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The Bernie Madoff story. 150 years in prison for a $64 billion financial pyramid scheme.

Bernie Lawrence Madoff, or “that Bernie,” is a famous financier and former chairman of the board of directors of the NASDAQ stock exchange. And part-time, he is a fraudster who deceived even seasoned financiers from Wall Street and brought down the US economy. He was called the greatest mind of his time.

And also a monster that destroyed the US economy in 2008. The worsening economic crisis of 2008 is Madoff’s fault. So who is he?

Bernie Madoff – Genius or monster?

For many years before this scandal, Bernie Madoff was adored and trusted. In 1960, Madoff created the investment company Bernard L. Madoff Investment Securities LLC. It won the trust of millions of investors, and Bernie Madoff himself successfully headed the office until December 11, 2008, when his business collapsed along with the $64 billion financial pyramid.

People who knew the Bernie Madoff story were divided into two camps. Some thought he was a villain. Others saw him as a genius. Both are true, because Bernie Madoff’s financial scam brought down and compromised the US stock market. It also led to the 2008 financial crisis. In June 2009, Bernie Madoff was convicted of all his crimes and sentenced to 150 years in prison. In some ways, Madoff is a unique character. He never denied that he committed the crime deliberately. In an interview with New York, the financier lamented that he was actually “not what everyone thinks.” But at the same time he admitted that he had deliberately deceived more than 37,000 people. And he suffered from remorse.

“How could I do this? I earned a lot. I didn’t need the money. Am I a flawed character? – he asked a psychiatrist during sessions in a federal prison.

Madoff suspected he was a sociopath, but he was not a sociopath. On the contrary, he was known as a family man. Bernie had a hard time when his 42-year-old son Michael, unable to withstand public persecution, hanged himself in the living room of his house with a dog leash. Many considered Madoff’s paternal grief to be just retribution. But this is all the denouement of the story. What was the beginning like?

Business for 500 dollars

Official sources and biographical books about Bernie Lawrence report that he began his career as a financier with $5,000, but he himself reported $500 to newspapers. And really, where does a 22-year-old guy have thousands of dollars in his bank account? In 1960 he rented an office in an accounting firm and founded his own office, Bernard L. Madoff Investment Securities.

“No one had even heard of anyone starting a business with $500. The SEC even had to interview me specifically to make sure I wasn’t crazy,” Madoff recalls about that time.

Starting a business

He started out as a market maker – an intermediary for those who wanted to buy and sell small quantities of securities – usually bonds. By secretly trading on the side, Madoff increased his profits. Just 20 years later, in the 1980s, he received the nickname “the incredible trader.” People who knew Bernard believed that he had a flair and an intuitive understanding of the stock market.

Bernie Madoff was bored by simply trading stocks. He dreamed of challenging the New York Stock Exchange and changing the approach to stock trading. Bernie had a talent for gathering gifted people around him and noticing what others did not see. Madoff noted that the system where human traders give investment advice is imperfect. In 1970, he recruited his brother Peter to automate the stock exchange. Automated trading systems were faster and more accurate than human traders and could accurately analyze stock market data in real time. Automation has taken over a significant portion of trading volumes from the New York Stock Exchange.

This is how Bernie Lawrence Madoff attracted the attention of the head of the New York Stock Exchange, Dick Grasso. Over the next eight years, Dick tried to make a deal with Bernie to learn the secret of automation and regain control of the stock market. It did not work out. Angry, Grasso called Madoff his “archenemy.” Bernie didn’t react. By that time, he had already become rich and was earning approximately $100 million a year.

From traders to criminals

At the height of his legitimate business’ profits, Bernie Madoff took a wrong turn. He himself emphasized many times in interviews that he clearly separates two periods of his life – legal and illegal. The illegal journey began harmlessly. At some point, Lawrence Madoff’s campaign expanded so much that it began to provide different types of services. Services included:

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  1. market making;
  2. brokerage;
  3. trading;
  4. financial advice;
  5. establishment of investment funds.

Bernie is a villain

Mediation in the purchase and sale of small volumes of securities, charity, financial advice, manipulation of securities – this is a small list of what they did at Bernard L. Madoff Investment Securities. From that moment on, the story of “that same Bernie”, the villain, began. Madoff’s funds have consistently attracted investors. With the money he received from investors, Bernie buys government bonds with a yield of 1-2%. Only Madoff promised investors 10-15%. He himself could not explain why he did this.

At first it worked because Bernie paid out of his own pocket. Then the interest payment scheme worked at the expense of the investors themselves. This is how a financial pyramid was built, which according to official documents alone was worth $65 billion. More than 37,000 people from 136 countries of the world invested in Bernie’s pyramid. The total amount of deposits is $17.5 billion.

Incident in September 2008 with Bernie Madoff

And then chance intervened. In September 2008, the price of securities collapsed. Investors, frightened by the situation, hastened to withdraw their deposits. It was then that the truth was revealed that the income from Madoff’s deposits was a fiction. Turning a $17.5 billion investment into a $65 billion payout is a daunting task even for an investment genius.

