Text size

The Believers: How Americans Fell for Bernard Madoff's $65 Billion Investment Scam, by Adam LeBorWeidenfeld and Nicolson, 280 pages, 18.99 pounds sterling (Published in the U.S. by Orion, $28.95 )

Early on in his fluent, fast-paced examination of the notorious Madoff investment scandal, Adam LeBor, who attests that what interested him most when he started out was the psychology of the fraud, challenges himself to solve a number of knotty issues. Why, for example, did Bernard Madoff continue to run a criminal enterprise for so many years when he was already a multi-millionaire and pillar of the New York financial establishment? How did he get away with the Ponzi scheme for so long? Where were the regulatory authorities during this extended saga? And perhaps most vexing, from the standpoint of Jewish readers: How could a prominent Jew perpetrate such evil against his own people, including charities and Holocaust survivors?

As it unfolds, "The Believers" serves up answers to most of these questions, beginning with the observation that "the simplest way to understand how Bernard Madoff persuaded thousands of investors to pour billions of dollars into his investment scam is to think of it as a cult." The guru, in this case, was a man of impeccable standing. From not particularly promising beginnings, he rose to prominence on the New York financial scene by running a highly successful and wholly legitimate securities-trading firm that pioneered electronic trading. He served not only as a chairman of the Nasdaq stock exchange but as treasurer of Yeshiva University's board of trustees and chairman of the board of its business school. And he was a philanthropist to causes beyond the Jewish sphere. What Madoff offered clients, moreover, was akin to the holy grail of investment: peace of mind achieved by steady returns in the area of 10 percent per annum, year in and year out, regardless of whether the market was in bull or bear mode.

After the fall, it was easy to sneer that even the most callow of investors should have known that a deal like that was too good to be true. But Madoff was a master of con. Beyond cultivating the belief that he had a foolproof investment strategy that few would be able to grasp, and bulldozing commonsensical types who queried him about it, Madoff cleverly left the task of advertising to word of mouth and played hard to get, creating a mystique of exclusivity that enhanced his allure. He also preyed largely, though by no means solely, on fellow Jews -- in what the U.S. Securities and Exchange Commission calls "affinity fraud" -- exploiting their assumption that their personal assets, along with institutional and philanthropic endowments, were safe with him because they surely would not be betrayed by one of their own.

Wholly fabricated

We now know that the money Madoff received from his trusting clients -- including hedge funds whose investors were not necessarily aware that their deposits had been channeled to Madoff -- was never invested and thus never generated returns. For Madoff was running a classic Ponzi scheme, to which he pleaded guilty in March 2009. Prosecutors charged that he had caused losses as high as $65 billion to some 4,800 clients swindled over the course of 20 years. The money he took in from clients was used to cover withdrawals by other investors and also, presumably, to support the Madoffs' lush lifestyle.

To cover the fraud, Madoff regularly issued wholly fabricated, computer-generated statements to his investors showing trades that had never been made and fictitious balances. And when withdrawals were requested, he always effected them promptly. Essentially, he had proven his reliability over the years, so why would anyone suspect skullduggery? Wall Street whizzes who knew that the strategy he claimed to employ would not yield what Madoff promised simply assumed he was cheating through front running (a form of insider trading ) in his legitimate securities-trading operation and shifting the profits to his clients. Only Harry Markopolis, a Boston portfolio manager and certified fraud examiner, was so convinced Madoff was running a Ponzi scheme that he twice alerted the SEC through detailed analytical memos -- alas, to no avail. Even the government, it seems, was primed to be Madoff's patsy.

The Madoff fraud was so colossal and so enticing to writers that "The Believers" joins a list of six other books and two DVDs of television features about the scandal, which broke only when Madoff was arrested by the FBI in mid-December 2008. As a veteran nonfiction writer with six earlier books to his credit, LeBor is deft at constructing a narrative marked by clarity and richness of detail. But as a British journalist living in Budapest, he wasn't exactly propitiously positioned to write about the New York financial scene. In fact, as the book's footnotes show, he drew heavily on previously published and broadcast material for insights from their primary sources. So why choose to read LeBor over his seasoned American counterparts with presumably better access to sources?

