New York, 11 December 2008.
Snow is falling gently on Manhattan. At 133 East 64th Street, in his lavish duplex penthouse on the Upper East Side, Bernard Madoff is starting his day. The tall arched windows of the living room look out over buildings rising into the December sky. The apartment, valued at $5M at the time, with its mahogany-panelled walls, its carefully chosen artworks and terraces wrapping around three sides, bears witness to the apparent success of its occupant.
At 8:03am sharp, two federal agents ring the doorbell. Madoff, in his dressing gown, lets them in. Beside him, his wife Ruth Madoff says nothing.
Amid the herringbone parquet and elegant mouldings, the agents ask Madoff whether he knows why they are there. He answers straight away that he does. After being read his rights, he chooses to talk without a lawyer.
With a strange calm, he tells them he had decided he could not go on any longer. That he was finished.
In this first encounter with the authorities, he explains:
That his firm had held a lot of client money and he had lost it. That it was insolvent. That he had paid clients with money that did not exist.
The arrest goes off without incident. The agents read him the charges. Madoff puts up no resistance. He understands that the biggest financial fraud in history has just been exposed.
Before noon, the media have the story. The financial world reels. Bernard L. Madoff Investment Securities, founded in 1960 with just $5,000, is nothing but a front. Behind the miraculously steady returns of 10 to 12% a year lies a fraudulent scheme of unprecedented scale.
Fifty billion dollars. That is the first estimate of the hole, a figure later revised to $65bn, of which $17.5bn had actually been invested by clients. Fifteen thousand victims: charitable foundations, hospitals, pension funds, millionaires, celebrities, but also retirees who had handed their life savings to the former chairman of the NASDAQ.
At the SEC1, there is dismay. Harry Markopolos, financial analyst and whistleblower, had warned them. As early as 1999, he had worked out that Madoff’s performance defied the laws of mathematics. He had sent the SEC five detailed submissions, the last of which bore an unambiguous title: “The World’s Largest Hedge Fund is a Fraud”. Nobody took him seriously.
What stuns the experts is not only the astronomical size of the scam, but how long it lasted. How could a fraudulent scheme thrive for nearly three decades under the regulators’ noses? How could one of the most respected figures on Wall Street, a well-known philanthropist and a prominent member of New York’s Jewish community, have orchestrated this charade?
Markopolos, for his part, had needed only four hours and a few calculations to spot the con. He would later tell Congress that it was mathematically impossible. Madoff’s returns matched nothing that happens in real markets. They were too steady, too perfect. Real financial markets are made of volatility, of ups and downs. Not of the near-straight, rising line shown on Madoff clients’ account statements.
But beyond that glaring inconsistency, a mathematical signal could have alerted the authorities much earlier. A simple calculation that anyone could do in a few minutes.
A test based on a mathematical law discovered by chance a century earlier by an astronomer leafing through tables of logarithms.
The FBI report on Bernard Madoff’s arrest