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Thinking About the 17th Floor
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I just watched Wizard of Lies, the film about Bernie Madoff, the fraudulent financier who, in 2009, admitted to operating the largest private Ponzi scheme in history—one that involved nearly sixty-five billion dollars. He never invested any of the money entrusted to him by clients. He just kept pulling in new clients and using their money to pay so-called dividends to his old clients.
The question is, of course, “How did he manage to get away with it for so long?”
The question is, of course, “How did he manage to get away with it for so long?”
He wasn’t just scamming retired widows. His clients included captains of industry… and especially of financial industry. It wasn’t a one-shot deal, either. Madoff claims it began in the 1990’s, but federal investigators believe that it began in the mid-1980’s, or even the 1970’s. Madoff had been at it for twenty years or even forty years!
What was his secret?
Here’s Madoff himself, offering us clues:
“[Prospective investors] were all told by me, ‘Don’t invest any more money than you could afford to lose. This is the stock market. There’s always stuff that can happen. Brokerage firms can fail. I could go crazy and do something stupid. If you want a [safe thing], put your money in government bonds. So everybody understood this… Everyone was greedy. I just went along. It’s not an excuse… Look, there was complicity, in my view.”
What was his secret?
Here’s Madoff himself, offering us clues:
“[Prospective investors] were all told by me, ‘Don’t invest any more money than you could afford to lose. This is the stock market. There’s always stuff that can happen. Brokerage firms can fail. I could go crazy and do something stupid. If you want a [safe thing], put your money in government bonds. So everybody understood this… Everyone was greedy. I just went along. It’s not an excuse… Look, there was complicity, in my view.”
He was making so much money for his clients, they didn’t want to ask questions. They didn’t want to look too closely at where all this money was actually coming from.
And besides that, Madoff had a huge firewall. He split off the “Investment Advisory” division of his business, where the fraud was actually perpetrated. This activity was located on the 17th floor, in a locked office space. According to the film, only one other employee was privy to what actually what took place on that floor. Most of the staffers in this division were high school graduates without securities licenses or training. They included a former waitress, a former construction worker, and a former keypunch operator. And, there were only about a dozen of them! Far too small a number to be managing billions of dollars worth of accounts. But even with such a small staff, they later testified that they frequently had no work to do. They would put their feet up on their desks and watch television.
And besides that, Madoff had a huge firewall. He split off the “Investment Advisory” division of his business, where the fraud was actually perpetrated. This activity was located on the 17th floor, in a locked office space. According to the film, only one other employee was privy to what actually what took place on that floor. Most of the staffers in this division were high school graduates without securities licenses or training. They included a former waitress, a former construction worker, and a former keypunch operator. And, there were only about a dozen of them! Far too small a number to be managing billions of dollars worth of accounts. But even with such a small staff, they later testified that they frequently had no work to do. They would put their feet up on their desks and watch television.
And here’s another thing about that 17th floor. It didn’t look anything like the rest of Bernard L. Madoff Investment Securities LLC. It was messy and full of out-of-date technology. The operations on the 17th floor were run out of a hack-proof, 1980’s IBM computer, complete with tower and green screen… in 2009! This computer was not connected to any of the other computers in the company’s network. It would leave a very limited (easy to delete) electronic footprint. And there was a dot-matrix printer. Dot-matrix? By 2009, brokerage firms provided their equity statements online, where they could be accessed by clients, allowing them to track the daily activity in their accounts. The only thing Madoff’s clients received were these dot-matrix, snail-mailed printouts on flimsy, lightweight paper never intended to last.
Okay… wildly unrealistic investment returns that consistently out-performed other financial investment companies, weirdly outdated modes of communication with clients, and a bizarre culture of secrecy around the locked office on the 17th floor.
Again, “How did he manage to get away with it for so long?”
Okay… wildly unrealistic investment returns that consistently out-performed other financial investment companies, weirdly outdated modes of communication with clients, and a bizarre culture of secrecy around the locked office on the 17th floor.
Again, “How did he manage to get away with it for so long?”
People trusted Madoff. In light of all the obvious red flags, why did his clients trust him?
They trusted him, because he made a point of gaining their trust. He deployed the six strategies for gaining trust that are identified by social psychologist Robert Cialdini:
1) Reciprocation. People feel indebted to those who do something for them or give them a gift. Madoff was paying his clients higher returns than they could get anywhere else, and they were grateful. Madoff also paid out a ton of bonuses to people who worked for him at all levels.
2) Social Proof. When people are uncertain, they want to know what everyone else is doing—especially their peers. Who was investing with Madoff? Steven Spielberg, Larry King, Sandy Koufax, Elie Wiesel, John Malkovich… banks, university, and charities… lots of charities. (Hint: They tend not to withdraw money for long periods of time… a plus with a Ponzi scheme.)
