Lord of the lies

The cat in the hat

The Wizard of Lies: Bernie Madoff and the Death of Trust. By Diana Henriques. Times Books; 419 pages; $30 and £17.99. Buy from Amazon.com, Amazon.co.uk

INMATE number 61727054, known to the world as Bernie Madoff, is serving a 150-year sentence in a prison in North Carolina, and is one of the world's most reviled men. For many, he embodies the greed, roguishness and deceit that caused the financial system to implode in 2008. He confessed in December of that year to operating a $50 billion Ponzi scheme, the largest in history, but few really understand why he did it or when it began.

In “The Wizard of Lies”, Diana Henriques, who covered the Madoff scandal for the New York Times, offers a riveting history of Mr Madoff's shady dealings and the shattering consequences of his theft. Mr Madoff grew up in Queens. His father's small business ventures repeatedly failed. Determined to be a success himself, and too proud or afraid to disappoint others (a fatal flaw, it would turn out), his first fraud dates back to 1962, when he was managing money for about 20 clients. Mr Madoff invested their money in risky stocks that went belly up. Instead of owning up, he borrowed $30,000 to buy back their shares, erasing the losses and allowing him to keep up the impression he was a brilliant money-manager. It set a pattern. Mr Madoff's Ponzi scheme probably began after the 1987 stockmarket crash, which prompted investors to withdraw billions from his fund. He used his new investors' money to pay out the old.

The fraud was especially jarring because Mr Madoff was the consummate Wall Street insider, writes Ms Henriques. He served as chairman of NASDAQ and was on the board of governors for the National Association of Securities Dealers. He saw the opportunity to speed up trading early on, and pushed for automated stock quotes. When the Financial Industry Regulatory Authority (FINRA) had to abandon its downtown offices after the September 11th 2001 attacks, FINRA's legal team worked out of Mr Madoff's offices.

His illegal activities were nearly uncovered many times. After numerous tips the Securities and Exchange Commission (SEC) investigated him. But, despite hours spent poring through his fabricated trading records, they found nothing. Fraud at another hedge fund, Bayou Group, exposed in 2005, prompted investors to withdraw cash from Mr Madoff and left him $92m short. He had only three days to sign up more investors or his fraud would have been detected. He got the money. Unable to find enough cash to meet all the redemptions in the crash of 2008, he finally confessed to his family about what he had done, and his sons turned him in.

Mr Madoff claimed he pulled off this massive fraud alone, but this seems unlikely. Who else knew? Several of Mr Madoff's employees falsified records of non-existent trading activity and will probably spend their lives in jail. Jeffry Picower, one of his longtime investors, may have also suspected it. He had been the victim of a Ponzi scheme before but, before he died, he made sure he was one of Mr Madoff's largest beneficiaries. Last December his widow reached a $7.2 billion settlement with the victims. Her husband, she insisted, knew nothing about the fraud.

Ms Henriques forcefully argues that Mr Madoff's wife, Ruth, and sons, Andrew and Mark, were ignorant about the scheme, despite public speculation to the contrary. She offers a raw and surprisingly moving portrait about the toll that Mr Madoff's deceit took on his family. Last December, unable to cope with the ignominy of being a Madoff, Mark committed suicide. Ruth, shunned by everyone she knew, including her sons, suffered too. A memoir published by one of Mr Madoff's investors after he went to prison revealed he had an affair while he was married. Ms Henriques offers this as proof that Mr Madoff hid a great deal from Ruth.

The big question that the book fails to answer is why Mr Madoff became a villain at all. He is no sociopath, Ms Henriques writes. So why ruin so many lives? Mr Madoff seemed unable to say no and risk disappointing those around him, which apparently sparked the fraud in the first place. In an interview from jail, he tells Ms Henriques that he felt burned by investors who withdrew their money after the 1987 crash. They “changed the deal on me,” he said. “I was hung out to dry.” That Mr Madoff feels resentment towards his investors is among the many ironies the book points out, and is one of its strangest legacies.