Madoff's life of make-believe

The exact scale of Bernard Madoff's Ponzi scheme may never be known, but it probably runs to tens of billions of dollars.

Mr Madoff snookered thousands of the wealthiest people in America, dozens of charities and several universities. It was not news only in Manhattan when he pleaded guilty to 11 felonies on Thursday. It made headlines on other continents. Television channels sent helicopters.

The Madoff case has become a powerful symbol. The odd thing is, no one is exactly sure what it is a symbol of.

You would guess our fascination has something to do with the present financial catastrophe. Does it, though?

Mr Madoff was just a crook. He was not a central banker, a subprime borrower, an overzealous wielder of the Black-Scholes option-pricing formula, an originate-and- distribute mortgage operator or a lobbyist undermining the regulatory apparatus. Nor did he have any political significance.

Had he been a partisan Republican or a big Republican donor, as many of the figures in the Enron scandal were, it is likely we would now be subjected to extravagant ad hominem metaphysical conceits about "Bush's America". But in fact he was a lifelong Democrat who found politics boring.

Mr Madoff is not even a particularly good symbol of the gap between the investor class and the rest of America. If in his often legitimately successful banking career he stood up for one principle (besides making money), it was democratising Wall Street. He was among the first to use computers to bypass the establishment gatekeepers who dominated trading when he started his career in the early 1960s. A former president of the Philadelphia stock exchange described him in one report as "the darling of regulators".

A key to Mr Madoff's infamy lies in the words "split-strike conversion strategy". That is the explanation he gave for his spectacularly consistent returns. It turns out, of course, that there was no such thing as the split-strike conversion strategy. Mr Madoff had made no real investments for his clients for 13 years.

In place of a strategy, what he had was a very American kind of verbal razzle-dazzle, of the sort that US carmakers used in the mid-1950s, when Mr Madoff was coming of age. The "motoramic Chevrolet for 1955" had a "new Sweep-Sight Windshield", a "new Anti-Dive Braking Control", and a "new High-Level Ventilating System". In other words, the thing had a windscreen and brakes, and you could roll down the window.

Other carmakers offered stranger descriptions that you could not figure out even if you thought about them a long time. Packard marketed its "Torsion-Level Ride" and "Twin-Traction Safety Differential". Pontiac did not just have an eight-cylinder engine - it had a "Strato-Streak V-8 + Strato-Flight Hydra-Matic". (Why "hydra"?, some will wonder - was it a steam engine?)

Mr Madoff would seem to differ from Chevrolet and Pontiac in that the carmakers at least had to provide a car of some sort. But in fact, Mr Madoff did have to provide an investment strategy, and this is what makes his crime absolutely mind-boggling. You won't find any explanation here of what a "split-strike conversion strategy" might be. But once it became clear

Mr Madoff was making bundles of money, even well before his exposure, there was plenty of discussion on internet investment forums about what it was and how to replicate it. Was it the same thing as a "split-price conversion"? Was it a combination of put and call options known as a "fence" or a "collar"?

Whatever it was, it had to look like a real strategy. This took some doing.

According to Thursday's guilty plea, Mr Madoff gave false testimony and filed false audit reports to the Securities and Exchange Commission and sent out false trading confirmations and false descriptions of market positions to his clients. These could not just be random bunches of numbers.

Mr Madoff's clients were multimillionaires and billionaires, many of whom had other top-notch financial advisers. These statements had to be "true" in the sense that a great novel is "true", even if the things related in it did not happen. To top it all off, there have been no charges of conspiracy against Mr Madoff. That means that, as far as prosecutors are concerned, and as far as we are permitted to speculate, this make-believe investment history was his own creation. He must have been one of the hardest-working men of his generation.

These are the kinds of lies that make your whole way of viewing the world cave in. Anyone who knows anything about human nature "knows" that a money man would never build such an imaginary investment world when he had shown himself perfectly capable of building a real one.

The road Mr Madoff chose was the road to disgrace and prison, and he admitted in his guilty plea that he had known this all along. Furthermore, no sign ever emerged over the decades that Mr Madoff's fondness for, and pride in, the working-class Jewish world he grew up in Queens and Long Island was anything but sincere. Yet among his biggest victims were some of his closest and oldest friends, and a list of Jewish charities and schools that is as long as your arm.

People say we should have listened to those few voices that were sceptical about Mr Madoff - the warnings of his former rival, Harry Markopoulos; the exposé published by Erin Arvedlund in Barron's financial weekly in 2001. How could we have? If those warnings had run up against obvious greed or deviousness, yes, we would have listened, launched a crusade, got to the bottom of the Madoff mess.

But they ran up against a much more formidable obstacle, which was everything we thought we knew about human nature.

The writer is a senior editor at The Weekly Standard.