never did the one thing that would have
cracked the case. Yeah. Madoff actually mocked
the investigators later. I bet he did. He said
they acted like LT Colombo. He said they never
asked the right questions. They would come to
his office, check his trade blotter, the list
of trades he printed out from the 17th floor,
and say, looks good. But they never checked if
the trades were real. They never picked up the
phone and called the central clearinghouse. If
they had called the Depository Trust and Clearing
Corporation, DTCC, and said, hey, did Madoff
buy a million shares of IBM yesterday? The DCCC
would have said, no, he bought zero. That seems
like step one of auditing 101. Check if the money
is real. It is. Madoff said, if you're looking
at a Ponzi scheme, it's the first thing you do.
But they didn't. And we have to talk about the
conflicts of interest here because it gets murkier.
Oh, this part makes my blood boil. The family
connections. It's deeply problematic. Madoff's
niece, Shanna Madoff, was the firm's compliance
attorney. The compliance attorney. Okay. She
eventually married Eric Swanson. And who was
Eric Swanson? He was an assistant director at
the SEC's Office of Compliance Inspections and
Examinations. You cannot make this stuff up.
The guy supposed to be policing the fraud marries
the niece of the fraudster. Now, to be fair to
the record, Swanson denied any impropriety, and
he recused himself from Madoff -related matters
after the relationship started. Okay, but still.
But the optics. The optics are terrible. And
it speaks to a deeper psychological issue called
authority bias. Explain that. The regulators
looked at Bernie Madoff and saw the former chairman
of the Nasdaq. They saw a philanthropist. They
saw a pillar of the community. Their brains simply
couldn't compute that a man of his stature would
be running a scam. They were starstruck. They
assumed there must be some complex explanation.
They just didn't understand. They were intimidated
by him. So he skates by year after year, decade
after decade. The lie keeps growing. But then
comes 2008. The great financial crisis. The moment
the music stopped. A Ponzi scheme relies on one
thing to survive. Flow. New money coming in must
exceed the money going out. As long as you can
pay the people leaving with the money from the
people arriving, the party continues. Right.
But in 2008, the entire financial world seized
up. It wasn't just Madoff. Everyone was panic
selling. Exactly. Liquidity dried up. Investors
were panicking. They needed cash to cover their
own losses elsewhere. So they called Bernie.
They said, hey, you've done great, but I need
my money back. They requested redemptions. How
much? In December 2008, clients asked to withdraw
$7 billion. $7 billion with a B. And how much
was actually in that Chase checking account?
In mid -2008, there had been about $5 .5 billion.
But by December... After paying out some early
redeemers, it was down to $234 million. That
is a math problem. You owe $7 billion, you have
$200 million. It was over. The math finally won.
So take us through those final days. The timeline
here is incredibly compressed. It's swift and
dramatic. On December 9th, Madoff confesses to
his brother, Peter. Peter was the chief compliance
officer of the firm. Bernie tells him he's finished.
And did Peter know? The whole time. Peter claimed
ignorance of the Ponzi scheme itself, though
he later went to prison for falsifying records.
So he knew something was wrong. But then on December
10th, the day of the company holiday party, Bernie
calls his sons, Mark and Andrew, into his office.
Now, the sons work there. They ran the legitimate
trading desk on the 19th floor. Right. And Bernie
tells them he wants to pay out bonuses early.
He wants to distribute $173 million in bonuses
immediately. Which makes no sense if the firm
is collapsing. That's just trying to get money
out to friends and family before the ship sinks.
The sons were suspicious. They asked him, Dad,
how can we pay bonuses if we're having trouble
paying clients? They demanded an explanation.
They went to his apartment later that day. And
that's when he dropped the bomb. What did he
say? He told them the asset management business
was one big lie. He said, it's basically a giant
Ponzi scheme. Can you imagine that moment? Your
father, your hero, the legend of Wall Street
tells you everything you know is a lie. The son's
reaction is the subject of much debate, but their
actions were decisive. They didn't help him pack
a bag. They didn't help him shred documents.
They didn't try to cover for him. They went straight
to a lawyer and the lawyer said, you have to
call the feds. And they did. They turned their
own father in. They did. And the next day, December
11th, the FBI shows up at the apartment in their
windbreakers. And Bernie Madoff is arrested.
