Lessons from history’s biggest Ponzi scheme | Diana Henriques | TEDxYale

[Music] Bernie Madoff is a liar perhaps the most gifted liar I've met in nearly 50 years of writing about finance and government his ability to tell credible lies helped him build the 65 billion dollar fraud that ruined tens of thousands of people's lives his lies were devastating even deadly at least two investors committed suicide when they learned of their Madoff losses but I don't think made offs talent for dishonesty alone explains how he did so much damage I think criminals like Madoff are helped enormous ly by our own fuzzy understanding about the quality of trust trust it's a beautiful and healthy part of every life we rely on it as individuals as consumers certainly and as citizens economists tell us that the ambient level of trust in a nation is a pretty good predictor for its economic success and psychologists tell us that the level of trust in our relationships is a pretty good predictor for their success - and after 50 years with the very trustworthy guy who is my husband I can tell you they're right about that but trust is a paradox isn't it trust beautiful as it is is the only weapon a criminal like Bernie Madoff needs to destroy his victims lives and even if you never lose a penny to a fraud criminals like Madoff tear at the fabric of trust that holds our society together and that hurts all of us this dual nature of trust the blessing occurs light-dark nourishing dangerous has always been endlessly fascinating to me and I think the Madoff story gives us a way inside that paradox of trust and offers us some practical lessons for our own lives today I hope you will learn more about how to protect yourself from criminals like Madoff but I also hope that you'll emerge with a deeper understanding that trust is nowhere near as simple as it seems when money is involved first a couple of definitions conman and Ponzi scheme Bernie Madoff is a conman well what does that mean conman as you may know is an abbreviation for confidence man a term that was in use at least as early as 1857 when Herman Melville used it as the title for his final novel and confidence man is a pretty good way to describe a criminal who wins your confidence and then uses it to swindle you yes there have been some confidence women but as a group con artists are overwhelmingly male so I'm going to stick with conman like Bernie Madoff all con men are liars but all Liars are not con men and we're at a moment in our history when it's important to make that distinction to point to some of the oft exposed Liars on the public stage today and say well they're con men well frankly that's an insult to con men liars they're a dime a dozen any four-year-old can tell a halfway-decent lie you and I can tell much better lies although I'm sure like me you try not to telling lies is very very easy telling lies without getting caught telling lies without raising a whiff of suspicion telling lies that inspire trust and belief and everyone who hears them well that is very very difficult and that is what every successful conman must be able to do let's think about Madoff for a minute in the decades that Madoff was secretly running his massive fraud no national publication ever ran a list of the 2000 lies that madoff had told in the previous year none of his speeches ever got four Pinocchios or a pants on fire reward if that had ever happened just once well may off would have still been a liar but his career as a conman would have been over okay that's conman let's turn to Ponzi scheme that's the kind of fraud that Madoff and a host of other con men like to pursue a Ponzi scheme is a very simple crime and it can be summed up in the old proverb about robbing Peter to pay Paul that's exactly what a Ponzi schemer does he takes the money invested by Peter and he uses it to pay the profits he's promised to Paul and he lies to both of them about what he's doing Ponzi schemes to like con men had been around for a long long time but for most of that history up until 1920 they were known as Peter to Paul schemes for obvious reasons then in 1920 an extraordinary con artist named Charles Ponzi set up the Peter to Paul scheme in Boston that would make him briefly rich and lastingly famous and the name stuck since Ponzi's arrests almost a century ago there have been countless copycat crimes and the odds are very good that there are dozens of undetected Ponzi schemes going on across the country right now the website Ponzi tracker dot-com reports that there have been on average 65 Ponzi schemes exposed every year since 2002 think about it that's a fresh for all it's surfacing every five days now we've had Ponzi schemes involving Bitcoin involving art involving wines latex gloves for some reason even tickets to the hit Broadway musical Hamilton so I can't predict what kind of fate investments will be involved in the next 65 Ponzi schemes that will surface in the coming year but I can tell you this about the people running them right now as I speak every one of them is a trusted figure in their community and I know that because the only people who can pull anyone into a Ponzi scheme is a trusted figure in their community like Bernie Madoff before his arrest like Charles Ponzi before he was exposed the theme is uncharted today and unfortunately in my context it's the criminals who've gone off the chart con men are changing but our understanding of them is caught in the old-fashioned stereotypes of the Charles Ponzi story the conventional wisdom has it that a Ponzi schemer it's always going to be above the life of the party telling jokes buying drinks and trying to hustle in admiring investors as fast as he can but that certainly wasn't true of Bernie Madoff Madoff was quiet dignified reserved and he turned investors away so often