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Bernie Madoff's Jewishness

Kevin MacDonald

January 8, 2008

The Bernie Madoff scandal is endlessly fascinating. As the media has emphasized, many of his victims were Jews and Jewish organizations. Madoff's behavior violated a cardinal rule of Jewish business ethics which is based on trust within the group. Indeed, a New York Times article commenting on effects in the real estate industry noted that

the outsize impact on the industry may have resulted largely because Mr. Madoff ... managed his funds much the way that real estate leaders [i.e., Jews]have operated successfully for decades: He provided little information and demanded a lot of trust.

“You have a lot of wealthy people who made a lot of money on handshakes,” said Mark S. Weiss, a commercial real estate broker at Newmark Knight Frank, where several brokers had invested heavily with Mr. Madoff. There was “something about this person, pedigree and reputation that inspired trust,” he said.

And the main thing about Madoff's pedigree that inspired trust among his fellow Jews was simply that he is Jewish. He  traveled in all the best Jewish circles:  on the board of Yeshiva University, a major donator to Jewish and Israeli charities, hobnobbing at Jewish country clubs, and living in upscale Jewish ghettos on Long Island, Palm Beach, and the upper eastside of Manhattan.

The Madoff scandal is a textbook example of how ethnic networks operate — and their pitfalls.  In traditional Jewish society, like other middlemen groups, business relationships are based on the assumption that one can trust one’s co-ethnic. Indeed, Janet Landa notes that this was one of the reasons for the success of middlemen minority groups, such as the Overseas Chinese in Southeast Asia: Close ethnic bonds lower the costs of doing business because there is greater trust within the ethnic group than between ethnic groups. This was certainly true in traditional Jewish society, where a handshake with a co-ethnic was enough to seal the deal, but business with outsiders was undertaken with much less trust.

The Madoff story from the beginning was presented by the media as a Jewish story. This almost certainly is because Madoff got his start among Jewish investors and because some of his victims were Jews. It was not because Madoff was Jewish.

Consider Michael Milken, the notorious 1980s junk bond king, who pled guilty to securities and reporting violations and was sentenced to ten years in prison. (He served less than two years — and is now asking George W. Bush for a pardon.) In that case, the mere mention of Milken and his cronies with all those Jewish names was enough to ignite a major uproar complete with accusations of anti-Semitism. Jewish activist Alan Dershowitz was center stage, even purchasing a full page ad in the New York Times (at a cost of $450,000) and ads in three other newspapers. 

To get an idea of  how innocuous the references to Jews were during the Milken scandal, the following is the offending paragraph from a review of James B. Stewart's Den of Thieves by Michael M. Thomas  in the New York Times Book Review:  

James B. Stewart . . . charts the way through a virtual solar system of peculation, past planets large and small, from a metaphorical Mercury representing the penny-ante takings of Dennis B. Levine's small fry, past the middling ($10 million in inside-trading profits) Mars of Mr. Levine himself, along the multiple rings of Saturn — Ivan F. Boesky, his confederate Martin A. Siegel of Kidder, Peabody, and Mr. Siegel's confederate Robert Freeman of Goldman, Sachs — and finally back to great Jupiter: Michael R. Milken, the greedy billion-dollar junk-bond kingdom in which some of the nation's greatest names in industry and finance would find themselves entrapped and corrupted.

Merely a listing of Jewish names was sufficient to bring down the wrath of the Jewish activists.

But Madoff's Jewishness is front and center in this scandal. So perhaps it's no coincidence that both the Los Angeles Times and the New York Times ran articles within a day of each other with statements from various Jewish luminaries reaffirming Jewish ethics and recounting the sense of betrayal Jews felt because Jews were among the victims.

However, the Jews-as-victims angle is at least a double edged sword. As in the Milken case, the default  strategy is to proscribe any mention that a person like Madoff, who feeds into all the negative Jewish stereotypes, is Jewish. Indeed, some voices within the Jewish community are bemoaning the fact that Madoff's Jewishness is so central to the media coverage. For example, in a letter to the New York Times, David A. Harris, Executive Director of the American Jewish Committee wrote, "Yes, he is Jewish. We get it. But was this relevant to his being arrested for cheating investors, or so key to his evolution as a businessman that it needed to be hammered home again and again?"

I strongly suspect that the answer to Harris's question is 'yes'. For one thing, Madoff seems to have personified the sort of guru I wrote about in The Culture of Critique: Someone with a great deal of personal charisma and a following that can only be described as adulatory. Madoff "was a legend in his social and financial circles, a giant; like a rock-star in that world, that financial realm. His clients thought he was a genius. People literally begged him to take their money."

