No One Would Listen: A True Financial Thriller

and in return he paid them substantially higher management fees than they could possibility have gotten anywhere else, which, combined with the percentage of the profits they were taking from their investors, meant they were making huge profits. Notice I said “making,” not “earning,” because they earned nothing. But Bernie was paying 16 percent gross returns and keeping way, way less than 1 percent per year for himself to keep his clients satisfied—and trapped. These feeder funds were earning almost 4 percent per year in fees while passing along 12 percent to their investors. It was a merry-go-round that stopped only to let new people get on, because nobody wanted to get off. Everybody was happy—the investors who were getting a regular return, the fund managers who were making a fortune without having to do any work at all, and Bernie. Who really knows what was going on in his head? Or how truly insane he was?

Let me explain how brilliant Madoff was in letting the feeder funds earn well over 90 percent of the available fees to lure in new victims. By being the top bid for new money, Madoff was every feeder fund’s best relationship. Bernie had great returns with low volatility, and he effectively paid the most for new investors. And Madoff didn’t need a lot of money for himself personally. For example, if I challenged you to spend a billion dollars, could you do it? Probably not unless you got a divorce is my guess. By offering unbelievably steady returns with almost no volatility he was providing the holy grail of investment products, and he was paying the feeder funds more than anybody else to sign up new investors. That’s what kept the scheme going for so long, and that’s why it was able to get so big.

What continued to amaze us was his size. He was already significantly larger than any other fund in existence, yet he just kept growing. We calculated that the minimum amount of money he was handling had to be at least $15 billion, possibly $20 billion. The numbers kept ratcheting up. They had long passed from unbelievable into fantasyland. At times Neil and I would just sit there and speculate about what would happen when Madoff blew up. There were no historical references to look at, as nothing like this had ever existed before. Compared to Madoff, the most infamous crimes in the world were small potatoes. I was certain that his arrest would put a lot of hedge funds of funds out of business. We assumed that most of the funds had 5 to 20 percent of their assets invested with him. It never even occurred to us that some of these funds would be almost all Madoff. We didn’t believe that any responsible asset manager would have 100 percent of its funds with one man with one strategy. Even investing 20 percent of a fund in one manager is extreme; 25 percent is insanely extreme, and anything beyond that is just plain crazy. But even those funds with a limited investment would be in trouble because their investors would panic and immediately withdraw the rest of their funds. That would cause the market to go down, which subsequently would force the innocent hedge funds to sell assets. My best guess was that the impact was going to cause the U.S. markets to fall between 7 percent and 10 percent in a relatively short period of time. It would be a category 2 or 3 hurricane. It would cause some damage, but most industry people would recover.

After I returned from Europe we knew it would have a worldwide effect. The French, who loved him, would be slaughtered, while places like Turkey, which stayed away from him, would not be hurt as badly. I also knew that we would never know the full extent of European losses. As I had learned, a great percentage of the European investments were made through offshore funds, funds that traditionally are used to hide pretax income. People who had put their money in those funds to avoid being taxed by their countries would not be able to acknowledge their losses; they couldn’t admit to having the untaxed money, so they certainly couldn’t admit to losing it. That group, I believe, includes everyone from European royalty to drug lords. And I still believe we’ll never know the full extent of the European losses, but they’re substantially more than losses in the United States.

We knew a lot of investors would be devastated, and many of them wiped out, but what we didn’t realize was how many people that included. We had assumed that most people invested in Madoff through the funds, and as we later found out we had assumed wrong. Although Mike Ocrant had told us that Madoff was so well known in the New York Jewish community that he was referred to as “the Jewish T-bill,” we really had no concept of the size of the affinity scheme. That was my fault for not realizing it. An affinity scheme targets people with similar affiliations; Bernie was Jewish, so he targeted the New York metropolitan area and Florida Jewish communities. Historically, almost by definition Ponzi schemes start within a well-defined community, often an ethnic or religious community. If I were trying to start a Ponzi scheme, for example, I would do it inside the Greek community. The reason for that is trust; nobody thinks one of their own is going to cheat them, not when they can cheat so many others. We were focused on the institutional accounts, so we didn’t have the slightest concept that Madoff was using separately managed accounts to ransack the synagogues for every cent he could pull out of them. I should have guessed that.

We also knew that the SEC would be roasted for not doing its job, although again at that time we still hadn’t realized how nonfunctional it was. My mistake was assuming that the problem was mostly