Bernard Madoff's secret life

The former Nasdaq chairman turned world's-biggest fraudster was a pillar of the Wall Street establishment. But it will be a long time before we really find out how he pulled off his massive con trick.

The secret life of Bernard Madoff unravelled as he stood in his Upper East Side apartment in a pale blue bathrobe and slippers, facing two FBI agents. "We're here to find out if there's an innocent explanation," they told him. "There is no innocent explanation," Madoff replied. Within hours, says the New York Daily News, investors were reeling at charges that one of the most trusted names on Wall Street was a fraud, responsible for $50bn in losses globally "a sum that provokes slack-jawed awe".

"In its conception, the scam is a classic. In its size, it is breathtaking," says The Independent. As Madoff, 70, confessed to his sons, Mark and Andrew, who later alerted the authorities, his money-management business was "just one big lie... a giant Ponzi scheme". Madoff managed $17bn directly for clients but, through derivatives, an estimated $50bn was banking on his performance. Yet the complex trading he claimed to be carrying out in his closed-off eyrie on the 17th floor of the Lipstick Building in mid-town Manhattan was a sham: the magic returns were "simply cash brought in from new victims". Madoff knew he was "finished" when investors under pressure to release cash demanded $7bn in redemptions. The money had long since evaporated.

The list of Madoff's victims is so vast and eclectic that it would probably be easier to ask "who hasn't been duped", says They range from charities and big-shots (Steven Spielberg, Jeffrey Katzenberg, Mortimer Zuckerman) to some of the world's biggest banks and supposedly sophisticated investors (see below). But it is among Madoff's own circle in the well-heeled country clubs of upstate New York and Florida that the sense of betrayal is especially acute. The former Nasdaq chairman was not just a pillar of the Wall Street establishment, notes The New York Times. He was well respected in the Jewish community: a big-hearted man "for whom philanthropy and family... were equally as important as finance".

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Madoff's journey from the back streets of Queens he founded his business on $5,000 gained from installing garden sprinklers "was just the sort of up-by-the-bootstraps foundation myth that Wall Street loves", says The Independent. And he traded as much on the perceived safety of his fund (nicknamed "the Jewish bond") as on the steady 10% it produced annually. The fact that he often turned down would-be punters only boosted his cachet: people spent years trying to get onto his client list.

However, with hindsight, there were red flags a-plenty, says the Halkin Report. "No one seemed to know what Madoff was doing." Regulators who visited in 2005 and 2007 gave him a clean bill of health despite reports that the auditors of his massive fund consisted of three people, operating out of a 13ft by 8ft office in "Nowheresville".

Another warning sign was the fund's improbably steady investment returns. When he described his method as "a split-conversion strategy", no one knew what it meant, but took it as another sign of his "investment genius". Now he is assured his place in history. "He'll always be the man who proved Warren Buffett's adage that when the tide goes out, you see who's swimming naked."

Bernard Madoff: not just a con trick, but a "major blow to trust"

It will be a long time before Madoff's massive con trick is unravelled. There are still many more questions than answers, says The Times. Madoff claims to have operated alone but, in a fraud of this size, could that really be the case? And how could he have duped so many sophisticated financiers for so long? Having lent billions to funds investing in Madoff assets, HSBC, RBS, BNP Paribas and Nomura have all taken big hits. The fall-out in Greenwich, Connecticut, heartland of the US hedge-fund industry, is so severe, says the New York Post, that the "suicide hotline... could be lit up". The already-reeling fund industry needed Madoff "like a hole in the head", says Simon Nixon in The Wall Street Journal. This is "another major blow to trust"; the consequences will be felt across the industry.

With lawyers across the world sharpening their pencils, the blame game has begun, says The Guardian. Nicola Horlick, whose Bramdean fund lodged nearly 10% of its cash with Madoff, has attacked "a systemic failure of the regulatory regime" in America. "Nice try," says Jeremy Warner in The Independent. But while the regulators were certainly culpable, Horlick and her co-investors can hardly escape censure. They were victims, "but only of their own stupidity, greed and carelessness".

Analyst Henry Blodget takes an even more cynical view. Some savvy investors may have figured Madoff was up to something, but "they suspected the wrong rigged game": they thought it was insider trading, not a Ponzi scheme. "And here's the best part: that's why they invested in him."