This article was adapted from "The Wizard of Lies: Bernie Madoff and the Death of Trust," by Diana B. Henriques, a reporter for The New York Times. The new book, published by Times Books, analyzes Madoff's rise and fall.
This article was adapted from “The Wizard of Lies: Bernie Madoff and the Death of Trust,” by Diana B. Henriques, a reporter for The New York Times. The new book, published by Times Books, analyzes Madoff’s rise and fall.
It is Wednesday, Dec. 12, 2007, the first day of the last year of Bernie Madoff’s epic fraud.
The paperwork has been completed for a $9 million unsecured loan from his company to Peter Madoff, whose titles at the firm include senior managing director for the private money-management business Bernie runs on the 17th floor of the tower known as the Lipstick Building in Midtown Manhattan.
Still, the Madoff firm is casual about titles. Peter’s primary title has always been “Bernie’s brother.” And this latest loan, to finance a real-estate investment, reflects this reality.
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At most big firms these days, an executive’s request for a $9 million insider loan with a gentle interest rate would be coldly denied as inappropriate. Despite growing worries in the financial markets, longtime employees of Bernie Madoff’s firm have no trouble borrowing cash when they need it.
But this loan to Peter — like all the insider loans that have come before and that will follow in succeeding months — is sucking out cash Bernie Madoff will need when the turmoil bearing down on Wall Street finally hits.
Tonight is the firm’s holiday office party, and employees are enjoying the margaritas and Mexican beer at Rosa Mexicano, a popular bistro a few blocks from the office.
The party might almost be a family reunion.
Beyond his own family ties, Bernie Madoff’s employees work with their fathers, cousins, nephews, stepsons, even their neighbors.
Some of them — notably the staff on the 17th floor — were hired right out of high school and have never worked anywhere else.
The traders may joke about Madoff’s nearly obsessive demand that they keep their desks clear and tidy, and they may roll their eyes at his crude humor, but the firm still seems like a great place to work.
Besides being generous with insider loans, Madoff also manages much of the money his relatives and other senior employees have saved: their deferred compensation and retirement savings.
Although he is prickly and secretive about it, everyone knows giant hedge funds and wealthy individuals are constantly jockeying to get him to manage their money. Employees feel lucky he is looking out for them, too.
There may be a hint of edginess in the air tonight. Madoff traders exchange jokes with traders at big Wall Street outfits; they all are hearing faint rumbles from the approaching storm.
Perhaps it comforts them to reflect that Madoff has seen rough weather before — from the shaky markets right after the terrorist attacks in 2001, all the way back to the glut of unfinished stock-trading paperwork that nearly choked Wall Street back offices in the late 1960s.
He’s seen it all and survived it all.
WEDNESDAY, JAN. 23, 2008
Steady patrons of culture
On Madoff’s calendar, this evening belongs to the New York City Center, the innovative cultural institution that he and his wife, Ruth, have supported for years and on whose board he has served for more than a decade.
Wall Street’s growing anxiety about an approaching recession probably seems like a faint distraction.
Madoff has at least $5 billion in the bank to sustain his Ponzi scheme, small bits of it contributed by people seated around him in this auditorium and giant slabs of it deposited by his global collection of hedge-fund clients.
THURSDAY, FEB. 14
Palm Beach partying
Madoff catches a night flight to Palm Beach, Fla., where hundreds of his investors live.
Among them is Carl Shapiro, the retired garment-industry entrepreneur who has been a client since the 1960s. Shapiro is celebrating his 95th birthday with a gala organized by his daughters. The Madoffs are invited.
The party the next evening is a head-turning event, even for Palm Beach. There are armloads of orchids, towers of roses, and caviar and Champagne in stunning abundance. The columnist Shannon Donnelly, the Palm Beach celebrity watcher, is on duty to collect the details.
Donnelly notices 40 notable society names among the guests, including the owner of the New England Patriots football team and a well-known Chicago financier.
