EIA Review of Netflix’s Madoff: The Monster of Wall Street
January 13, 2023
Welcome to our review of the new Netflix documentary Madoff: The Monster of Wall Street. The show isn’t just entertainment value/voyeurism. There are important financial lessons to learn in both watching the show, and reading our review and comments below.
When I was a tech geek/engineer at IBM, I specialized in computer and network security. There’s a phrase we used—“security theater,” which means something that is made to give the appearance of providing security, but really doesn’t. It’s there as an illusion to make people feel safer. A non-computer example would be taking your shoes off in the security line at the airport.
What does this have to do with personal finance? Plenty! I talked about illusions in my previous blog Dirty Secrets of Personal Finance. It’s a rampant problem in finance. Often, clients are lured in by the fake veil of success and wealth from an advisor, planner, insurance salesperson, or other finance professional (and, yes, scammers). Often, despite the (fake?) Rolex watches and smart suits, they’re just normal broke, debt-ridden people who make worse decisions around money than regular folk. The problem is they have regular folk’s money to do that with!
When this happens and comes to light, we get angry. We want accountability, but rarely ever get it. That’s infuriating. I got into advising/planning because I got tired of seeing people paying too much or being ripped off after spending their lives working and dreaming of the day they’d be free. It happens far too often. Almost every financial product or service I see advertised is a bad deal for consumers.
If you watched The Big Short, you saw how greedy, unethical individuals in the financial industry plotted and caused the 2008-2009 financial crisis and ruined the lives of countless working people, many of whom lost their homes. If you’re familiar with the Enron scandal, or the latest case of Sam Bankman-Fried’s collapsed FTX crypto exchange, you understand the gross malfeasance in those events. Were people held accountable? Not much. Nobody went to jail. Taxpayers bailed out the perpetrators. Most got to waltz away to their lifestyles of the rich and famous, maybe slightly bruised. “George Santos” worked for an investment company that also ran a Ponzi scheme, and now he sits in US Congress, despite a completely fraudulent resume. Another guy earned the cult-like adoration of 1/3 of the country and rose to President after living a long life right in the open of tax fraud, running a fraudulent charity and scam university, bankrupting casinos and ruining about everything and anyone else he came in contact with. I’m amazed that people still bank and invest with Wells Fargo, after what they did to their customers. I’m surprised they’re still in business. Seeing their happy-go-lucky karaoke commercials upsets me. These were cases of outright and intentional fraud, and a lot of innocent people got hurt.
Which brings us to Bernie Madoff, who until Bankman-Fried came along, was the historical king of financial fraud. The new Netflix documentary on the subject is fascinating, unsurprising, and yes, infuriating. It walks us through his start back in the days of yore, long ago, before computers. He married into money and was given his first clerical/accounting job in the industry by his father-in-law, plus a loan to start his own penny-stock brokerage, Madoff Investment Securities, in 1960. The function of Madoff’s company (a sole proprietorship until 2001!) wasn’t an advisory. It was more involved in the mechanics of over the counter buying/selling/trading securities (called a market maker).
Madoff then created a registered investment advisory (RIA), except he never bothered to actually register it! That was egregious, unbelievable event number one for those of us who go through all the rigor to make sure we do things right in our own RIAs. At this point, Madoff was a well-known person on Wall Street. He had a reputation as a financial genius (a penny for every time we’ve heard that moniker…) and moved in the highest circles in the industry. He was on several prominent boards and worked with the very agencies that were responsible for regulating and overseeing his business. You could say Mr. Madoff was a walking, talking example of financial theater. People wanted in on that success. They began throwing their money at him, begging him to work his magic and invest for their families.
Bernie gladly took the cash, under the auspices of his fake RIA. He took mountains of money from family, friends, coworkers, and their family and friends. A problem with this was, just like he never registered his RIA, he never actually invested anyone’s money. He banked it, and used some to hand to his investors as false returns on their investments. As the computer age gradually dawned, he enlisted the help of some tech geeks and dot-matrix printers to generate fake statements showing his clients’ investment portfolios and how wonderful they were performing. It was a classic Ponzi scheme, continuing to take money from new investors in order to keep older investors happy and fill his own pockets.
