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 Knowing Bernie Madoff; Gilt by Association
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The Lipstick Building at 53rd Street and Third Avenue, designed by Philip Johnson, offices of Bernard Madoff. 10:10 PM. Photo: JH. |
12/15. Cold weekend in New York; almost winter.
Knowing Bernie Madoff; Gilt by Association. Bernie Madoff was a big deal, especially in New York and Palm Beach. Although I’d never heard of him until this scandal broke last week. Which is one of the things I love about New York: there’s always more to learn.
One reason I wouldn’t have known Bernie Madoff was because I don’t have any money. It turns out, however, that I do know a lot of people who know Bernie Madoff, and even a lot of people who had their money with Bernie Madoff. (For those of you looking for karmic clues, the name is pronounced Made-off, and for extra universal luster, he even had a 55-foot sailboat which he named “Bull.”)
He was a legend in his social and financial circles, a giant; like a rock-star in that world, that financial realm. His clients thought he was a genius. People literally begged him to take their money. Why? Because he delivered. 10% or so a year, year in year out.
He wasn’t some fly-by-night. He had solid relationships with clients of twenty and thirty years. They held him in the highest esteem. You could retire with only ten million and have that $600,000 - $700,000 a year to live in Palm Beach, in New York, as sure as the Sun comes up and the Moon goes down.
There were those – smart financial people, investors – who weren’t so sure. One man told me he had some money with Bernie a long time ago but couldn’t figure out “how it worked,” so he took his money out, recalling the sage advice of an elder who warned: “if it sounds too good to be true, it probably is.”
Playing golf at the Palm Beach Country Club, knowing Bernie put you in class by itself, even if you had only ten million. Ezra Merkin, the deeply respected hedge fund owner, business executive and philanthropist thought so highly of Bernie that his Ascot Fund became a feeder fund for Bernie Madoff and his genius jillions.
Not everybody could invest with Bernie, you see. It was a most exclusive club. That was part of Ezra Merkin’s genius: those who couldn’t get Bernie to take them could buy into Merkin’s fund and get the same treatment. Ascot, according to the reports circulating, had a $1.8 billion participation in Bernie Madoff’s genius. So Ascot had many millionaires and billionaires who have lost it all.
There were others like Merkin deeply invested with Bernie Madoff. Walter Noel’s Fairfield/Greenwich Group with more than $7 billion was said to be another feeder fund for Bernie. The rock star.
And why would they do this, given that the investor was smart and shrewd (which turns out to be a very generous given)? Because it was a no-brainer: The hedge (feeder) fund takes the money from the investor, charges its annual fee as well as percentage of the annual appreciation and simply hands the dough over to Bernie and pays his brokerage fees. Let your fingers do the walking, as they say, and everybody wins.
But that was then, before last week when Bernie evidently confessed that it was just one great big Ponzi scheme. The greatest Ponzi scheme in the history of the world. So far.
“He’s God’s avenging angel,” remarked a man close to the situation who had family and friends invested with Bernie.
“Many of these people were arrogant and thought they were smarter because they were with Bernie and making money all the time. They were tempted by something that their greatest instincts must have told them didn’t add up. It’s a dybbuk -- unfortunately taking a lot of innocent people with it.”
The fall-out is impossible to assess at this stage. It will definitely have a profound effect on the social life in New York, Palm Beach and Southampton. The gossip circulating is already about who has lost and how much they have lost and how that will change their lives. Schadenfreude is perched on many a shoulder, with shock and self-pity perched on many others.
It will have an increasingly profound effect on the hedge funds whose current business contraction is putting more and more pressure on securing redemptions. It will fuel the already serious downsizing and de-accessioning in these funds. This is just another aspect of the deflationary cycle that got Bernie Madoff and his clients in this mess in the first place.
Entire charitable foundations have been wiped out. Educational and medical institutions will be profoundly affected and its work reduced or eliminated, leaving thousands of others behind without livelihood.
Bernie Madoff was on the Board of Trustees of Yeshiva University Business School. He was treasurer of the University. How much of their money did he take on, is the question many are asking. Ezra Merkin, a man of very high standing in his business and community will probably have to resign from his boards. And again the question is posed: how much of those institution’s monies were with Bernie Madoff either directly or indirectly?
You may think, as it is easy to, that losing ten or fifty or a hundred million bucks isn’t so terrible if you’re very rich. Well, it is if it’s all you’ve got. And for some of these people, maybe many of these people, it’s all they’ve got. Or rather, had. There’s a rumor that one of the richest men in New York has lost hundreds of millions with Bernie.
There are harsh opinions — besides the angst and the fear — about some of these men within that community. Many were most arrogant, which is, after all, a common affliction amongst the rich. We all live in a world where rich = smart even in many cases when we know it’s stolen or ill-gotten.
What have been our great scandals in the past fifteen years of credit default swaps, mortgage backed securities and all the other derivatives which have expanded, really distended the wealth of nations and individuals? Have they been about the money, about the gorging on paper of questionable worth? No. They have been about the private sex lives of people from Paris Hilton to Bill Clinton to Governor Spitzer. We Nero; That Rome.
The opinion within Bernie Madoff’s world, the community of the very rich Jewish families who were either invested with him or had their foundations invested with him, has been more than harsh. As a younger member of that community explained to me, “these were a group of people who have an awful lot of money and wanted to believe they were smarter than everybody else. Bernie was their genius. Knowing Bernie Madoff was a kind of power in itself.”
“They are shamed in the community,” he said. “This has been the most horrible thing, almost as if God were saying: ‘you people have too much, you give too little, you’re too vain and greedy and we’re gonna send the dark left hand of God, Bernie Madoff and fleece you guys."
“There are very few innocent victims,” he continued, “These people were guilty for being stupid, for being greedy. How could (some of these hedge fund managers) not know there was something wrong with Bernie’s numbers?”
How did this happen to so many people, so many institutions, so many charitable foundations?
The boom years, we are now getting to see, were very reckless and the recklessness was wide-spread. It’s not them, it’s us. We’ve been living in a time when men have paid themselves annual fortunes great enough for several lifetimes while at the same time cutting labor costs and lobbying against income tax. So what we have wanted quite simply was: MORE. And we got it. MORE is still the operative word. Bernie Madoff simply gave them what they wanted. MORE.
It is tempting to reproach. I asked someone who knew Bernie Madoff what the man himself was like. “He’s a man with a lot of anger,” my friend told me. “He hates God for what happened in his life. He’s also a man of immense charm.”
A few years ago I asked John Dizard, the very smart and heady columnist for the FT what was at the root of this great financial boom we were experiencing. He replied with one word: “liquidity.”
“Meaning ...?”
“The world is awash in liquidity, more than ever before and everywhere ...”
“How long will this go on?”
He didn’t know.
“Will it end?”
“Oh yes,” he smiled ruefully, “it’ll end in tears.”
Another wise friend of mine who makes his living as an investor answered the same question this way: “Once confidence is lost, there’s no telling where it will all end.” |
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