Bernie Madoff : The American Dream

People have called Bernie Madoff the most hated person in America, a thief, a sociopath, and a host of other things I refuse to put into writing. This man has received death threats to the point that he was forced to wear a bulletproof vest to and from court. Even Eli Wiesel – who won the Nobel Prize for peace – joined the angry mob, recently saying that no punishment was harsh enough and that he could never forgive Madoff for what he did.

When a Nobel Peace Prize winner is calling for your head, you know you’re a hated man.

Here’s the brutally honest truth: Bernie Madoff (which should always be pronounced “made-off” as in “made off” with everyone’s money) is the embodiment of what, for too many, has become the American Dream. He may have technically broken some rules (hence the jail time) but his method, in spirit, was well in line with some of our most treasured cultural values -- and not very far from what our country says is perfectly legal.

Bernie Madoff is guilty of creating a Ponzi scheme. Essentially, Mr. Madoff took people’s money, promising to pay them high returns on their investment – but then paid these people with the money of other investors, rather than on gains from actual investments. So long as Mr. Madoff could find investors, the scheme worked. It was only when the economy tanked that Madoff couldn’t find enough new investors and was finally… apprehended (I was going to say “caught” but he really wasn’t – his two sons turned him in).

So Bernie Madoff made money without doing any work – and so long as the economy was good, he didn’t have to work. He made a bundle and everyone was happy getting a guaranteed ten percent plus return on their investments. Wealth without work, wealth without risk. The good life for everyone involved. The American Dream.

Is this much different than the way banks and Wall Street firms operate?

Many people have this image of banks as being large vaults filled with money. Banks, they imagine, lend this money to people and make money on the interest charged for this service.

In truth, banks don’t have anywhere near the amount of money on deposit that they lend out. The capitalization requirements for banks are quite small (thanks to deregulation). The job of banks, therefore, is not really to lend money. A bank’s job is to assess risk. So long as banks are properly assessing risk, in theory they can continue their business without much actual money because most people will be paying off their debts. In other words, debtors replace the money the bank has to pay out with new money. Sound kind of familiar?

Of course, assessing risk properly means you don’t make as much money because it means you can’t lend to a lot of people – namely people who can’t really afford it. So there is an incentive to figure out ways to make risky loans (without taking the risk yourself, of course).

One way to do this is to bundle these loans up and sell them to Wall Street -- who really doesn’t care if they are risky because they can give them a fancy name (mortgage backed securities) get a fancy rating agency to slap a AAA rating on them (another player in the scheme who gets paid to do nothing) and then sell them to the unsuspecting public.

And nothing can go wrong because AIG is insuring all of it.

Everyone is happy. The banks make money, Wall Street makes money, investors make money, and the guy making twenty five thousand a year gets to live in a six hundred thousand dollar home. Wealth without work, wealth without risk. The American Dream.

And this works just fine until the economy tanks and banks can’t find enough people who can actually pay back the debt they’ve issued and the whole house of cards collapses. A few people at the very top get very (unbelievably) rich from this scheme – and the rest of us suffer dearly.

Does this sound familiar?

The only real difference is that the executives in the second scenario probably won’t go to jail. Why? What they did was more confusing than what Mr. Madoff did – involving more people, complex financial instruments, and many different institutions. So there will be a lot of finger pointing and much unraveling to do – and in the end nobody gets blamed.

So what is Bernie Madoff’s real sin here? Perhaps it is that he didn’t make his scheme complicated enough. Or maybe he just got unlucky with the economy. If the economy had only waited fifteen years to fall off a cliff, Bernie Madoff might have been able to spend the rest of his days in Palm Beach instead of a jail cell.

But the real point of this article is that Bernie Madoff isn’t an evil man. He’s just a product of his environment. And I’m not just talking about Wall Street – I’m talking about America. When we look at the Bernie Madoffs of the world and call for their heads, we should be looking at our culture and, perhaps, taking a long hard look in the mirror.

I think one reason we all despise Madoff is that we secretly admire the man. As a culture, we have always admired great wealth. But our culture is increasingly putting less and less value on the work and the risk associated with obtaining that wealth. When we see Richard Fuld take 25 million out of Lehman Brothers days before it collapsed or executives at AIG receive bonuses for doing a bad job, we are appalled – but I think secretly jealous.

“This working for a living crap is for losers and suckers,” we secretly think as we slog to work every day making a fraction in a lifetime as Mr. Fuld “stole/earned” in a day on the “job” at Lehman. That’s the way we’d all like to live our lives – getting something for nothing. Wealth without risk, wealth without work. Darn those Wall Street executives!!

But… Come to think of it, many of us do live our lives the same way as Mr. Fuld, the AIG executives, and Mr. Madoff – we’re just not as successful at it.

We routinely spend money we don’t have (and in many cases will never earn) on houses and cars and other luxuries we can’t afford. We are happy to take the ridiculous lines of credit banks routinely offer us on little plastic cards (another Ponzi scheme that’s going to come back to bite us quite soon) because we know we can’t live the way we want if we live within our means.

Indeed, living within one’s means seems very un-American -- especially given the fact that our economy is based on spending and not saving. Be patriotic! Go buy something expensive (with money you don’t have).

Yes -- most of us very willingly participate in the great American Ponzi scheme and then we’re surprised when we find ourselves in foreclosure. We’ll be more surprised when we want to retire – but that’s another article.

So to all the victims of Mr. Madoff, guess what – many of you are just as much to blame as he is. I know I’ll get a lot of hate mail for saying so – but it’s the brutally honest truth.

I won’t blame people who didn’t know they were invested with Madoff or the charities that were hurt. I do feel badly for them. But the rest of you knew.

You knew that investing with Bernie Madoff was a rigged game. You were financially sophisticated, business savvy people who knew that it is impossible to legitimately guarantee ten percent plus returns every year, year after year.

You were among the social elite – a small privileged group who could access Mr. Madoff – a former NASDAQ chairman who had some sort of insider information, you thought, that made his investments risk free.

With a wink and a nod, you all put your money into an investment referred to by many as a “Jewish bond” – a ten percent plus return with no risk. Wink, wink. Nod, nod. You knew deep down this arrangement had to be a fix – but chose to look the other way because you wanted in on the great American Ponzi scheme too. Wealth without risk, wealth without work.

And you got burned (by Bernie – even his first name is ironic) who was doing exactly what you thought he was doing – gaming the system. You just didn’t think you were the part of the system he was gaming.

If we want to fix the economy we have to fix our culture. Rich or poor, we have to accept that nothing is free, bailouts don’t work forever, and there is such a thing as a budget.

The American Dream can’t be based on the lie of easy credit -- or the sentiment of too many at the top that only suckers and losers work for a living and pay taxes.

If we really want the American Dream, we have to be willing to pay for it.

As we are beginning to see, an American Dream based on a Bernie Madoff style Ponzi scheme will render that dream a mere fantasy and our reality a nightmare.