Business Brief: Madoff scandal highlights need for investor education
As a veteran New York Times Financial Reporter, Diana Henriques knew Bernie Madoff as a respected statesman of Wall Street – until December 11th, 2008.
The news broke that day that Madoff’s two sons told federal investigators the truth about their father: instead of investing billions of dollars for his clients, Madoff had been running the world’s largest known Ponzi scheme.
The news shattered investor trust and strengthened calls for greater regulation of Wall Street. But over the last several years, public suspicion and demands for stronger investor protections have faded.
Diana Henriques, author of The Wizard of Lies: Bernie Madoff and the Death of Trust, talks with WHQR’s Rachel Lewis Hilburn in this edition of the Business Brief.
Diana Henriques was the first journalist to interview Bernie Madoff in prison.
“Was there ever a moment when you’re sitting with him in the interview, and he’s looking into your eyes, and you think, ‘Okay, I’m drinking the Kool-Aid. I can feel myself getting sucked into this manipulation.’?
There was. There was a moment that I reflect on with humor. I was asking him a lot of questions. I could hear the clock ticking in my head. I had only two hours for this interview.”
Madoff starts to digress, says Henriques, taking great pains to explain a rather arcane investment strategy that she already understands. She nods hurriedly, thinks about the ticking clock, and tries to push Madoff to answer her original question.
“And he looked at his lawyer with this marvelously grateful look and said, ‘Oh, it’s such a pleasure to deal with someone who really knows the markets.’”
It was a deft little compliment, she says. But alerted to that tendency, she watched for those moments, when Madoff would drop what she calls “honey on [her] tongue”.
“…letting me know that he thought I was the most intelligent, trustworthy, knowledgeable, journalist he’d ever dealt with. And you know, Rachel, I knew he was a liar and a fraud and it still felt good!!”
And that’s lesson Number One about Ponzi schemers. There’s a misguided notion that they’ll show up sporting horns, pointed tail, or obvious psychopathic traits, says Henriques. The misplaced confidence that comes with the erroneous sense that con men are eminently identifiable is part of what allows them to perpetrate the con.
“Before the music stops, every single successful Ponzi schemer was an admired, respected, trusted person. Because if they hadn’t been, they wouldn’t have been able to lure you into a Ponzi scheme in the first place.”
Henriques calls Ponzi schemes and schemers the “cockroaches of crime” because of their continuing prevalence. In the aftermath of Madoff’s arrest, 150 Ponzi schemes collapsed over the next year and a half, according to Henriques.
“What we don’t know is how many are going strong today that haven’t collapsed yet. Ponzi schemers have learned a lot from the Madoff scandal. They’ve learned that if you set up a Ponzi scheme that doesn’t promise sky-high returns – it pays you just a nice, steady return – not only will you disarm peoples’ suspicions, but the cash that you raise from new investors goes a lot further. You can keep your scam going a lot longer when you’re paying modest returns.”
Which brings us to Lesson Number Two.
“As a good friend of mine, a fraud analyst told me, if it sounds too good to be true, you’re dealing with an amateur… Because gifted Ponzi schemers not only have a gift to make them trust you… but they also know never to make it sound too good to be true to the audience they’re pitching it to.”
The federal government could strengthen investor protections, says Henriques, by requiring money managers to have a third-party custodian. And, she says, letting the profitable Securities and Exchange Commission operate as a self-funded entity rather than turning its profits back over to Uncle Sam would be another prudent step.
But until there is substantial regulatory change, Henriques is a passionate advocate for investor education.
“My nightmare, Rachel, frankly, is that right out there, right now, in today’s very low interest rate environment, which is punishing savers who can’t make a good return on their savings… someone can come forward to your listeners and say, ‘look, I’ve got this really safe, low-risk, short-term bond fund. It doesn’t pay a lot – just two and a half – three percent. But it’s really safe and a lot of people you know and admire are investing there and it’s a lot better than what you’re making in your money market fund right now.’ And you’re going to fall for it.”
There are people who escaped Madoff. Henriques tells their stories in The Wizard of Lies.
“And they are instructive. They escaped Madoff not because they suspected he was a crook. They didn’t. They wanted very much to invest with him. But they had sensible rules about investing that they stuck with even when they were tempted to waive them for Madoff.”
And it was those sensible rules that allowed them to walk away unscathed, says Henriques, perhaps entirely unaware of the close call they’d had.
Diana Henriques, author of The Wizard of Lies: Bernie Madoff and the Death of Trust, will speak at UNCW on March 20th about the lessons to be learned from the Madoff scandal. Registration is required by March 15th.
For more information on this event, follow this link: http://uncw.edu/articles/2013/02/dianahenriques/
For more on Diana B. Henriques, follow this link: http://dianabhenriques.com/