Books I Like - Wizard Of Lies

Wizard of Lies by Diana Henriques (2011)

Being disgusted by the Bernie Madoff saga and having no interest in learning more about it I ignored this book when it first came out.  Then I happened to see the author, a financial reporter for the New York Times, on CSPAN Book TV, and was intrigued by her discussion so I took a chance.  It turns out the book is a page turner, remaining exciting even though you know the ending and most importantly explains convincingly how this appalling fraud happened.



The author was able to interview Madoff in prison and, as she told it on CSPAN, he even managed to con her from jail.  She takes you through the mechanics of the fraud (which she does not believe Madoff's family had knowledge of) and most frustratingly, through the multiple times various individuals, firms and government agencies came close to uncovering the scam, yet failed to ask that one extra question or seek to cross check one extra piece of information.  At the end, Madoff nominally was managing $65 BILLION in investments and it was all a Ponzi scheme - there was not one dollar of legitimate investment.

Madoff's personality comes through, particularly his ability to instill trust.  He had a very canny approach, never promising or delivering huge profits but always consistently providing his clients with a decent and steady return.  It was an approach that allowed his customers to think they were being prudent.

The best example of Madoff's style is in his 2009 interview with the SEC, after he confessed.  The SEC had conducted an investigation of his firm in 2006 and failed to connect the dots, in part because Madoff created false documents to show them.  In 2009, the SEC investigator was able to question Madoff about the 2006 investigation.  Here's how the book tells it:

Did you create false documents to give to the SEC?
No, Madoff answered, almost affronted.  He said he gave the SEC the same documents he gave to his customers.
But weren't those customer statements actually false documents?
No, they weren't.  Madoff paused for what seemed like thirty seconds, then gave a tiny nod to reality. "I could see how you might see them as false," he said.

What remains staggering is for how long Madoff was able to pull this off.  He confessed in December 2008 saying that the fraud started in 1992.  The author believes that it actually started at the latest by the late 1980s and may have started by the late 1970s.  The one weakness in the book is that while Henriques does cover the mechanics, it is still not clear to me how Madoff, with such a small group of co-conspirators (about six people who are awaiting trial) could have pulled off something so massive for so long.

One of the strengths of the book is Henriques' ability to get inside the minds of the investors and explain to us how what now looks crazy didn't look that way at the time.  The books contains some very perceptive observations of the limitations of our usual regulatory approaches to preventing this type of problem: 

"Regulators believe in the fine print.  Investors never, ever read the fine print - never . . . The "full-disclosure" regime that had been generating fine print for investors for more than seventy-five years didn't work . . . It didn't work because it doesn't reflect the way today's investors make their decisions".

". . . We do not consult the fine print to decide if we trust someone.  We consult our friends, our relatives, our coworkers, our sons, our fathers, our richest acquaintances, our past experiences, and, ultimately, our gut.  And as Bernie Madoff learned, once trust is earned, it will protect a con man from every red flag."

I'll leave the final word to another voice from the book, Elie Wiesel, Nobel laureate and Auschwitz survivor, from whom Madoff stole his charitable foundation's entire endowment.  When Wiesel was asked how the scandal could have happened he said "It's almost simplistic. The imagination of the criminal exceeds that of the innocent".