Like the movements described in The Culture of Critique, Madoff's scheme began within the Jewish community and then spread like a virus to the surrounding society. The analogy with a Jewish intellectual guru like Freud is striking (including the fact that both may be labeled charlatans). Like all of Madoff's original investors, all of the original psychoanalysts were Jews. Like Madoff, Freud was idolized by Jews generally. Historian Dennis B. Klein notes that Jews "treated [Freud] as if he were ‘a God-fearing Chief Rabbi,’ or ‘a national hero.’ ” And, as noted above, Madoff was a pillar of the Jewish community. There is more than one way to become a pillar of the Jewish community, but without doubt the main one is to be a major donor to Jewish causes, and Madoff certainly fit that profile. 

Madoff got his start as a macher (big shot) within the Jewish community, but he certainly went well beyond that. Just as Freud recruited non-Jews like Ernest Jones to front the psychoanalytic movement, Madoff formed relationships with  non-Jews who operated feeder funds that attracted largely non-Jewish money.  Indeed, the New York Times notes that "if the wealthy Jewish world he occupied was his launch pad, the wealthy promoters he cultivated at Fairfield Greenwich were his booster rocket."

The Fairfield Sentry fund, headed by Walter Noel (who is not Jewish),  was the largest feeder fund for Madoff, with a total value of $7.5 billion before the collapse — a sum that dwarfs the reported losses from individual Jews and from Jewish charities. 95% of its money was from foreign investors, mostly from Europe. And the bulk of the rest of the major losers were European and Asian banks.

Another large conduit for non-Jewish money from Europe was Rene-Thierry Magon de la Villehuchet whose Access International Advisors lost $1.4 billion. Mr. de la Villehuchet committed suicide because of guilt over his role in losing so much of other people's money:  “If you ruin your friends, your clients, you have to face the consequences,” as his brother framed it. I can't help quoting the New York Times on Mr. Villehuchet's death because his suicide seems to be the only shred of nobility in all of this.

Mr. de la Villehuchet’s attitude appears to be rare. So far, the leading players in Mr. Madoff’s case have maintained a stony silence, studiously avoiding apologies or statements of responsibility.

Mr. Madoff’s sons have said nothing about how they could have worked at their father’s firm for decades without noticing that the money he supposedly managed did not exist. The accountants and regulators who were supposed to protect investors have not explained their failure to do so. And the hedge funds that invested tens of billions of dollars with Mr. Madoff despite obvious red flags have said the fraud was his fault, not theirs.

Assigning the precise role of Jewishess in this scandal will take some time. As in all Ponzi schemes, the early investors are the winners, and in this case we know that Jews were the early investors and that at least some of them made money overall. (Editorial note, January 27, 2009: Hadassah, the Women's Zionist Organization of America, originally invested $40 million with Madoff, and claimed that they lost $90 when the fund collapsed. They recently announced that they withdrew $130 million since 1989 from this account. In addition, they also had profits of $50 million from another account with Madoff.) (However, there is legal precedent for the winners being required to forfeit their gains, at least from the last 6 years, so some of these ill-gotten gains may be forfeited.) And we know that the really big money came from non-Jews who invested later in the scheme. (See James Murray's TOO article.)

We are still unclear on the role of Jewishness in the lax oversight of the fund. We do know that Jonathan Sokobin, whose job was to monitor market risks for the SEC, did not respond to the critique of Madoff made by Harry Marcopolos, a former employee of a firm that competed with Madoff. We also know that Madoff boasted that his niece, who was a compliance officer for Madoff's firm, had married a former SEC regulator. And we know that in 2006 Madoff sailed through an examination by the SEC based on Markopolos's allegations, being required only to register with the SEC as an investment advisor.

An adequate account would be based on interviews of all the participants in the oversight process in order to shed light on their motivation. These motivations may range from unconscious biases in favor of Madoff because of ethnic ties to active collusion.

Biases resulting from Madoff's status as a macher in the Jewish community are a likely possibility. It would be a bit like having a Jewish psychologist in charge of deciding the scientific status of Freud. The psychologist might consciously attempt to be objective, but the status of Freud as a Jewish folk hero might well get in the way of an unbiased appraisal. It is like questioning the truthfulness of God. In the end, that may be what we are dealing with here.

Kevin MacDonald is a professor of psychology at California State University–Long Beach.  

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