What Investors Should Learn From Bernie Madoff
Russel Kinnel: Hi. My name is Russ Kinnel. I am director of mutual fund research for Morningstar, and today I’m going to be talking with Diana Henriques, author of The Wizard of Lies, a book about Bernie Madoff who pulled off the greatest Ponzi scheme ever.
The first question I want to ask you is about some of the research you did looking into his early life, and it’s really striking to see the signs of what would later become a giant Ponzi scheme were really there early on if you knew where to look.
Diana Henriques: That’s true, Russ, and I was quite surprised at that, as well. One of the mysteries I’m afraid, that will live as long as Madoff does, is when exactly the Ponzi scheme started. But I was able in my research to uncover an incident in 1962 when he was a very young over-the-counter trader with his own little firm.
He had invested money that was given to him by friends and family in very speculative, risky, over-the-counter stocks. In a market air pocket in May 1962 the bottom just dropped out of those stocks, and they lost all their money. But rather than confess that to them, he covered it up. He bought the shares back from their portfolios at what they paid for it and didn’t reveal but for that they would have been completely wiped out.
Now, he insisted to me, after the prison interview I had with him in August of 2010, that he kept it a secret from the investors because he knew that if he told them about it, they would insist that they take the losses and that he not nearly bankrupt himself to cover them up for him. But I don’t really buy that. I think he burnished his own reputation as the boy genius in the family and managed to hang on to those investment clients by lying to them about what he had done to prevent those losses in their accounts.
Now, that’s not the beginning of the Ponzi scheme, there’s no doubt about that. But it certainly was a very telling experience in the young life of the young Madoff.
Kinnel: You certainly get the sense that he, and maybe even his father to a degree, were trying to put a veneer on things that made things look better. And maybe all along he was trying to make it look like maybe he was a little more skilled investor than he was and that everyone was better off than they really were?