Bernie Madoff is a liar perhaps the most
gifted liar I’ve met in nearly 50 years
of writing about finance and government
his ability to tell credible lies helped
him build the 65 billion dollar fraud
that ruined tens of thousands of
people’s lives his lies were devastating
even deadly at least two investors
committed suicide when they learned of
their Madoff losses but I don’t think
made offs talent for dishonesty alone
explains how he did so much damage
I think criminals like Madoff are helped
enormous ly by our own fuzzy
understanding about the quality of trust
trust it’s a beautiful and healthy part
of every life we rely on it as
individuals as consumers certainly and
as citizens economists tell us that the
ambient level of trust in a nation is a
pretty good predictor for its economic
success and psychologists tell us that
the level of trust in our relationships
is a pretty good predictor for their
success – and after 50 years with the
very trustworthy guy who is my husband I
but trust is a paradox isn’t it
trust beautiful as it is is the only
weapon a criminal like Bernie Madoff
and even if you never lose a penny to a
fraud criminals like Madoff tear at the
fabric of trust that holds our society
together and that hurts all of us this
dual nature of trust the blessing occurs
light-dark nourishing dangerous has
always been endlessly fascinating to me
and I think the Madoff story gives us a
way inside that paradox of trust and
offers us some practical lessons for our
own lives today I hope you will learn
more about how to protect yourself from
criminals like Madoff but I also hope
that you’ll emerge with a deeper
understanding that trust is nowhere near
as simple as it seems when money is
involved first a couple of definitions
conman and Ponzi scheme Bernie Madoff is
a conman well what does that mean conman
as you may know is an abbreviation for
confidence man a term that was in use at
least as early as 1857 when Herman
Melville used it as the title for his
final novel and confidence man is a
pretty good way to describe a criminal
who wins your confidence and then uses
it to swindle you yes there have been
some confidence women but as a group con
artists are overwhelmingly male so I’m
going to stick with conman like Bernie
Madoff all con men are liars but all
Liars are not con men and we’re at a
moment in our history when it’s
important to make that distinction to
point to some of the oft exposed Liars
on the public stage today and say well
they’re con men well frankly that’s an
liars they’re a dime a dozen any
four-year-old can tell a halfway-decent
lie you and I can tell much better lies
although I’m sure like me you try not to
telling lies is very very easy telling
lies without getting caught telling lies
without raising a whiff of suspicion
telling lies that inspire trust and
belief and everyone who hears them well
that is very very difficult and that is
what every successful conman must be
able to do let’s think about Madoff for
a minute in the decades that Madoff was
secretly running his massive fraud no
national publication ever ran a list of
the 2000 lies that madoff had told in
the previous year none of his speeches
ever got four Pinocchios or a pants on
fire reward if that had ever happened
just once well may off would have still
been a liar but his career as a conman
would have been over okay that’s conman
let’s turn to Ponzi scheme that’s the
kind of fraud that Madoff and a host of
other con men like to pursue a Ponzi
scheme is a very simple crime and it can
be summed up in the old proverb about
robbing Peter to pay Paul that’s exactly
what a Ponzi schemer does he takes the
money invested by Peter and he uses it
to pay the profits he’s promised to Paul
and he lies to both of them about what
he’s doing
Ponzi schemes to like con men had been
around for a long long time but for most
of that history up until 1920 they were
known as Peter to Paul schemes for
obvious reasons then in 1920 an
extraordinary con artist named Charles
Ponzi set up the Peter to Paul scheme in
Boston that would make him briefly rich
and lastingly famous and the name stuck
since Ponzi’s arrests almost a century
ago there have been countless copycat
crimes and the odds are very good that
there are dozens of undetected Ponzi
schemes going on across the country
right now the website Ponzi tracker
dot-com reports that there have been on
average 65 Ponzi schemes exposed every
year since 2002 think about it that’s a
fresh for all it’s surfacing every five
days now we’ve had Ponzi schemes
involving Bitcoin involving art
involving wines latex gloves for some
reason even tickets to the hit Broadway
musical Hamilton so I can’t predict what
kind of fate investments will be
involved in the next 65 Ponzi schemes
that will surface in the coming year but
I can tell you this about the people
running them right now as I speak every
one of them is a trusted figure in their
community and I know that because the
only people who can pull anyone into a
Ponzi scheme is a trusted figure in
their community like Bernie Madoff
before his arrest
the theme is uncharted today and
unfortunately in my context it’s the
criminals who’ve gone off the chart con
men are changing but our understanding
of them is caught in the old-fashioned
stereotypes of the Charles Ponzi story
the conventional wisdom has it that a
Ponzi schemer
it’s always going to be above
the life of the party telling jokes
buying drinks and trying to hustle in
admiring investors as fast as he can but
that certainly wasn’t true of Bernie
Madoff Madoff was quiet dignified
reserved and he turned investors away so
often it became something of an honour