3) Commitment and Consistency. People do not like to back out of deals. Madoff was following through with consistent high returns. His clients were consistent and committed, too.
They trusted him, because he made a point of gaining their trust. He deployed the six strategies for gaining trust that are identified by social psychologist Robert Cialdini:
1) Reciprocation. People feel indebted to those who do something for them or give them a gift. Madoff was paying his clients higher returns than they could get anywhere else, and they were grateful. Madoff also paid out a ton of bonuses to people who worked for him at all levels.
2) Social Proof. When people are uncertain, they want to know what everyone else is doing—especially their peers. Who was investing with Madoff? Steven Spielberg, Larry King, Sandy Koufax, Elie Wiesel, John Malkovich… banks, university, and charities… lots of charities. (Hint: They tend not to withdraw money for long periods of time… a plus with a Ponzi scheme.)
3) Commitment and Consistency. People do not like to back out of deals. Madoff was following through with consistent high returns. His clients were consistent and committed, too.
4) Liking. “People prefer to say ‘yes’ to those they know and like,” Cialdini says. They are also favor those who are physically attractive, similar to themselves, or who give them compliments. Madoff cultivated the country club set. Jewish himself, he cultivated Jewish investors and Jewish charities. He was charming and charismatic.
5) Authority. People respect authority. They follow the experts. Madoff was the former chairman of NASDAQ, the second largest exchange in the world. And, of course, he was a billionaire with all the trappings: the homes, the cars, the clothes.
6) Scarcity. The more rare a thing, the more people want it. Madoff created an aura of exclusivity about clients. He made investors compete for limited slots in his imaginary funds, and then he used this competition to leverage the size of the investments.
Summing up: Why didn’t people see what was going on?
They trusted Madoff. He manipulated that trust.
5) Authority. People respect authority. They follow the experts. Madoff was the former chairman of NASDAQ, the second largest exchange in the world. And, of course, he was a billionaire with all the trappings: the homes, the cars, the clothes.
6) Scarcity. The more rare a thing, the more people want it. Madoff created an aura of exclusivity about clients. He made investors compete for limited slots in his imaginary funds, and then he used this competition to leverage the size of the investments.
Summing up: Why didn’t people see what was going on?
They trusted Madoff. He manipulated that trust.
So Madoff is behind bars for life, and what was left of the assets of his bogus operation have been distributed by the courts to his victims.
But what if there is another Ponzi-type scam going on in this country—one that is so huge, nobody can even see it? What might that 17th floor look like?
Well… I think it would be full of environmental pollution from Trump’s deregulation and gutting of the EPA. It’s expensive to comply with regulations, which is one of the reasons why the stock market soared the day of his election. But… like a Ponzi scheme, deregulation is going to have a day of reckoning... especially when it results in the gutting of natural resources and quality of life. Short-sighted isn't even the word...
The 17th floor is also filled with slaves and people working at slave wages in the countries where so much of our manufacturing is being outsourced. Again, higher profits for us… but at what cost? Neocolonialism is going to work about as well as colonialism, and at the end of the day, it will collapse like a Ponzi scheme.
What else is on our 17th floor? Weaponry. Tons and tons of it… much of it obsolete even before it’s finished. But who cares? The military is the single largest contractor in the US, and nearly every corporation makes big bank off selling to them. But to keep that party going, we need to be perpetually at war… which we have been for decades now. But as we continue to generate demand for military goods in these manufactured wars, we are also growing our enemies, and they are forming ever-more-powerful alliances, often fighting us with weapons we built! Again, how sustainable? As with a Ponzi scheme, the balloon payment is going to be a real killer.
But what if there is another Ponzi-type scam going on in this country—one that is so huge, nobody can even see it? What might that 17th floor look like?
Well… I think it would be full of environmental pollution from Trump’s deregulation and gutting of the EPA. It’s expensive to comply with regulations, which is one of the reasons why the stock market soared the day of his election. But… like a Ponzi scheme, deregulation is going to have a day of reckoning... especially when it results in the gutting of natural resources and quality of life. Short-sighted isn't even the word...
The 17th floor is also filled with slaves and people working at slave wages in the countries where so much of our manufacturing is being outsourced. Again, higher profits for us… but at what cost? Neocolonialism is going to work about as well as colonialism, and at the end of the day, it will collapse like a Ponzi scheme.