Exotic species

One reason might be the advantage of an outsider's perspective -- and we certainly get that here. LeBor comes across as a mix between Alexis de Tocqueville and Margaret Mead in relating to Americans, and particularly Jewish Americans, as something of an exotic species whose ethos he decodes for a British audience. I wish I could say that his insights on this score are enlightening. Unfortunately, I find them the least satisfying aspect of the book. LeBor opens, for example, with a review of what he calls the Yekkes-shtarkers dichotomy -- the Yekkes being the German Jews (immortalized in Stephen Birmingham's 1967 social history "Our Crowd: The Great Jewish Families of New York" ) who began to arrive in the United States in the early 19th century, established themselves in successful businesses in New York and, as a rule, turned down their noses at the 2 million East European Jews (dubbed the shtarkers, who are described by LeBor as "tough guys who know how to look after themselves" ) who flooded into America from the 1880s until the outbreak of World War I. LeBor calls this discord the "rancorous divide between rich and poor American Jews," and so it undoubtedly was for a time. Brandeis University historians Jonathan D. Sarna and Jonathan Golden describe the rift as being well on the mend before World War I and essentially healed by the end of the 1930s, for the ravages of the depression and spread of anti-Semitism had supplied Jews of all stripes with other fish to fry.

Yet LeBor portrays not only Madoff (who was born in 1938 ) but all third-generation American Jews of East European origins as having "neither forgotten nor forgiven the Yekkes' disdain for their Yiddish-speaking ancestors." So strong was the umbrage, he posits, that revenge against the Yekkes was a prime motive of Madoff's criminal behavior. "Whatever wrongs the patronizing Upper East Side Jews had done to the shtarkers would eventually be avenged [by Madoff] on an almost Biblical scale," he writes. Unfortunately, LeBor fails to show how he arrived at this consuming-rancor theory, which he presents in sweeping terms as having "shaped [the] psyche" of Madoff's generation and "left a sour legacy of resentment that still rankles today."

As a third-generation American of East European origins, I must confess that my first encounter with this purportedly defining phenomenon was in the pages of "The Believers," where it struck me as being quite a stretch. Yet it becomes a leitmotif of the book, to the point where LeBor surmises that Madoff probably wallowed in schadenfreude at the September 2008 demise of Lehman Brothers (ironically, the seed of his own downfall ) because the company had been established a century and a half earlier by German Jews.

This is not the only instance in which LeBor reaches into the specious to explicate Jewish-related issues. In addressing why Jews were so vulnerable to Madoff's lure, he seems unsatisfied with the standard

explanation of an affinity scam and presents us with Vanity Fair writer Marie Brenner's observation that America's upwardly mobile Jews suffered from "a nagging unease, even guilt" about the material success that education and hard work had brought them and "thought of money with a complex tangle of shame and attraction, as if they believed that understanding money would drag them back into the stereotyping of their immigrant roots." Thus, LeBor concludes, they turned to "Uncle Bernie" to "deal with these complicated, perhaps even tainted matters for them."

I admit to puzzlement over why LeBor slipped this notion in. Surely his point cannot be that placing the management of financial assets in the hands of investment professionals is peculiar to Jews because of their unique psychological makeup. Or (especially after the 2008 debacle caused by collateralized debt obligations and credit default swaps highlighted how arcane the ways of the market can be ) that "understanding money" is a basic skill inevitably acquired by Jews, unless it's blocked by some defense mechanism born of insecurity or shame about their roots.

In any case, the nagging, key question that remains unanswered by "The Believers" is why, some 30 years into a successful and lucrative career as the head of a flourishing family business that brought him respect and renown, Bernard Madoff was prompted not only to launch a criminal operation on the side but to perpetrate so ugly and punishing a social crime as bilking charities, among many other innocents. If not as vengeance for slights, perceived or imaginary, to his ancestors, why did he wreak all that damage -- which extended, of course, far beyond snooty Upper East Side Yekkes to include plenty of the shtarkers' progeny, as well as and Europeans and Latin Americans with no Jewish connection at all?

LeBor allows himself to speculate that Madoff may have been infected by "the thrill of the crime [and] simple greed for more riches," and twice he sums up his subject as a "sociopath ... lacking empathy, scruples, or morals." In his guilty plea, Madoff portrayed himself as trapped by his own device. "When the Ponzi scheme began," he stated -- and note the use of the passive construct, as if it came into being on its own -- "I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult and ultimately impossible and as the years went by I realized that this day [of reckoning] would inevitably come." This statement explains why he persisted in his criminal enterprise for so many years but not why he embarked on it. And that riddle may never be solved, unless the laconic Madoff tells us some day, or a talented criminologist or investigator manages to penetrate his mind.

In the meantime, "The Believers" at least provides us with some perspective on magnitude. Its subtitle notwithstanding, it informs us that the widely quoted figure of $65 billion dollars lost in the Ponzi scheme includes gains that existed only in Madoff's fraudulent statements. According to Irving Picard, the court-appointed trustee of the assets seized from Madoff and his wife, the real sum is far lower. Picard has stated that $36 billion was invested in the scam, of which half was withdrawn by clients over the years and half is still missing. Anyone who can take comfort in that information is welcome to do so.

Ina Friedman, the Israel correspondent of the Dutch daily Trouw, is co-author of "Murder in the Name of God: The Plot to Kill Yitzhak Rabin."

Haaretz Books, April 2010,