Post-Mortem on Madoff’s Fraud While Scandal Is Still Quivering

While operating the scheme, Mr. Madoff was hailed as a pioneer in electronic trading, served as chairman of the Nasdaq stock exchange and became one of the world’s most respected investment managers. His estimated 20,000 victims included hedge funds, executives, foundations, university endowments, the wealthy and famous (Elie Wiesel, Steven Spielberg), and thousands of ordinary people whose lives were devastated; several committed suicide. One of Mr. Madoff’s sons committed suicide too; Mr. Madoff himself is in prison for life.

And now from Diana B. Henriques, a senior financial writer for The New York Times, who covered the issue and was the first journalist to interview Mr. Madoff in prison, we have a frequently compelling but ultimately disappointing new book. Her “Wizard of Lies” provides an extended discussion of whether the members of Mr. Madoff’s immediate family knew of his fraud (definitive evidence is lacking, but Ms. Henriques concludes that they did not). She also describes the huge cleanup and recovery effort led by Irving H. Picard, the tough-minded Madoff bankruptcy administrator, whose operations have already cost a quarter of a billion dollars, with an estimated billion more to come. This effort includes a sad, grinding fight among Mr. Picard, the “net winners” (investors whose payouts exceeded their investments with Mr. Madoff), and the “net losers” (who had cash losses).

But while the book does an excellent job of recounting the Madoff story, it is all trees and no forest, focusing repeatedly on details while skipping over enormities. We learn about houses, clothing, charities, holiday parties, friendships, personal quirks. Ms. Henriques’s reporting offers insight into how the fraud was perpetrated. In some ways it was highly sophisticated (software that duplicated the screens of other financial software and created thousands of precisely faked statements); in other ways, it was extremely crude. (Some of his claims were often ludicrous to experts.) We also learn that Mr. Madoff was dishonest even as early as the 1960s.

While he relied for his money upon a vast network of “feeder funds,” some of whose managers almost certainly knew the truth, Mr. Madoff used only a handful of longtime employees to perpetrate the fraud. But how many people in the feeder funds, the banks and the financial world knew that Mr. Madoff was crooked? What can be done to prevent a recurrence of such schemes? What more should be done to facilitate restitution for victims, many of whom remain in limbo? Little is said about these questions. Nor is there a clear description of Mr. Madoff’s various financial entities or their regulatory status.

If Mr. Madoff were a unique criminal genius, able to conceal the world’s largest fraud from the world’s smartest financiers and investigators, he would be fascinating. But he wasn’t. His often shockingly obvious behavior deserves examination principally for the ghoulishly revealing light it sheds on what was contemporaneously happening to America’s financial system and government.

Many observers suspected that Mr. Madoff was a fraud. The Securities and Exchange Commission received six complaints, including detailed analyses from the personally unappealing but absolutely correct Harry Markopolos, and it caught Mr. Madoff in obvious lies, yet did nothing. Here Ms. Henriques is oddly tone-deaf. Even the S.E.C.’s own later post-mortem was damning, but while Ms. Henriques notes the agency’s failures, she partly excuses them and chides Mr. Markopolos for alienating S.E.C. staff members over their ignorance of derivatives.