What else is on our 17th floor? Weaponry. Tons and tons of it… much of it obsolete even before it’s finished. But who cares? The military is the single largest contractor in the US, and nearly every corporation makes big bank off selling to them. But to keep that party going, we need to be perpetually at war… which we have been for decades now. But as we continue to generate demand for military goods in these manufactured wars, we are also growing our enemies, and they are forming ever-more-powerful alliances, often fighting us with weapons we built! Again, how sustainable? As with a Ponzi scheme, the balloon payment is going to be a real killer.
Like Madoff’s 17th floor, ours is also a throwback to an earlier era. We are being sold on racism and rigid gender roles, on the glories of the free market (which is a blatant myth in the era of globalization), and the conflation of patriotism with hyper-militarization.
But still we trust. We don’t ask questions. We don’t go up on the 17th floor.
We trust, because investments are still turning profits. We trust because everyone else is trusting. People with even modest savings are investing. We believe in our country. We have a commitment. We like our bankers, our advisors. They are nice people. They have authority. And we believe we are lucky to have this economy. There is so much scarcity everywhere else. We, like Madoff, are in too deep to even consider ways of getting out. And our trust, like the trust of Madoff’s clients, is carefully cultivated and manipulated.
But still we trust. We don’t ask questions. We don’t go up on the 17th floor.
We trust, because investments are still turning profits. We trust because everyone else is trusting. People with even modest savings are investing. We believe in our country. We have a commitment. We like our bankers, our advisors. They are nice people. They have authority. And we believe we are lucky to have this economy. There is so much scarcity everywhere else. We, like Madoff, are in too deep to even consider ways of getting out. And our trust, like the trust of Madoff’s clients, is carefully cultivated and manipulated.
In the film, there was one man who stood up to Madoff, who saw what he was up to. It was Ken Langone, the ultra-conservative co-founder of Home Depot. There is a scene in the film where Madoff is trying to get Langone to invest in a new, exclusive fund that he claims is going to make huge profits. He tells Langone that he is only opening it to new investors. Langone is puzzled by this. If it’s such a fantastic opportunity, why wouldn’t Madoff be offering it to his oldest and most loyal clients? Why would he exclude them in favor of newcomers?
"He said something I found repulsive. He said to us, 'By the way, this fund I'm starting is going to be better than (the ones for) my existing investors.' That turned me off," Langone said.
Langone was not blinded by prospects of above-market returns and not seduced by seemingly preferential treatment by a Wall Street mogul. Langone, identifying with the interests of others, was, apparently, the exception. Most of Madoff’s clients would fall for his pitches. (Yes, it's too bad Lagone cannot extend that kind of identifying to gays and lesbians.)
But That little vignette with Lagone is the key: Identify with others. Who is being thrown under the bus for corporate profits? Are we honestly believing that, when the crunch comes, we will not also be considered expendable?
"The whole government is a Ponzi scheme." -- Bernie Madoff.
"He said something I found repulsive. He said to us, 'By the way, this fund I'm starting is going to be better than (the ones for) my existing investors.' That turned me off," Langone said.
Langone was not blinded by prospects of above-market returns and not seduced by seemingly preferential treatment by a Wall Street mogul. Langone, identifying with the interests of others, was, apparently, the exception. Most of Madoff’s clients would fall for his pitches. (Yes, it's too bad Lagone cannot extend that kind of identifying to gays and lesbians.)
But That little vignette with Lagone is the key: Identify with others. Who is being thrown under the bus for corporate profits? Are we honestly believing that, when the crunch comes, we will not also be considered expendable?
"The whole government is a Ponzi scheme." -- Bernie Madoff.
First was the lack of due diligence on behalf of his clients. The first and easiest alarm bell is that Madoff's fund auditor was a one man operation in Westchester (they even mention not taking a client who was asking questions about that). I have been involved in hedge fund audits and there are lots of people involved and lots of hours put into each fund. How anyone would just take the work of a one man operation is beyond me.
Also, Madoff made him name not as an adviser or fund manager but as a market maker in securities. He is the one of the people that invented NASDAQ and in some ways democratized securities purchasing. He made his money using technology to buy and sell stocks for his customers quicker, cheaper, and going around the NYSE and other stock exchanges. Nothing in his past suggested that he was a good adviser. Yet people gave him money willingly.
Second, Madoff was working the affinity con. Although there were big name banks and investment firms that lost money, Madoff's client base was the "Jewish circuit" -- wealthy Jews and charities that focused on Jewish issues. It does not make things better -- in the movie, someone yells at Madoff at one point that "You stole from your own people!" I am not sure that makes much of a difference. If he stole mostly from non-Jews would that have been better or worse? But it does show that he lacked a moral center.
Third in the movie he tries to say that his marks were really to blame, as they were greedy. maybe so, but I think that shows if anything he is a sociopath.
There is so much you can say about him. I'll stop here for now.