it became something of an honour to be allowed to invest with him so Madoff didn't fit anybody's obsolete stereotype of a Ponzi schemer and that helped him avoid detection the conventional wisdom also holds that Ponzi schemes always involve outrageous promises pie-in-the-sky overnight wealth that's at the heart of that old investor warning you've heard it if it sounds too good to be true it is but that isn't true of the Madoff case Madoff's returns while consistent were comparatively modest by hedge fund standards one of his investors calculated he would have made more money investing in the fidelity Magellan fund which I'm sure he wished he'd done so Madoff's unmasking actually led one smart fraud analysts to say we need to rewrite that old warning instead it should read if it sounds too good to be true you're dealing with an amateur think about it Madoff was no amateur he was a professional and his investors did not look to him to make them rich overnight they look to him to keep them safe in a scary volatile market and they could not believe he would ever betray them and in a very tiny way I know a little bit of how they felt because in far less consequential matters Madoff betrayed me too it was in the summer of 2010 Madoff it finally agreed to my many Quest's for an interview for the book I was writing about his case but he insisted that those interviews be used only for my book I was reluctant to agree to this embargo because the book wouldn't be out for many many months and Madoff could talk to a lot of writers between now and then and my hands would be tied so I said I would only agree if Madoff would agree not to talk to any other reporters before my book was published well he readily said yes he even put it in writing and he seemed so sincere so trustworthy that I believed it and I already knew he was a crook that's how good he is of course he broke his promise no surprise there but what was surprising was how shocked I was when it happened and how foolish I felt for ever trusting Bernie Madoff in the first place so if we can't trust our gut to recognize a conman and we can't what should we do well relying on financial regulators is not a good bet these are devilishly hard crimes to detect in advance everything looks rosy until the money runs out and then it's usually too late trusting in bankers who serve Ponzi schemers to catch them well the track record isn't so good every successful Ponzi schemer had a banker who failed to catch him so what should we do there were two anecdotes from the Madoff story that I think are very helpful the first involved a retired retailer who was eager to invest with Madoff when he finally got a meeting with Madoff they'd off told him well his minimum investment was five million dollars the retailer was a wealthy man he could have written the check easily but he explained that he had a firm rule he never invested more than a quarter of a million dollars with a new money manager in the first year later on who knew but only a quarter of a million madoff stood firm five million dollars or no dice the retailer was tempted he wrangled this invitation to talk with madoff but he thought about it finally he shook his head shook Bernie's hand and walked away similarly a small charity had an opportunity to invest with Madoff but their investment committee of their board had a long-standing rule they only dealt with money managers who used an independent bank or third party to hold the assets in their account and madoff didn't do that but it could have made an exception in this case to get the talents of this market wizard but they decided you know the rule was served as well we'll stick with it and they walked away now what's fascinating about both of these stories is that in neither case did anyone suspect madoff was a crook far from it the charity the retailer they continued to admire and respect and trust Bernie Madoff right up until the day he was arrested they didn't have some kind of x-ray vision into Bernie soul they didn't have some kind of geiger counter in their gut that told them beware no they just had some common-sense rules and they stuck to them and we can do exactly the same thing we could for example decide that we are only going to invest and well regulated public mutual funds and that would keep you safe from Ponzi schemers so long as you don't waive that rule when you're brilliantly successful neighbor invites you into his private Bitcoin fund on a more difficult level we could decide that we simply will not invest with close friends family members ever precisely because we understand that the trust we place in them will inevitably blind us to any red flags we would need to see to know that we were in trouble firm common-sense rules no exceptions I think Bernie Madoff would tell you that that's the best way to protect yourself from con men like him the only other way I can think of is clinical paranoia on a global scale con men cannot work in a world where nobody trusts anybody else but nobody wants to live in a world like that modern Commerce is impossible in a world like that and healthy relationships are destroyed by a world like that so by all means continue to trust one another let's use trust to build strong relationships strong communities a strong country but for heaven's sake find something besides trust to guide how you handle your money because trust will always be that two-edged sword the con man's favorite weapon trusting in trust alone to navigate the world of money well that's exactly what the next Bernie Madoff is hoping that you will do and what I'm hoping you won't thank you very much [Applause] you [Music]

Channel: TEDx Talks

Views: 15,485

Keywords: TEDxTalks, English, Business, Finance

Id: ijzgDYu1s9s

Length: 17min 24sec (1044 seconds)

Published: Tue Mar 20 2018