Some two weeks have passed since Bernard Madoff has admitted to his sons, and later to the police, that he had perpetrated the greatest financial swindle of the history of mankind, and we yet have to come to terms with it (hint: it’ll take years). Meanwhile, a life was lost, as one institutional investor, Rene-Thierry Magon de la Villehuchet, committed suicide after having lost some USD 1.5 billion for his clients through Bernard Madoff. For the benefit of those who, surely steeped in their Torah study, failed to notice the uproar in the streets, I will briefly outline what I gleaned from court papers and the financial press on this matter. (If you do know the details, you can skip ahead.)
Bernard Madoff, one of the founders of the NASDAQ stock exchange, a pioneer in electronic stock trading, also ran an investment called a hedge fund. All investments carry risks, and the potential for earning profit is generally in function of the risk one is willing to bear; more risky investments may earn more profit, but they can also lose more money. Hedge funds are supposed to better control risk, so as to obtain a higher return while minimizing risks. Hedge fund managers do this by not only investing in a larger number of companies, to spread the risk, but also by investing in so called derivatives, financial obligations that can be used to either increase or limit one’s exposure to the risks that a particular stock carries. (For more information, click here)
So Madoff ran this hedge fund for years. The problem is that some time ago – the exact year isn’t known yet – some of his investments were unsuccessful. This happens in the business, which is why investment funds don’t always increase in value. However, Madoff, instead of admitting temporary failure, claimed all was well and paid dividends to the investors out of capital that had been recently deposited with him. In his words to Theodore Cacioppi, the FBI agent who arrested him, he
(source: the Madoff Complaint filed with the United States Southern District Court of New Yorkhttp://online.wsj.com/documents/madoffcomplaint.pdf)
Effectively, the fund he apparently had started in all honesty become slowly the greatest Ponzi scheme the world has ever known. By the time of his arrest, on the 11th of December ’08, Madoff estimated he had created a hole of approximately – by his own admission – USD50,000,000,000.00 (seeing it written out gives some perspective, does it?).
Madoff counted many prominent clients, such as Banco Satander, Bank Medici, Fortis, HSBC, BNP Paribas, AXA, the Abu Dhabi Investment Authority.
Oh, and many of those whose money Madoff swindled were Jews and Jewish philanthropies, such as Yeshiva University, the Elie Wiesel Foundation, a charity by Steven Spielberg, the Ramaz school, the Kehilat Jeshurun synagogue and many more. And Madoff himself is Jewish, too.
Now Madoff didn’t commit this fraud because he was Jewish, and he didn’t learn any swindle tactics in yeshiva; apparently, he wasn’t even religiously observant, though he was a member of at least one Orthodox synagogue (which reportedly also lost dollops of money with him). Nonetheless, it is proper to disown him (though he remains Jewish) and distance ourselves from him and his antics, if only to come to terms with the fact that one of our tribe has sadly succumbed to the draw of stolen money, and this on a scale that is beyond the imaginable, וכן לא יעשה – and such shall not be done.
While Madoff was known as a major philanthropist, his good deeds where from fruits of stolen waters, aptly considered like the אתנן זונה, the payment for prostitution, which may not be brought as an offering unto the mizbea’h (see Devarim 23:19 and Michah 1:7). The damage this descendant of Avraham, Yitz’haq and Ya’aqov, whose forefathers stood at the foot of Mount Sinai, caused, is an abomination before G”d, and it must be remembered into infamy.
Rightly, the Rabbinical Council of America issued a statement in light of the Madoff scandal.
How did the Mighty Fall
This mother of all frauds raises many questions. How did Madoff, the successful, pioneering stock trader, former chairman of the NASDAQ stock exchange, become the greatest ganef in recorded history?
How come his clients, supposedly sensible financial investors with hordes of analysts working for them, fall for a Ponzi Scheme? How come the regulatory agencies didn’t notice? And what lesson may we draw for the future?