The $65 billion lie is exposed. And the world
goes into shock. It's fascinating that the sons
turned him in. I mean, we'll get to the tragedy
of the family in a bit, but it really highlights
that this wasn't a family business in the sense
that everyone was in on the secret. Wow. The
secret was the 17th floor. The 19th floor, the
sons were kept in the dark, effectively. Legally,
yes. Though we should note the trustee later
sued the family, alleging the firm was used as
a family piggy bank. A piggy bank. They withdrew
millions for homes, credit cards, vacations.
Whether they knew it was stolen money or just
thought dad was a financial genius is the legal
distinction. But they certainly benefited from
the fruit of the poisonous tree. So Madoff is
arrested. The cameras are flashing. But the story
doesn't end there. The aftermath is. Well, it's
a Shakespearean tragedy. It's almost biblical
in its destruction. It truly is. The destruction
of the Madar family is total. Let's talk about
the sons. Mark Madar. Mark bore the brunt of
the public suspicion. He was the older son. He
worked closely with his father. Even though he
was never charged with the fraud itself, the
public pressure was immense. I can't even imagine.
The media was camped outside his house. He couldn't
get a job. He was a pariah. And the date of his
death. On December 11, 2010. Exactly two years
to the day after his father's arrest, Mark Madoff
hanged himself in his apartment. That date choice,
that's a message. That is a final act of communication
to his father. It's a devastating signal of unresolved
anger and shame. It's just gut -wrenching. And
then Andrew Madoff, the younger son, he had battled
lymphoma before and beaten it, but after the
scandal, the cancer returned. He died in 2014.
And he blamed the stress. He explicitly blamed
the stress of the scandal for his relapse. He
told People magazine, the stress killed my brother
and it's killing me. He viewed his father as
his murderer. Well, yes. And Ruth, Madoff's wife.
She was his high school sweetheart. She stood
by him initially, which destroyed her relationship
with her sons. Eventually, she was ostracized
by society. And she lost all the money. She forfeited
$85 million in assets, leaving her with just
$2 .5 million. Which I know listeners might say
$2 .5 million is a lot. When you're 70 years
old, you're the most hated woman in New York.
And you used to live on billions. That is a total
collapse. She even claimed in an interview that
she and Bernie attempted a suicide pact on Christmas
Eve 2008. They took a handful of Ambien, but
they just woke up the next morning. It's just
grim. The whole thing is just... Darkin made
off himself. He pleaded guilty. He didn't fight
it. He pleaded guilty to 11 felonies in March
2009. No plea bargain. He admitted to everything.
And the judge, Denny Chin, didn't hold back.
No. Judge Chin called the crimes extraordinarily
evil. He noted something very telling. Usually
when you sentence someone, you get letters of
support. Right from friends, family. Friends,
rabbis, neighbors writing to say he's a good
guy who made a mistake. Judge Chin noted the
complete absence of any letters of support for
Madoff. No one stood up for him. So what was
the sentence? 150 years. The maximum allowed.
It was a symbolic sentence, obviously. He was
71 years old. It guaranteed he would die in prison.
And he did. But his time in prison is kind of
interesting. You'd think he'd be a pariah there,
too. But the notes say he was treated like a
mafia don. It's a strange dynamic. In the federal
prison system, money and notoriety still carry
weight. He was a celebrity criminal. In a letter
to his daughter -in -law, Madoff wrote, They
call me either Uncle Bernie or Mr. Madoff. It's
really quite sweet. Uncle Bernie. There were
stories that he cornered the market on hot chocolate
packets in the commissary and sold them for a
profit. He's running a hot chocolate arbitrage
in prison. Allegedly. Once a traitor, always
a traitor. But it wasn't all sweet. He got beat
up, right? Yeah, in 2009, he suffered a broken
nose and broken ribs. He tried to claim it was
dizziness and hypertension that he fell, but
the rumor was heavily that another inmate assaulted
him. And he eventually died in 2021. Yes, of
kidney disease. He was 82. There is one silver
lining in all this, though, and it's a surprising
one. Usually in a Ponzi scheme, the money's just
gone. Right. It's spent. It's been on yachts,
champagne, private jets. Investors get pennies
on the dollar, if anything. But the recovery
here was different. This is where the story pivots
to a legal procedural. We have to talk about
the court -appointed trustee. Irving Picard.
