If a heavily armed Somalian boat approaches your oil tanker in “Pirate Alley,” you know you’re in trouble. Bernard Madoff is different. He gives to charity. He’s good to his family. He even looks like nice guy. Is that why he was able to defraud investors out of an estimated sixty billion dollars? Yes, but only in tandem with another powerful force: nostalgia. There is a nostalgia for relationships in business instead of transactions and it works to the advantage of people like Bernard Madoff.
A long time ago, all business was done through relationships. Every company gave its banking business to one bank, its legal work to one law firm and never considered using anyone else. These relationships were often so durable that they were passed down through the generations. If you needed a specialist of some kind, you developed a relationship with him and he became your specialist. There’s a lot of security in this arrangement, but no motivation to improve. Then, one day, someone suggests a change. They propose having different firms compete for the business and may the best deal win. If the old firm wants it bad enough, they know how to get it. This idea becomes very popular and soon, a lot of healthy, new relationships are spawned. However, given the tendency of people to take things too far unless someone stops them, the relationships get shorter and shorter until they become mere transactions. “What have you done for me lately?” becomes “What can you do for me?” The rise of hedge funds makes the transactions larger and the use of computers and the Internet makes them faster until entire fortunes are made – or lost - in seconds.
One beautiful, quiet evening before the current financial crisis, a hedge fund manager is replacing the green light at the end of his pier, when he stops and gazes at Long Island Sound and the sky stretching above it. He’s always admired their power, but tonight, for the first time, he realizes how empty they are. Then he looks back at the warm glow coming through the windows of his seventeen room Georgian-style mansion and experiences a stronger, almost over - whelming realization: not that there’s more to life than money, but that there’s definitely more to business. The next day he trades his warm-up suit for a business suit and goes downtown to see his old friend, Bernie.
They have a wonderful lunch (the Chateau d’Yquem goes perfectly with the foie gras) and the man realizes how much he misses working with people, especially people he likes. Where is the trust, he wonders. Remember when a man’s word was his bond and deals were sealed with a handshake? He vows to change his ways. Feeling equally expansive, his friend, Bernie, decides to let him in on a deal that, technically, is closed, but he’s willing to make an exception. Not only are the returns excellent, but they are consistent to a surprising, even shocking, degree. That’s all the financier needs to hear before sinking a tidy piece of change into the enterprise. They shake on the deal and our investor heads home, filled with a sense of gullible warming. He is, in fact, so pleased with himself, so convinced that his virtue has been rewarded that he decides to share the deal, Bernie won’t mind, with twelve of his closest friends. Then they tell twelve and they tell twelve and before you can say, “Ponzi scheme,” bankers in Vienna are in on the deal.
Does our misty-eyed mogul ever learn his lesson? Possibly, but it doesn’t matter. Today, everyone who trusted Bernard Madoff or trusted someone who trusted him is in the same financial toilet – and all the excuses and all the lawsuits in the world can’t make it a Jacuzzi.
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