As I noted above, the initial complaint filed by the FBI with the courts indicate that Bernard Madoff started his professional career as an upright businessman. Initially, he really did invest the money he was entrusted with. However, as has been shown time and again by financial academicians, one can “beat the market” once, twice, or even a few years in a row, but one cannot consistently produce results that are better than the market (for a better understanding, read about the efficient market hypothesis). After some investment bets lost out, Madoff, instead of admitting that the investments had lost value, hid this truth from his investors and turned his hedge fund into a Ponzi Scheme. How long ago this happened is unclear, though it likely started more than 15 years ago; the FBI and SEC must now sift through whatever evidence they find and will report to the courts.
Why could Madoff not admit defeat?
The Mishnah in Avot (4:28) teaches:
רבי אליעזר הקפר אומר, הקנאה והתאווה והכבוד, מוציאין את האדם מן העולם
Rabbi Eli’ezer haKappar says: Envy, Lust and [the quest for] Glory remove man from the world
The quest for glory, in this case for the glory of being the best and safest investment advisor, seems to have driven Madoff out of his senses. However, as Talmud teaches:
ללמדך שכל המשפיל עצמו הקב”ה מגביהו וכל המגביה עצמו הקב”ה משפילו כל המחזר על הגדולה גדולה בורחת ממנו וכל הבורח מן הגדולה גדולה מחזרת אחריו וכל הדוחק את השעה שעה דוחקתו וכל הנדחה מפני שעה שעה עומדת לו
Thence thou canst learn, that everyone who maketh himself humble is raised up by the Holy One, blessed be He, and one who is arrogant is humbled by the Holy One, blessed be He. He who pursueth greatness, the greatness escapeth him, and he who avoideth greatness is sought by greatness. He who forceth time (i.e., he who perforce would become rich though fortune be against him), time oppresseth him, while he, who awaiteth his time, is assisted by time.
At least since 1999, and especially since 2005 (source: WSJ), the SEC was aware of suspicious activity in the Madoff investment advisory business. Investment funds are not profitable every year, except for Madoff’s. Investment funds are usually heavily audited, but Madoff’s auditor was an unknown accounting firm, Friehling & Horowitz, which consisted of only one active accountant. Investment funds must file regularly with the SEC, but through clever trading, Madoff avoided needing to file anything. Any of these signs should have been enough to become suspicious and abstain from investing in Madoff’s fund, taken together, it was like plastering warning labels all over Madoff’s face, but the investors kept coming. Why?
Madoff’s slick marketing machine helped. He carefully screened his clients, thus casting an aura of exclusivity on his fund and his clientelle. One is reminded of the quest for glory, which Rabbi Eli’ezer haKappar in the Mishnah warns against (see above).
Investment advisors feeding into Madoff’s fund were undoubtedly also fooled by attractive margins, which reminds us of the Torah’s admonition against kickbacks, כִּ֤י הַשֹּׁ֙חַד֙ יְעַוֵּ֣ר פִּקְחִ֔ים וִֽיסַלֵּ֖ף דִּבְרֵ֥י צַדִּיקִֽים – “for a gift blindeth them that have sight, and perverteth the words of the righteous.” (Shemot 23:8, Devarim 16:19)
Ultimately, however, there is probably only one answer: greed, either of the clients, or, in other cases, of the investment advisors managing so called feeder funds.
King Solomon teaches in Kohelet (5:9):
אֹהֵ֥ב כֶּ֙סֶף֙ לֹא־יִשְׂבַּ֣ע כֶּ֔סֶף וּמִֽי־אֹהֵ֥ב בֶּהָמֹ֖ון לֹ֣א תְבוּאָ֑ה גַּם־זֶ֖ה הָֽבֶל׃
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance, with increase; this also is vanity.
As the classical saying goes: יש לו מנה רוצה מאתים – “whoever has a hundred wants two hundred.” Our appetite and greed know no end, they are bottomless pits, and they are not harmless.
Envy, Lust and the quest for Glory are not necessarily vices. They can drive a person to do good. However, as Rabbi Eli’ezer haKappar teaches, more often than not, they are vices, and they are so powerful, that they can draw man into the abyss. Greed is the combined force of all three vices, and it seems that greed drove investors to blindly put their trust in Madoff, the financial miracle maker, or, as we now know, the charlatan.
Greed is a natural drive, however, it is also fed, excited, even aroused by our envy and our quest for glory. We want to keep up with the Cohens, invite to the most beautiful and stunning affairs, though one wonders whether they truly sustain simcha, we want our kids’ schools to exude an aura of exclusivity, we want to dress to kill, and we want to be spiritual, too. We want what is known in America as the American Dream.
