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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. (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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