Some of his big clients were too scared, Madoff said, and he was forced to enter into long-term hedging contracts on unfavorable terms. This was the first nail in the coffin of Bernie’s capital:

“They [the investors] betrayed me,” Madoff recalled. After the withdrawal of his first large investments, his old schemes of covering debts at the expense of his own company’s profits no longer worked.

The temporary delay was to attract new investors. But this could not last long. In fact, the first to leave the pyramid scheme, on the one hand, were saved in time, and on the other hand, became the beginning of the end for Bernie and his manipulations. Bernie had both too much other people’s money and too little working capital to invest.

“Imagine a nightmare: you come home every night, unable to tell your wife and sons that you live with an ax over your head,” Madoff recalled about that time.

Beautiful reporting served as advertising for Bernie. New money began to flock to him from various sources – not only private investors, but also bankers such as representatives of Banco Santander, Credit Suisse and UBS. This calmed Madoff and stroked his pride. Madoff could no longer admit his incompetence under such circumstances.

Deposits from everyone

“It’s not that I need money. I just thought it was temporary, and suddenly everyone is throwing billions of dollars at you. They say, “Look, if you can do this for us, we’ll be your customers forever.” It was captivating.” So Madoff continued to take money not only from people, but also from banks. He invested the bank’s billions in Treasuries, earning 2% a year, while writing statements claiming investors were earning about 15%.

“I was too scared and couldn’t bring myself to tell everyone that I had failed,” he recalled. When investors suddenly doubted the legality of Bernie’s financial frauds, he attacked: he refused checks, but confidently offered investors the return of their deposits. Out of greed, no one did any of this. Before it’s too late.

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And the pyramid collapsed

When the truth was revealed, the hardest thing for Madoff was to admit to his wife and sons that everything and millions, cars and luxury items were a fiction, and in fact the family was bankrupt. Bernie’s wife, like the financier’s sons, never forgave this lie until the end of his days.

The reason for this is the suspicions of lawyers that family members were accomplices. Close attention from the law and the public has embittered everyone in Madoff’s household. In the past, wherever Bernie’s sons went, they heard about their father’s skill. To people, their father was a Wall Street player, a wizard, and a man who made a lot of people a lot of money. But after being exposed, Bernie became the man who forever ruined the attractiveness of the United States for foreign and domestic investors.

Madoff’s family later wondered if they were all victims of Bernie’s manipulations. Perhaps even the image of a family man was used to carry out schemes.

But the money was still returned

One of the unique features of Bernie’s pyramid scheme is that all initial investments were returned to investors. Irving Pickard, Madof’s lawyer and fund manager, took care of this. But there were no fewer dissatisfied people.

To minimize the damage, Picard proposed a scheme: everyone who profited from Bernie’s pyramid would have to return the interest they earned to the fund. Then those who lost their investments could get them back. For example, if an investor invested $2 billion and withdrew $3.5 billion with interest, then he was required to return $1.5 billion.

Irving Picard ruthlessly demanded profits even from charities that managed to profit from Bernie’s schemes. Thus, the damage to the economy was partially mitigated, but, of course, not all people liked it.

How the “great villain” and his family ended

Since both of Bernie’s sons worked in his company until their father’s arrest in 2008, they were never able to wash themselves away from shame and suspicion. The youngest son, Michael, committed suicide by hanging himself with a dog leash. The eldest, Andrew, died in 2014 from cancer that developed due to stress.

Madoff’s wife forbade her husband to see their children, but they themselves avoided meetings, since both were angry with their father. Bernie’s wife hasn’t forgiven him either. Because of her husband, she became an outcast. She was recognized everywhere and driven away from everywhere. It was impossible to even get a haircut at a hairdresser without causing a scandal. In the end, she was forced to move into the wilderness, to a modest shack in northern Connecticut. All the family’s property was confiscated and sold for debts.

Madoff died in a prison hospital on April 14, 2021. 14 months before his death, in February 2020, Bernie Lawrence Madoff filed an appeal. He asked for early release because he suffered from a fatal kidney disease, but the pardon was denied. Bernie Lawrence Madoff died at the age of 83 – lonely, abandoned and hated by everyone, even his wife and children.

And in 2017, a film was released with the story of Bernie – “The Liar, the Great and the Terrible.” The film is an artistic interpretation of all events, with elements of Madoff’s biography. In the film adaptation, the role of Madoff was played by Robert De Niro.

What does the Bernie Madoff story teach us?

Perhaps this is the first atypical story of the creation of a financial pyramid – either out of boredom or by accident. At the same time, in fact, all those deceived were able to get their money back. Moreover, Mr. Madoff did not act like a typical scammer – he did not promise exorbitant interest rates, but offered profits only slightly higher than the market.

And, if people react greedily and eagerly even to classic financial pyramid schemes, then they will definitely fall for such implicit schemes. So, maybe it’s worth reconsidering your attitude towards MMM in general and learning to recognize them?

Disclaimer: This information is not investment advice. Assess the risks yourself before making any investment decisions.

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