In Defense of Bernie Madoff: A Portrait of Pathological Optimism

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I feel badly for the victims of Mr. Madoff and there are many, many victims of this heinous crime. But I also feel badly for Bernard Madoff as well. I do not believe he intentionally set out to defraud his clients, at least not initially.

Money is a corruptive element – only the most integrated of individuals can handle controlling large amounts of money and manage to keep their hands clean. That is part of he reason we need to have regulators and controllers built into the financial system. That is also why there always need to be checks and balances within organizations. Time and again we have seen people corrupted by money. It is a common theme throughout history.

I don’t know the details of the road that lead Madoff to this inevitable tragedy, but I can certainly take an educated guess. The basic concept is that Madoff robbed Peter to pay Paul. I am sure he started out with the intention of being a straight, honest investor. Then a debt arose from somewhere and in order to pay that debt, Madoff borrowed from money he should not have touched. Then the snowball starts to grow…

I know how these minds work. Madoff is like many entrepreneurs – an eternal optimist. In fact the term I use for men like him is “pathologically optimistic.” Even in the worst cases, these types of people can conceive of everything working out just fine. Madoff borrows money he shouldn’t borrow believing that things will turn around and he’ll be able to re-pay the initial illegitimate debt, generate even more revenue, and no one will be any the wiser. In fact, once everything works out everyone will be even better off than before! Pathological optimism is a very dangerous thing – and I see it all around us.

So then at some point the thing gets completely out of control – the debt will never be paid off. Madoff knows this, but he has gone past the point of no return. This is like a gambler borrowing money from a cash advance outfit and putting it all on black in order to try and win back the debt. But it is too far gone – and now all Madoff can do is grip and hold on. So this is what he does. He holds on in a death grip until the thing finally crumbles around him and there is nothing left to cling onto.

It’s a horrible tragedy for the people who lost money – but where is their accountability? The first rule of investing is to diversify your investments in order to limit your exposure to a shifting market. Why were so many of these people “all in” with Madoff? Anyone with the slightest modicum of common fiscal sense who took a quick look at his literature would have questions as to the legitimacy of this organization. Madoff showed a profit every single quarter of every single year the fund was in business – and he would not reveal the holdings or divulge any information on how the money was being generated. What his company said was impossible. No one is that good – no one. So while the investors have some of my sympathy, I also think they are partially complicit in this nightmare scenario unfolding. They all wanted that something for nothing, that sure thing, golden ring; they all took part in the magical thinking and pathological optimism that lead to their collective financial demise.

Once again we come to that age-old adage – if it seems too good to be true it probably is.