But perhaps that isn’t so good for us. Perhaps our children are suffering, confused between our alternating allegiance to material and spiritual values. Meanwhile, our machers and shvitzers get the message that, as long as you make large donations and carry yourselves in a dignified fashion, neither financial nor sexual improprieties will withhold honors from you. As long as you are not socially awkward, we’ll fail to notice personal failings, and might even rally around the one who has some juicy lashon hara’, too.
Am I condemning us too strongly? Can we not think of times, when people who would act in ethically or morally questionable manners, some of whom try to look quite pious and meticulous in certain mitzvah observances, would be honored in our synagogues and at organizational dinners? In one place a convicted fraud is warmly welcomed when he returns for a brief reprieve from jail, in another place adulterers, wife beaters, child abusers, get refusers (both male and female), insurance defrauders or sundry other failures are allowed to bask in the limelight, because of their philanthropic or organizational work, or simply because we fail to recognize the gravity of moral and ethical failings. Typically, no organization is guilty of glorifying all these categories of questionable individuals, but the temptation is great to glorify at least some.
Must we wonder when the עם חכם ונבון, the wise and understanding people, while surely not harboring any more criminals than any other ethnic group, has figured out how, when one does do a pleite, to do so with the greatest possible damage?
Our Torah teaches the most sublime principles, of piety and of honesty and modesty. If we will follow them and teach them to our children, if we will set the standard high and rally around it, if we will honor the humble and the honest, rather than the rich and famous (though thankfully, sometimes they are one and the same), will we not fulfil our destiny, to be an אור לגוים, a light unto the nations?
The Take Home Message
The failings of Madoff are not exclusively Jewish failings. Major clients the world over fell for his charm (well, he had no properly audited accounts to show; it must have been his charm), and even the regulatory authority, the SEC, failed to see through this scam in a timely fashion. No, this is not a Jewish problem. However, we are well equipped to take the lesson home. Investors and regulators of every imaginable religious and ethnic group will draw lessons from what happened. Some will rightly conclude that the regulatory agencies must make it their priority to protect the weak, which, in financial markets, are those who necessarily possess less information.
But it is doubtful that rich financiers, as well as the wannabe super rich will suddenly become humble and modest. Their greed will abate a little bit, but by next year, all will largely be forgotten, as they work on earning their next billion. This greed, however, has caused us enough damage; perhaps it is time to gain perspective, to understand our basic drives, to understand how they can drive us to good but also to bad things.
Educated about ourselves, we might just begin to channel our energies more productively, endow them with more justice, honesty and humility. Envy, desire and the quest for glory can be positive forces, when we free ourselves from our bondage to the material and begin including the spiritual and the emotional as the domains of our desire. Our sages teach us that קנאת סופרים תרבה חכמה, spiritual and intellectual competition increases knowledge. קנאה is not just envy of the material, but also, in its productive incarnation, immensely caring about principles. And finally, financial success is not only a privilege, but a responsibility. Those of us who were granted this financial success were entrusted by the Heavenly Tribunal as custodians for the betterment of our people and of humanity; they were entrusted because they can be trusted – provided they acknowledge their responsibilities.
While I studied in business school, Shaheen Boma, a professor at Ball State University, published the results of research showing that MBA graduates had a sense of ethics comparable with criminal convicts; convicts even had a stronger sense of loyalty. In reaction, business schools everywhere started requiring students to take business ethics courses, which up until then were optional.
The future is unknown, and we do not know who will be tomorrow’s business leader. Perhaps we need to educate everyone, in elementary and high school, in beit midrash level yeshivot and at yarchei kallah seminars about our religiously mandated responsibilities towards investors, regulators, the government and society at large, in the expectation that those who become tomorrow’s business leaders will tackle the challenges and confront the temptations head on, solidly grounded in the exacting expectations of ethics and morality of the highest order. At the beit midrash and yarchei kallah levels, our forays into business ethics will rest upon the solid pillars of Talmud and posqim, our ba’alei machshavah and ba’alei mussar, for this matter is a religious, yeah, halakhic issue, indeed.