How Mad Is Bernard Madoff?

Last week, Bernard Madoff pleaded guilty to charges of fraud, money laundering, and perjury, admitting he operated a Ponzi scheme that bilked investors out of billions of dollars over several decades. In a packed federal court in New York, Madoff apologized for his crimes before being hustled off to jail to await sentencing.

“As I engaged in my fraud, I knew what I was doing was wrong, indeed criminal, Madoff said in his statement, which was posted online by the Associated Press. “When I began the Ponzi scheme I believed it would end shortly, and I would be able to extricate myself and my clients from the scheme.”

In the wake of Madoff’s guilty plea, BU Today sought out Mitchell Zuckoff, a College of Communication professor of journalism, who spent years researching and writing about the man who gave his name to this type of scheme, Charles Ponzi, the first — if not the most highly compensated — master of the financial con game that uses one investor’s money to pay “dividends” to other investors. The result was Ponzi’s Scheme: The True Story of a Financial Legend (Random House, 2005). Zuckoff offers his opinion of what, exactly, Madoff was thinking.

BU Today: Were you surprised that Madoff decided to plead guilty?
Zuckoff:I actually was not, because from the very first day, from December 11, he confessed that this was a Ponzi scheme. And this is also a very strategic move. By confessing at that point, and by pleading guilty now, he is trying to take all the responsibility himself and perhaps deflect it from family members or others who might have been swept up if it had gone to trial. So one way to look at this is that this is a guy who is still manipulating the system.

What kind of personality does it take to run a Ponzi scheme?
I think it comes down to conscience, and specifically, to the lack of one. There’s no way that somebody with a real conscience could do this, and certainly not for such an extended period of time. This is somebody who has to divorce his behavior from what he knows would be the consequence of the exposure of his actions. If you’re taking money from endowments, foundations, and charities and claiming to return wonderful results to them, knowing that there’s no foundation — there’s nothing underneath — and it ultimately is going to come crashing down, the only way that you could possibly sleep at night is if you simply didn’t think about it, didn’t worry about it, or didn’t care about it.

Do you think that a Ponzi-type person believes he has done wrong? Did Ponzi?
Ponzi is a different case, because he thought what he was doing at first was possible, plausible, and profitable. He turned a corner when it turned out to not be workable, and then decided he would keep turning the money from one investor to another. So he’s a little bit different. I think most of these people do know they’re doing wrong. They just don’t care.

Is Madoff’s confession of wrongdoing in keeping with Ponzi’s precedent?
It’s similar in certain ways. Ponzi also pleaded guilty to federal charges against him to avoid a trial. But in Ponzi’s case, he did it because it would result in a five-year prison term. In Madoff’s case, it’s different, because he did this knowing that it’s likely to be a life sentence. So they’re similar in the sense that they’re both trying to control the process as best they can, under the circumstances. In Ponzi’s case, he was trying to limit the amount of prison time he would do. In Madoff’s case, he’s trying to limit the amount of exposure of other people close to him.

Is there a lesson in any of this for the rest of us?
Ponzi schemes are all different to some extent, but I think underlying all of them is a certain amount of selfishness and greed. At the same time, we should think about the psychology of the investors. While we certainly feel bad for them for their losses, let’s not forget that many violated two of the most basic rules of investing: if it sounds too good to be true, it probably is, and don’t put all of your eggs in one basket. These are both clichés certainly, but they’re true. And so we should ask ourselves as well, might some of the responsibility — certainly not as much as belongs with Madoff — belong to those of us who allowed ourselves to be gullible, hoping for better than average returns?

Click here to view a story on Madoff whistleblower, Harry Markopolos, on WBUR.

Robin Berghaus can be reached at berghaus@bu.edu.