to be allowed to invest with him
so Madoff didn’t fit anybody’s obsolete
stereotype of a Ponzi schemer and that
helped him avoid detection the
conventional wisdom also holds that
Ponzi schemes always involve outrageous
promises pie-in-the-sky overnight wealth
that’s at the heart of that old investor
warning you’ve heard it if it sounds too
good to be true it is but that isn’t
true of the Madoff case
Madoff’s returns while consistent were
comparatively modest by hedge fund
standards one of his investors
calculated he would have made more money
investing in the fidelity Magellan fund
which I’m sure he wished he’d done so
Madoff’s
unmasking actually led one smart fraud
analysts to say we need to rewrite that
old warning instead it should read if it
sounds too good to be true you’re
dealing with an amateur think about it
Madoff was no amateur he was a
professional and his investors did not
look to him to make them rich overnight
they look to him to keep them safe in a
scary volatile market and they could not
believe he would ever betray them and in
a very tiny way I know a little bit of
how they felt
because in far less consequential
matters Madoff betrayed me too it was in
the summer of 2010 Madoff it finally
agreed to my many
Quest’s for an interview for the book I
was writing about his case but he
insisted that those interviews be used
only for my book I was reluctant to
agree to this embargo because the book
wouldn’t be out for many many months and
Madoff could talk to a lot of writers
between now and then and my hands would
be tied so I said I would only agree if
Madoff would agree not to talk to any
other reporters before my book was
published well he readily said yes he
even put it in writing and he seemed so
sincere so trustworthy that I believed
it and I already knew he was a crook
that’s how good he is
of course he broke his promise no
surprise there but what was surprising
was how shocked I was when it happened
and how foolish I felt for ever trusting
Bernie Madoff in the first place so if
we can’t trust our gut to recognize a
conman
and we can’t what should we do well
relying on financial regulators is not a
good bet these are devilishly hard
crimes to detect in advance
everything looks rosy until the money
runs out and then it’s usually too late
trusting in bankers who serve Ponzi
schemers to catch them well the track
record isn’t so good every successful
Ponzi schemer had a banker who failed to
catch him so what should we do there
were two anecdotes from the Madoff story
that I think are very helpful the first
involved a retired retailer who was
eager to invest with Madoff when he
finally got a meeting with Madoff they’d
off told him well his minimum investment
was five million dollars the retailer
was a wealthy man he could have written
the check easily but he explained that
he had a firm rule
he never invested more than a quarter of
a million dollars with a new money
manager in the first year later on who
knew but only a quarter of a million
madoff stood firm five million dollars
or no dice the retailer was tempted he
wrangled this invitation to talk with
madoff but he thought about it
finally he shook his head shook Bernie’s
hand and walked away similarly a small
charity had an opportunity to invest
with Madoff but their investment
committee of their board had a
long-standing rule they only dealt with
money managers who used an independent
bank or third party to hold the assets
in their account and madoff didn’t do
that but it could have made an exception
in this case to get the talents of this
market wizard but they decided you know
the rule was served as well we’ll stick
with it and they walked away now what’s
fascinating about both of these stories
is that in neither case did anyone
suspect madoff was a crook
far from it the charity the retailer
they continued to admire and respect and
trust Bernie Madoff right up until the
day he was arrested they didn’t have
some kind of x-ray vision into Bernie
soul they didn’t have some kind of
geiger counter in their gut that told
them beware no they just had some
common-sense rules and they stuck to
them and we can do exactly the same
thing we could for example decide that
we are only going to invest and well
regulated public mutual funds and that
would keep you safe from Ponzi schemers
so long as you don’t waive that rule
when you’re brilliantly successful
neighbor invites you into his private
Bitcoin fund on a more difficult level
we could decide that we simply will not
invest with close friends
family members ever precisely because we
understand that the trust we place in
them will inevitably blind us to any red
flags we would need to see to know that
we were in trouble
firm common-sense rules no exceptions I
think Bernie Madoff would tell you that
that’s the best way to protect yourself
from con men like him
the only other way I can think of is
clinical paranoia on a global scale con
men cannot work in a world where nobody
trusts anybody else but nobody wants to
live in a world like that modern
Commerce is impossible in a world like
that and healthy relationships are
destroyed by a world like that so by all
means continue to trust one another
let’s use trust to build strong
relationships strong communities a
strong country but for heaven’s sake
find something besides trust to guide
how you handle your money because trust
will always be that two-edged sword the
con man’s favorite weapon trusting in
trust alone to navigate the world of
money well that’s exactly what the next
Bernie Madoff is hoping that you will do
and what I’m hoping you won’t thank you
very much
[Applause]
you [Music]