Frankly, I don’t know quite what to make of Bernie Madoff, the $50 Billion Man. When you hear the term Ponzi scheme you think of words like con artist, financial predator, flim flam artist, trickster. While I don’t know Madoff personally, nor do I understand the ins and outs of his financial operation, somehow I can’t see him in these terms. I don’t see him as Michael Milken, Ivan Boesky or Alberto Villar, a bottom feeder out to help himself to whatever he can get. Frankly, while it was a convenient foil for his work to be a wealthy New York Jewish philanthropist, I don’t see him as a poseur in this. I’m fairly sure that while he has destroyed lives and done great harm to American Jewish philanthropy, the person harmed the most has been Bernie Madoff.
I couldn’t begin to speculate about what drew him into this fraud: whether it was willful connivance and greed or merely a desire to help friends, family and fellow Jews to improve their investment returns; or some combination. Personally, I’d like to learn more about his psychological motivation. It somehow seems more complicated that the typical Wall Street Gekko-like scam. Gershom Gorenberg speculates here:
Why did Madoff do it? My guess is that the start he was making profits legally. People admired him for it, and wanted to belong to his country club. When he had a bad month, he got embarrassed, like a smart kid who doesn’t want to admit he got a bad report card. So he faked good results, figuring he’d cover the loss later…Eventually, faking became his full-time business. I’d feel sorry for him, if I wasn’t busy feeling sorry for the rest of us.
Madoff has done incalculable harm to everyone he has touched from international banking giants, to small Jewish foundations promoting Jewish identity, to synagogues and Jewish federations. The Jerusalem Post calculates that he has destroyed $600 million in Jewish charitable funds (not including personal losses to investors who used these funds for their own charitable giving) with the possibility it could reach as high as $1.5 billion. The Post quotes sources who estimate a possible 20% reduction in funding for Jewish federations around the country.
Jonathan Sarna puts the catastrophe in a broader Jewish philanthropic context:
The Madoff crisis marked an unprecedented loss to the “Jewish economy” – the networks of Jewish institutions, donors and charities that include universities, schools, hospitals and community centers, agreed Jonathan Sarna, a scholar of American Jewish history at Brandeis University.
“I know of nothing [in history] on this scale,” he said.
Sarna predicted that the wholesale destruction of fortunes and endowments would prove to be a turning point in American Jewish institutional life..”The reduction of billions…in the Jewish economy means that there is just not going to be enough money to sustain all the institutions and initiatives that have been created”…
“We will be a poorer…for that. What’s been wiped out is an infrastructure that was particularly important in sustaining these institutions. The people who were invested with Madoff were the generation that not only supported institutions like Yeshiva University or the Holocaust museums, but that created them,” Sarna said.
The list of specifically Jewish clients reads like a virtual Who’s Who of American Jewry. According to the N.Y. Times and other sources Mortimer Zuckerman’s charitable foundation lost $30-40 million, Yeshiva University lost $100-125 million, Israel’s Technion lost $6-million, the Jewish Community Foundation of Los Angeles lost $25.5-million, Washington DC Jewish federation lost $10 million, Manhattan’s Ramaz Jewish day school lost $6 million, the American Jewish Congress lost two-thirds of its endowment (which may’ve totalled as much as $17-million), Elie Wiesel’s charitable foundation lost $37 million, one of Steven Spielberg’s foundations lost a considerable portion of its $12 million in assets.
While individually these amounts don’t seem like a lot of money in a world in which we’re talking about $700 billion bailouts (or to Banco Santander’s $3-billion exposure to Madoff’s meltdown), we must remember these sums, in many cases, are everything or most everything the charity had. Some have gone out of business entirely. Many will be forced to drastically curtail their services or reduce staff. All of which hurts the deserving beneficiaries of these groups: teachers, students, the elderly, the homeless, cancer victims, etc.
Apparently, Madoff had close personal and financial relationships with Jewish members of the Palm Beach Country Club. One of the members who helped introduce fellow members to Madoff, Carl Shapiro, lost $145 million from his own personal foundation. The Lappin Foundation in Boston and the Chais Foundation in Los Angeles have closed their doors since their entire endowment was invested with Madoff. And these are only the ones we know. Imagine how many other clients we don’t yet know about.
What immediately jumps out at you is the incalculable harm, as I mentioned above, that has been done to American Jewish philanthropy. And not just by the financial losses. Think what a devestating blow this will be to organizations who cherished the trust their donors placed in them to invest their gifts wisely. Once you violate such trust it takes years to re-earn it, if you ever can.
I know this because I spent seventeen years as a non-profit fundraiser, many of those years working for Jewish communal groups including two federations. One of the points that Jewish charities pride themselves on is the sober, judicious, conservative approach that they take to the funds they raise. These funds are considered almost a sacred trust since tzedakah is one of the highest values in Jewish tradition.
One of the things you learn both as a fundraiser and ordinary investor is to diversify your portfolio. Never rely on a single donor, never rely on a single investment vehicle, never rely on a single investment company. If you do, you run the risk of destroying your project if there is a financial cataclysm. Financial advisors often tell their clients never to have more than 5% of their assets invested in a single company’s stock or with a single broker. It boggles the mind that a foundation could invest its entire $7 million endowment with a single company as the Lappin Foundation did.
What would cause otherwise prudent people, some with sophisticated understanding of finance to override these concerns and throw caution to the winds? The L.A. Times calls it an “affinity scam.” In other words, Madoff relied on the Jewish community, in an almost tribal way, to support his financial scheme. There does seem to be some sort of almost atavistic instinct at work that led many of these individuals to trust Madoff with all their worldly assets. Perhaps they saw Bernie as “one of their own.” A smart Jewish boy who would take care of them. Some might have felt that in handling their own money, they needed someone who was more than just a distant banker; someone who they could trust as a member of the tribe.
This is yet another indication of the damage done by Bernie Madoff. Perhaps it is wise not to trust someone just because they get good investment returns and they share your religious affiliation. But in the days before the Madoff affair, days which seem innocent and faraway though they were just last month, it was a comforting thought that you could do so. Now, it seems a harsher, less trusting, more atomized world in which you can’t trust your fellow country club member, your fellow synagogue member, your fellow federation donor, your fellow board member to do the right thing by you or your charity. In the rest of the world maybe nothing is sacred. But in the Jewish world some things still are–or were until Bernie Madoff came along.