You're Wrong About Madoff

[OmaHusker]

Madoff owned homes in Florida, Manhattan, and southern France. He belonged to the exclusive Palm Beach Country Club, and he owned an 89-foot yacht.

Most of the money that paid for his lifestyle was pilfered from investors in his $65 billion Ponzi scheme; the man was clearly motivated by greed and a necessity to keep up appearances.

Right?

My guess is that 99% of people would agree with this. The problem that they would be 100% wrong.

Many assume that what motivated Madoff to squander the savings of millions of people was a desire to have more toys or pad his bank account. In fact, nothing could be further from the truth. In the end, the fraud stemmed from his desire to be viewed favorably and to please others. It overruled any allegiance he may have had to the truth.

Greed is dangerous, but if we're to learn anything from the Madoff scandal, it's that there's something far more toxic than greed: an inability to soberly confront an undesirable reality.

Skirting the facts of life may not sound nearly as sinister as greed, but that's what makes it so dangerous. Usually we can see greed coming from a mile away. Dishonesty, especially when it springs from an understandable desire to project a positive image, is far more likely to slip under our radar.

Motley Fool

[ChitownHusker]

This is often true in investor Ponzi schemes. What customarily happens is that an investor will be dissatisfied with performance, so the asset manager will falsify his statement to goose up the performance, usually in the mistaken belief that he will be able to make it up in the next month. As he starts to fall further behind and create more and more falsified statements, he will have to start stealing money from one investor in order to pay off the withdrawals of other investors who believe they have a lot more money in their accounts than they usually do. Pretty soon it snowballs out of control, and the asset manager has to devote 100% of his efforts to bringing in new investors in order to pay off the withdawal demands of existing investors.

I worked on the biggest case of fraud by an individual broker before Madoff came along, and it was very similar. He gained almost nothing from his scheme -- it was all about trying to make his investors think he was better than he actually was.