From the Independent

Madoff reveals his suffering: I'm in therapy

By Tom Peck
Tuesday, 1 March 2011


In his first extensive interview since being jailed in 2008, the disgraced former financier Bernie Madoff has revealed he is receiving weekly therapy sessions.

In a series of telephone interviews from his detention centre in North Carolina, Madoff, 72, has spoken of his turmoil over the suicide of his son, the deterioration of his relationship with his wife, of the lie that he led and how his scheme snowballed out of his control. He also launched a controversial attack at critics who have branded him a monster.

"Let me tell you, I cried for well over two weeks. I cried and cried," he said about hearing of the suicide of his son, Mark, a leading figure in his business and one of the many victims of his deception.

"I didn't come out of my room. I didn't speak to anybody, and so on. I have tears in my eyes when I'm talking to you, even. Not a day goes by that I don't suffer."

He was placed on suicide watch by guards at his detention centre, who looked in on him every hour, though they apparently did not need to worry. "I never thought of taking my life," he told New York magazine. "It's just not the way I am."

His suffering will come as scant consolation to his victims, though Madoff refuses to accept the entire blame.

"Everyone was greedy," he said. "I just went along. There was complicity, in my view. The SEC [US Securities Exchange Commission] looks terrible in this thing. It's unbelievable, Goldman... no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme."

Madoff said his criminal enterprise began in the recession of the early 1990s, when he was already an established figure on Wall Street. "The market went to sleep," he said, and on the books of his hithero legitimate business was too much of other people's money. With nowhere to invest it, he started borrowing from his investors' capital to pay big returns. Though they were false, they attracted attention.

"All of a sudden, these banks, which wouldn't give you the time of day, they're willing to give you a billion dollars," he said. "It wasn't like I needed the money. It was just that I thought it was a temporary thing, and all of a sudden, everybody is throwing billions of dollars at you.

"These banks and these funds had to know there were problems. I was not willing to have them come up and do the due diligence that they wanted. I said, 'You don't like it, take your money out', which of course they never did.

"I kept telling myself that some miracle was going to happen or that I was going to be able to work my way out of it. I just didn't know when that was." By 2002, he realised this was a fantasy. "By then, the number was so astronomical I didn't know what I was hoping for, quite frankly."

When the markets seized up in 2008, and he was left with $7bn (£4.3bn) worth of repayments he knew he could not make, he confessed all to his family. His sons turned him over to the police.

Of his wife, Ruth, he said: "We had a very luxurious life. There's no question about that. But that was not what she was interested in. She would have been perfectly happy if I'd been a teacher. My wife, quite frankly, doesn't forgive me for what I did. But at least she understood. You know, I guess, they say for better or for worse. She stood by me."

He said he had always been a "worrywart", something of an understatement for someone who concealed a $65bn fraud for almost two decades.

Originally Posted by Francois Cellier

Madoff said his criminal enterprise began in the recession of the early 1990s, when he was already an established figure on Wall Street. "The market went to sleep," he said, and on the books of his hithero legitimate business was too much of other people's money. With nowhere to invest it, he started borrowing from his investors' capital to pay big returns. Though they were false, they attracted attention.

In order to attract customers, banks (and bankers) need to offer high interest rates. In order to finance these high interest rates, they are under pressure to find investment opportunities themselves that pay even higher interest rates so that they can

1. pay out the interest that they promised,
2. pay for their investment expenses,
3. pay the tax-man, and
4. make a living themselves on the remainder of the difference.

In times of recession, businesses disappear, and the investment opportunities dry up. Thus, the bankers are faced with the problem that they can no longer find investment opportunities that pay enough interest to make the scheme work.

If they are honest bankers, they then need to reduce the interest rates that they offer to their customers so that it is sufficiently below the interest rates that they can generate themselves to pay for investment costs, the tax-man, and still make a living.

... and if they do, they'll watch their customers leave in big numbers to invest their money with another investor who still offers them high interest rates. These other investors can offer higher interest rates, because they are not honest.

As they cannot generate enough income, they take some of the invested money to pay out interest, hoping that rosier times will arrive before the Ponzi scheme is discovered, i.e., before the customers come and demand their money back, which is no longer there.

As we reach the Limits to Growth, the investment opportunities disappear, because sustainability means zero real growth; it means living in steady state.

