The Wizard of Lies:
Bernie Madoff and the Death of Trust
By Diana B. Henriques
Times Books; 448 pp, $30
People are greedy," Bernard Madoff tells Diana B. Henriques in a jailhouse interview. "I told everyone, 'Don't put more than half of your money with me—you don't know, I could go crazy.'"
Henriques is quick to note that it takes some kind of chutzpah for Madoff, of all people, to level accusations of greediness against others, much less chide them for being excessively trusting. This quotation, from a meeting that took place last summer at the Butner Federal Correctional Complex in North Carolina, is presented in the epilogue of The Wizard of Lies, after Henriques has spent 300-odd pages documenting how carefully Madoff cultivated his investors' trust and how zealously he pursued their cash in orchestrating history's biggest Ponzi scheme.
And the levels of chutzpah go still deeper. The "I could go crazy" assertion is yet another Madoff lie. There's no evidence in the preceding chapters that Madoff ever warned off his investors on the basis of an impending crackup, nor that he ever discouraged any of them from giving him every last penny of their net worth. Henriques has been granted an unprecedented level of access to Madoff—two in-person interviews, plus sustained (and warden-vetted) correspondence via letters and e-mails—but she knows that she is dealing with, in her words, "possibly the least reliable source in history."
So Henriques, a financial correspondent for The New York Times, gets in the trenches and digs up Madoff's past, via records, court transcripts, and the recollections of others. Given the saturation coverage the Madoff story has already engendered, what could she uncover that we haven't already heard? As it turns out, plenty. Henriques offers an impressive, meticulously reported postmortem not only of the Ponzi scheme but also of Madoff's entire career, and what's striking is that it had a whiff of criminality about it from nearly the very beginning.
We learn that in 1962, when he was a small-time broker, Madoff violated the wishes of his 20 or so clients—many of them relatives, all of them presuming he was pursuing a low-risk strategy—by investing their money in volatile new-issue stocks. When the market suffered a mini-crash that May, Madoff's clients, unbeknownst to them, were nearly wiped out. Madoff, by his own account, used his firm's own money to cover these losses, buying back his clients' positions at the stocks' original offering prices and getting an infusion of cash from his father-in-law, an accountant named Saul Alpern, to keep his firm afloat.
The market then stabilized to the point where his clients' returns were solid, and Madoff was able to pay Alpern back. It wasn't a Ponzi scheme—there were actual trades being made—but it was dishonest and a flagrant misappropriation of funds. It also set the template for what was to come: the ask-no-questions opacity; the appearance of steady returns; the disclosure of nothing but good news; and the back-end reliance on wealthy benefactors.
In light of the question most frequently posed about Madoff's swindle—"How could this have happened?"—Henriques's reporting provides a ready answer: The guy had practice, and lots of it. Madoff's secret shenanigans grew more brazen as he expanded beyond his workaday brokerage into a more lucrative private investment advisory business. (Those very words now carry an absurdist sting, like John Gotti's lawyers' description of him as a "plumbing supplies salesman.") Henriques makes a strong circumstantial case that the Ponzi scheme, which Madoff says didn't begin until 1992, commenced no later than the aftermath of the '87 crash, when such big-ticket clients as Carl Shapiro and Jeffry Picower started making sizable withdrawals. It's likely, Henriques contends, that Madoff obliged these redemption requests by using the money that was being channeled to him by such new clients as Jeffrey Tucker and Walter Noel Jr., the founders of the Fairfield Greenwich Group family of funds.
It was also around this period that Madoff's trusted lieutenant, Frank DiPascali—a Queens kid hired straight out of high school as a low-level employee in 1975—became complicit in his boss's fraud, concocting false records and monthly statements to match Madoff's supposed trading activity. As trading grew ever more automated and electronic—an area in which Bernard L. Madoff Investment Securities was truly in the vanguard, instrumental in the development of valuable new systems—DiPascali, a techno-financial autodidact, devoted himself to putting together what Henriques dryly calls "customized Ponzi software": computerized spoofware designed to head off queries from nosy investors and the Securities and Exchange Commission.
Henriques paints a damning portrait of the SEC. Underfunded and rendered toothless by deregulation and bureaucratic inertia, the agency repeatedly fumbled away opportunities to investigate Madoff's activities, which raised red flags as early as 1992. From 2001 onward, SEC officials time and again resisted the entreaties of the Boston financial analyst and would-be whistleblower Harry Markopolos, largely because he had an obnoxious personality.
When the agency finally did launch a serious investigation into Madoff's activities in 2005-06, it came tantalizingly close to unmasking the Ponzi scheme. Investigators merely needed to call the Depository Trust and Clearing Corp. (known colloquially as the DTC), Wall Street's central clearinghouse for its securities transactions, to verify that Madoff's firm actually had the billions of dollars' worth of shares and bonds in its DTC account that it said it had. What these investigators would have discovered was a tiny fraction of the claimed volume. "I thought it was the end, game over," Madoff later said. The call was never placed; the SEC people on the case didn't fully comprehend what the DTC was or how it was relevant to their investigation. Besides, they were focused on rooting out insider trading, not Ponzi schemes.
Henriques exhibits a becoming reportorial modesty throughout The Wizard of Lies. The focus is kept squarely on Madoff, with no use of the first person (outside of the acknowledgments) and no trumpeting of her scoops. That said, she managed to get uncommon access to this confounding monster of a man, a serene smoothie who spent every day of the Nineties and Aughts under siege, expecting to be caught out at any moment—a sociopath who befriended and betrayed people in one stroke. Surely Madoff turned on the charm, or tried to, for Henriques. There has to have been some kind of Hannibal Lecter-Clarice Starling dynamic at work.
Yet we never see this. The Wizard of Lies would have been still more compelling if Henriques had let her tightly scripted narrative breathe a little, if she had permitted us a glimpse into her encounters with the master criminal—giving us a feel for his affect, his seduction technique, his motives beyond simple greed and social status. In promotional interviews, Henriques has let it be known that Madoff promised her she was the only writer he was talking to—a pledge that turned out, naturally, to be a lie.
Would that this episode, and some commentary on it, had made the book. The con seems to be its own thrill for this man, even as he molders in his cell, even as he's been found out. The Wizard of Lies is the definitive book on what Madoff did and how he did it, but not why he did it.