The outright fraud was made easier by the fact that the Chief Compliance Officer was his brother. Madoff’s sons were also heavily involved in the business, but the Netflix documentary seems to show they weren’t aware of the fraud until much later, and worked on the legit side of the business. Madoff hired a high school grad with a similar lack of morals to run the unregistered RIA operation.
Through this time, Madoff became known as Wall Street’s biggest star. He tried to keep the RIA on the down-low, which confused people—after all, he was the only guy who beat the markets every.single.time and never lost money for his clients. As you financially savvy folks know, this is not possible over the long haul. The fact that he wasn’t shouting that from the mountaintops was a big red flag all along.
This put investigative journalists and other investigators on his trail. The SEC even did a few half-hearted investigations with junior agents, because, after all, this was Bernie. They knew him. He was on boards—he was the king. Why look at this guy closely? They often simply took him at his word and didn’t cross check the info he was providing. A few significant market downturns in 1962 and 1999 caused clients to make a run for their money, and Madoff’s scheme came close to being exposed, as he neared the end of his cash. He had friends bail him out and lived to scam another day (actually, years).
This was all propped up by the illusion of success. He liked to hire uneducated employees and throw money at them to buy their loyalty. Madoff avoided putting things in writing, as most con men do. He was almost toppled when someone did put a “100% performance guarantee” on paper—something advisors know to never do. He was a bully and master manipulator who controlled people with threats, anger, and retribution.
In the end, Madoff was brought down by the 2008 financial crisis. That one was too big a pill to swallow, and he could no longer prop up his massive, out of control Ponzi scheme. An investigation followed, which as wealthy folks are wont to do, he stretched that out over time as he aged and continued to live an enviable life. He ultimately did go to prison, an old man, and died there after a few years, but not before seeing both of his sons die and his wife homeless for a time. He ruined countless lives, and never seemed remorseful about it. Sociopaths and greed often go together.
The regulatory agencies had been warned relentlessly over the years about what Madoff was up to. Their job is to protect consumers, and they failed. This is why I take great exception to organizations like the Certified Financial Planner (CFP®) board saying they’ll find you a “trusted planner” when they never bother to check disciplinary records of the people they’re referring, relying on self-reporting by planners/advisors, some of whom have serious violations and disciplinary actions yet still bear the CFP® mark. Some of this problem is also caused by deregulation. When you hear politicians screaming about wanting to get rid of the “red tape,” keep in mind those regulations are what keep your kids’ food, medicines and car seats safe, and supposedly all of us as consumers of financial and other products. They’re being paid by lobbyists for big companies that don’t like regulations that interfere with their profits. Who cares if a few baby car seats fail or families are financially ruined, as long as the quarterly numbers are good, right?
The anger over this and the 2008 financial crisis inspired the Occupy Wall Street movement and revolt. It was well-justified. But, then, people just forgot, it all went away, and business as usual proceeded to happen. People still give their money to Wells Fargo, JPMorgan Chase, Citigroup, and others who have done so much wrong. They still let other people manage their money at egregious hidden fees from their investment/retirement accounts. They still get roped into buying insurance products like deferred annuities, as “guaranteed” income, when it can all disappear in a puff of smoke if the insurance company goes out (not to mention the ridiculous fees and contract language). It’s sad, and it won’t be the last time we see massive scandals like this, as witnessed by the very recent FTX debacle. Often, it’s us as the taxpayers and working people who bail them out, after ripping us all off. It’s crazy.
The Netflix documentary was good edutainment. It inspired lots of emotion, and some good financial education. What should consumers take away from this? Here’s my take. Learn the basics of investing and how to grow your money and use it for your goals. Have a plan. It’s not complicated. Choose your information sources carefully. Investopedia.com is wonderful. There’s a lot of bad, misleading stuff on social media and the internet. Pay for some time to have an ethical, advice-only, fee-only registered advisor teach you. Don’t hand your hard-earned nest egg over for expensive, risky products like deferred annuities or permanent life insurance. Don’t pay someone else to manage it, especially with the egregious assets-under-management fees of 1% or higher. If something looks too good to be true, it very likely is!
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