He is the unsung hero of this saga for the victims.
What did he manage to do? You have to understand,
the $65 billion figure was mostly fake profits.
It was air. The actual real money that investors
put in the principal was about $17 .3 billion.
Okay, the real cash. Picard and his team have
recovered over $14 billion of that. That is unheard
of. That's like, what, 80 %? It's an incredibly
high recovery rate for a fraud of this scale.
How did he do it? Where did he find the money?
Through a relentless pursuit of clawbacks. And
this creates a new category of victim. The net
winners. Right. Explain this concept because
it sounds counterintuitive. If I invested with
Madoff and I took my money out before the crash,
why am I in trouble? I didn't steal anything.
Here is the logic. Let's say you, listener A,
invested $1 million in 1995. Over the years,
Madoff sends you statements saying you made profit.
In 2005, you cash out $2 million. Okay. You walk
away thinking you made a million bucks. Okay.
I'm happy. I bought a house in Florida. Life
is good. But Listener B invested $1 million in
2007. Madoff took Listener B's money and gave
it to you to cover your withdrawal. That $1 million
of profit you spent, it wasn't profit. It was
Listener B's money. It was Listener B's life
savings. Oof. Put that way, it's storing goods.
Exactly. So the court ordered those people, the
net winners, to return the fictitious profits
to the pot so it could be distributed to the
people who lost their principal. That must have
been a bitter pill to swallow. You think you're
retired. You think you're safe. And suddenly
the government says, hey, that money you spent
five years ago, you owe it back. It caused immense
financial hardship for people who thought they
were innocent bystanders. But legally and perhaps
morally, it was the only way to create some equity
among the victims. We've covered the rise, the
mechanics, the fall and the aftermath. But let's
zoom out. What does this all mean? Why are we
still talking about Bernie Madoff almost 20 years
later? Because Madoff isn't just a story about
a crook. It's a story about us. It's about the
vulnerability of trust. The trust builder. That's
how we started. Exactly. Madoff excluded the
very thing that makes markets work. Markets run
on trust. You trust that the broker executes
the trade. You trust the auditor checks the books.
You trust the regulator is watching. Right. Madoff
realized that if you mimic the signals of trustworthiness,
the suits, the prestigious offices, the steady
returns, people will stop verifying. And the
exclusivity was the cherry on top. By making
it hard to get in, he bypassed the scrutiny.
It raises an important question for every listener.
If an investment opportunity looks too good to
be true, perfectly steady, no volatility, it
almost certainly is. But more importantly, if
the strategy is too secret to explain, that is
the ultimate red flag. It's a black box. It's
proprietary. You wouldn't understand. If you
can't understand how your money is being made,
you don't know if it's being made at all. It
reminds me of the Markopoulos point. The math
didn't work. The volume of options didn't exist.
It was there in black and white. But nobody wanted
to look because the check cleared every month.
We call it willful blindness. The banks, the
feeder funds, they made fees off Madoff. They
had an incentive not to look too closely. So
are we safe now? I mean, surely the SEC fixed
the LT Colombo problem. They've made changes.
But the complexity of financial instruments has
only increased since 2008. Crypto, high -frequency
trading, algorithmic derivatives, the capacity
for concealment is still there. That's a comforting
thought. Well, skepticism is a healthy survival
trait in finance. So here is where it gets interesting
for you, the listener, to think about. No. We
usually blame the bad apple. We say Madoff was
a monster. And he was. But he operated for decades.
He was the chairman of the Nasdaq. He was the
establishment. And that leads to the final provocative
thought. We focus on Madoff the criminal. But
we rarely ask. How many other Madoffs are operating
right now? Not by hiding in the shadows, but
by hiding in plain sight. protected by our own
assumption that surely someone else is checking
the math. Are we any better equipped to spot
the next one? Or are we just waiting for the
next crisis to reveal who's swimming naked? That
is the question. A huge thank you to everyone
for listening to this deep dive into the $65
billion lie. It's a wild story, but the lessons
are real. Keep your eyes open. And verify the
math. See you next time.