She doesn’t mention the Madoffs, even though they have owned a home on this thin, rich island for almost 15 years.
THURSDAY, FEB. 21
One simple question
Back in Manhattan, Madoff welcomes a British bank executive into his office on the 19th floor, two floors above his intensely private money-management business.
The banker works in London for HSBC, which handles the administrative paperwork for a growing roster of global hedge funds.
Some HSBC units have been recommending various Madoff feeder funds to their clients for years, starting with the Fairfield Sentry fund in 1999.
A number of the bank’s offshore hedge-fund clients are invested with Madoff. Legally, that makes Madoff’s firm the “sub-custodian” of the funds, since HSBC is accepting fees to serve as their official custodian.
The banker needs to answer a simple question: Are the securities the hedge funds have left in Madoff’s custody actually there?
They aren’t, of course. Madoff knows this — and by now there is enough quiet gossip about him in the hedge-fund world to suggest that what he already knows others are starting to suspect.
As early as 2001, a few bank executives were expressing doubt about Madoff. In September 2005, the bank asked the accounting firm KPMG to review the “operational risks” of Madoff’s business.
When the report came back in early 2006, it included a chilling list of what could go wrong, from misdirected trades to outright fraud.
Despite doubts, the bank apparently believed Madoff’s stainless reputation and his standing with market regulators made such nightmare possibilities sound outlandish.
HSBC will continue to provide administrative and custodial services to the funds that deal with Madoff for almost 10 more months.
FRIDAY, MARCH 14
Fear on Wall Street
The Federal Reserve extends an emergency line of credit to Bear Stearns, which was caught in an old-fashioned “run on the bank.” It is the first time in history the Fed had stepped in to rescue an investment firm.
Rumors of unrecognized mortgage losses are shaking people’s faith in other giant Wall Street firms, too. The Dow closed down nearly 200 points.
It is a day to frighten anyone, but Madoff is characteristically calm. He gives a quiet but reassuring lecture on the safety net that protects customer accounts on Wall Street. He is confident Bear Stearns will find its footing once today’s panic ebbs.
But federal regulators are already scrambling to find a buyer for Bear Stearns.
From this weekend on, pension funds and other institutional investors will demand more information about the banks and brokers they deal with.
There will be more questions put to Madoff, more answers demanded, and more nervous withdrawals.
It is an anxious, faintly terrifying day, but this is nowhere near as bad as it will get.
WEDNESDAY, MAY 14
Madoff looks quizzically at the two men who have been waiting in his 19th-floor conference room since 11 a.m., and gestures them into his adjacent office.
“I don’t know why I agreed to see you,” he says.
He doesn’t sound rude, just a little confused. He moves to his seat behind the desk as the visitors, a retired New Jersey businessman and his accountant, settle into the chairs across from him.
The businessman mentions the name of the wealthy Madoff investor who had made the introduction. Madoff looks blank, as if he does not recognize the name.
He has thousands of investors — but his visitors do not know that. They still think Bernie Madoff is an exclusive, highly selective investment adviser. After all, the businessman made at least a half-dozen calls before finally getting this spot on Madoff’s calendar.
“All right, as long as you’re here,” Madoff says, as he seems to relax slightly. He does not have a lot of time to spare, he adds — he will be leaving the next day for France.
They trade some pleasantries about his vacation plans. He seems in no hurry to make a sales pitch; he shows no sign of wanting the businessman’s money.
Suddenly the businessman asks, “You didn’t grow up wealthy, did you?”
Madoff smiles. He begins to recount his humble beginnings, the classic biography of the self-made man, something he has in common with his visitor.
Finally, they get down to the details.
What is his fee? There is no fee.
What is the minimum investment? Five million dollars.
“I’m not really prepared to put in that much at first,” the businessman says. Typically he starts small with a new money manager, waiting for good results before committing as much as Madoff requires.