Madoff's scheme worked for quite a while, because he chose to offer the highest interest rates promised by anyone in the market, i.e., to be the biggest among the many crooks. Therefore, more honest bankers saw their clients disappear and invest their money with Madoff ... and as long as he could increase the number of his clients, his Ponzi scheme fueled itself.

Exponential growth can mean exponential growth of the money ... but it can also mean exponential growth of your customer base. Either of the two will do the trick. Since he could no longer rely on exponential growth of the money markets, he banked on exponential growth of his customer base.

... and then he reached his own Limits to Growth. He could no longer attract enough new customers, because the next recession evaporated much of the money that potential new customers could invest with him, and because everyone greedy and reckless enough to buy into his scheme had already done so.

... and this is where it all ended.

These same problems are even noticeable to me as a (mini-)investor. Here in Switzerland, I pay roughly 1.2% of estate taxes. These are wealth taxes that I pay on everything that I own. In addition, I pay roughly 25% on income taxes.

Therefore, if I decide to park my saved money in a savings account, which currently pays a very low interest of maybe 0.1% annually, I lose big time, because I need to invest at an interest rate of at least 1.2% to overcome the estate tax. Otherwise, I spend more money on the tax-man than I make myself on the investment.

Comparing myself with Madoff, I have one "investor" who "invested" his money with me. His name is tax-man, and I "promised" him an interest in his investment of 1.2%. Thus, I need to re-invest his invested money at a rate that is higher than 1.2%, otherwise I lose.

Let us say that I choose to invest in the Swiss bond market. Most Swiss bonds currently offer an interest of 1.5% - 1.75%. Do I make any money when I choose this type of investment?

Let me say that I invest my money in bonds that pay 1.5% interest, clearly above the 1.2% limit ... and yet, I still lose money. Why?

The 1.5% is income, and consequently, I pay 25% of that income as income tax. Thus to break even, I need at least 1.6% interest so that I can pay 25% of that, i.e., 0.4% as income tax and the remaining 1.2% as estate tax.

With 1.6% interest, I break even in the sense of being able to pay the tax-man. Yet, I still haven't offset my investment expenses.

The investment cost depends on the type of investment. The investment cost on a savings account is very low, but then again, I don't make much in terms of interest on such an investment either. The more complex my investment, and usually higher interest rates mean more complex investments, the higher will be my investment cost. If I invest in a business, say I invest in a apartment that is rented out to tourists on a weekly basis, for example, I may easily spend 1/3 of my total investment income as an investment expense.

Let me assume a middle ground and claim that I need to spend about 0.4% on investment expenses. Thus, I will need to choose an investment that offers at least 2% interest, before I make any money at least nominally, i.e., before I have paid off the tax-man and offset my investment expenses. This cuts out the Swiss bond market. Even if I should find such an investment, I still haven't offset the inflation rate.

I may be able to get a higher interest rate if I invest in the Swiss stock market, but the risks are much higher, and at least in the last 3 years, the Swiss stock market hasn't performed well either.

For foreigners, the Swiss financial markets may be more attractive, because they may speculate on the stability of the Swiss currency, and indeed, foreign investors have done well in recent years by investing in Swiss Francs, because they made a lot of money on the strength of the Swiss currency, i.e., on the exchange rate. Yet, this doesn't help me when I am living in Switzerland and my expenditure is calculated in Swiss Francs also.

So, what do I do? If someone has a lot of money, s/he may be able to invest in a Swiss business directly and get a sufficiently high interest rate in this way. Yet, this only works with a fairly large portfolio. For small investors, it doesn't work. They are forced to take their money to the bank, and Swiss bankers won't offer sufficiently high interest rates to offset the expenses, and even less to make any money on the investment.

Thus, I may choose to invest in a market that is less saturated, i.e., has better growth potential. Currently, I might invest in bonds traded in Australian Dollars. These offer interest rates of 5-6% currently. If I do, I now carry the risk of a changing exchange rate between the Swiss Franc and the Australian Dollar. In recent months, the Australian Dollar has strengthened even more than the Swiss Franc, i.e., such an investment paid off well, but who knows what the future will bring.

For the time being, I am positive about investments in the Australian economy. Australia is a large underpopulated country rich in natural resources and relatively close in proximity to the emerging markets of China and India. Especially China is eager to buy energy resources from Australia.

Yet, sooner or later, the entire globe will reach its Limits to Growth, and that will be the day of reckoning for all investors ... including the tax-man.