Madoff shrugs. “Well, you can put in $2 million now, but by the end of the year you have to put in the rest.”
At that, the businessman’s accountant knows this discussion is going nowhere and he turns his attention to his surroundings.
There is not a single item on Madoff’s desk — not even a pencil. He notices the array of costly Roy Lichtenstein prints on the wall, all variations on the figure of a bull, Madoff’s icon. He takes in Madoff’s expensively cut dress shirt and handsome tie, his silver hair curling stylishly over his collar. Madoff truly seems indifferent to the outcome of the meeting.
The businessman continues to quiz him — that’s his style, as his accountant can attest. He pokes and prods until he gets answers.
Abruptly, Madoff becomes firmer. “Listen,” he says. “You ask a lot of questions. I just want to make one thing clear: With all due respect, once you invest, you can’t call me. You’ll deal with someone else.”
The businessman smiles — his accountant knows the comment has shut the door on any possibility of a deal. Perhaps that’s what Madoff intended.
As much as he needs this man’s cash, he cannot afford this relentless curiosity. After a few more pleasantries, they rise, exchange handshakes and walk toward the double glass doors leading to the elevators.
TUESDAY, JULY 15
Madoff is meeting with four visitors from Florida — and he knows this meeting could cost him as much as $33 million.
Three of the visitors are associated with the MorseLife Foundation in West Palm Beach, which operates one of the premier senior-care facilities on Florida’s golden east coast.
The fourth is a financial planner in the West Palm Beach office of Merrill Lynch, who has recently expressed a few mild doubts to the foundation’s board about its Madoff investment.
His specific concern is that the foundation is putting too many of its eggs in Bernie’s basket. In the spring, he recommended pulling out some of the Madoff money and investing it elsewhere.
The MorseLife Foundation, whose board is dominated by the same sort of wealthy philanthropists whom Madoff has cultivated everywhere, opened an account with him in 1995. The foundation has invested more than $11 million and has never made a withdrawal.
These visitors believe MorseLife has about $33 million in that account, representing almost 60 percent of its total endowment.
There is nothing in the account, of course. It is just another small pipeline into Madoff’s huge criminal enterprise.
Madoff is relaxed and calm, and he clearly succeeds in reassuring his visitors about his hedged, conservative investment strategy.
Shortly after this meeting, the Merrill executive will reverse his position and accept the foundation’s continuing investment with Madoff.
SUNDAY, SEPT. 7
More cause for alarm
The federal government is seizing control of Fannie Mae and Freddie Mac, the two largest mortgage-finance companies in the country. The bailout is the brainchild of the Treasury secretary, Henry M. Paulson Jr., and its price tag is rumored to be in excess of $25 billion.
Madoff knows that this news will further alarm his institutional investors, especially the overseas hedge funds he is fleecing through his Ponzi scheme.
MONDAY, SEPT. 15
Vacation cut short
Bernie and Ruth Madoff and some friends had come over to the south of France on the company jet before the weekend. They plan to fly on to Italy after a few days. But the news from New York is alarming. Lehman Brothers, one of the most fabled names on Wall Street, filed for bankruptcy, after a frantic weekend of failed negotiations with bank regulators and government officials.
Within hours, there are dire predictions that another Wall Street giant, the insurance firm American International Group, is sinking under the weight of its derivatives losses. Beset by fear and seeking capital, executives at Merrill Lynch are rushing into a shotgun wedding with Bank of America.
The stock market seems to be in a death spiral, and even seasoned Wall Street veterans are shaken by the faint trace of panic they hear in the voices of customers, regulators and television commentators.
“Let’s go home.” It is the group’s decision. Something deep in the bedrock of Wall Street is cracking, and the tremors can be felt even here.
There are calls to the airport to ready the jet. Bags are quickly packed, and the plane takes off. Bernie Madoff is flying into the financial storm of the century; he will not fly out again.