BERNIE MADOFF EXPLAINS HIMSELF
A few years ago, professor Eugene
Soltes phoned convicted felon Bernie Madoff and asked him an
important question: How would you explain your actions and misconduct to
students? The recorded answer offers sobering lessons for anyone with business
ambitions.
·
One
December evening in 2011, while preparing a lesson plan, Harvard Business
School professor Eugene Soltes picked up the phone for his weekly conversation
with Bernie Madoff.
Soltes,
who was doing an in-depth investigation on white-collar crime, had been
interviewing Madoff every Wednesday evening for several months. Madoff, a
renowned stockbroker turned fraudster, conducted the phone calls from FCI
Butner, a medium-security federal correctional institution in North Carolina.
At the time, he was serving the third year of a 150-year prison sentence for
orchestrating the biggest Ponzi scheme in history.
“MADOFF IS AN EXTREME CASE IN MANY WAYS, BUT IN OTHER
WAYS, HE IS JUST SOMEONE WHO FELL PREY TO BIASES AND THE TENDENCY TO
RATIONALIZE”
Madoff’s
phone-time allowance was limited, and he saved much of it for his conversations
with Soltes. They conversed in 15-minute chunks, the maximum amount of
uninterrupted call time that the prison would allow.
The
professor and the felon shared a genuine, geeky interest in financial
economics. Sometimes they discussed the early days of Madoff’s career, which
began in 1960. Other times they chatted about new books, academic journal
articles, or recent events in the news. But that evening Soltes led the
conversation with a specific question: How would you explain your actions and
misconduct to a group of students?
Interviewed in prison, Bernie Madoff reflects on his crime. (Click on the sound icon to mute and unmute the recording.)
Madoff’s
three-minute response, posted here, is an extemporaneous reflection on
accountability. “In hindsight, when I look back, it wasn’t as if I couldn’t
have said no,” Madoff says toward the end of a recording punctuated with many
halting instances of “uhh” and “you know.”
He
doesn’t sound remorseful in the recording, but he displays some
self-recognition. “It wasn’t like I was being blackmailed into doing something,
or that I was afraid of getting caught doing it,” he continues. “I, sort of,
you know, I sort of rationalized that what I was doing was OK, that it wasn’t
going to hurt anybody.”
Soltes
now plays the recording for students in his MBA and Executive Education
courses. His goal is not to garner a discussion of Madoff’s massive crime, but
rather to help students realize something important about themselves. In short,
the recording shows students that knowing the difference between right and
wrong is not sufficient to avoid falling into the behavioral traps people can
face when under pressure to succeed.
Answering
a single question, Madoff exhibits several all-too-familiar cognitive biases,
psychological tendencies that can lead to irrational behavior. “In a
three-minute recording, we hear Madoff describe a multitude of common biases,”
says Soltes, the Jakurski Family Associate Professor of Business Administration
at HBS. “They’re amplified—biases on steroids, in Madoff’s case. But they’re
biases that we all have, that we all experience.”
For
example:
·
Ambition: “In the recording, he describes
his ambition, which is something that every single person at Harvard Business
School—and really every person aspiring to be successful in business—can relate
to,” Soltes says.
·
Overconfidence: “I built my confidence
up to a level where I…felt that…there was nothing that…I couldn’t attain,”
Madoff recalls in the recording.
·
The “slippery slope” that enables a small
transgression to grow into a bigger one: “I started to go off the tracks,
and I was able to convince myself that this was, you know, a temporary
situation,” Madoff says.
·
Lack of self-control: “I…probably…just
didn’t give it enough thought or wasn’t frightened enough…to say to myself, I
can’t, you know, I can’t do this, I can’t take the risk,” Madoff says.
·
Rationalization of iffy decisions: “The
piece that’s most humbling in the recording is the realization of
rationalization,” Soltes says. “He recognizes now that it was all
rationalization.”
“Once
students recognize that this is a smart guy, and he didn’t need to do what he
did, but he still did it anyway, there is a degree of humility in the
classroom,” Soltes says. “Madoff is an extreme case in many ways, but in other
ways, he is just someone who fell prey to biases and the tendency to
rationalize.”
The scary link
between ambition and infamy
It’s
especially important for budding entrepreneurs to appreciate the link between
Madoff’s ambition and his slippery slope to infamy, says Soltes, whose new
book, Why They Do It: Inside the Mind of
the White-Collar Criminal, devotes an entire chapter to Madoff
and his Ponzi scheme.
For
starters, Soltes wants students to understand that while Madoff possesses an
extraordinary lack of empathy for his victims, he didn’t explicitly set out to
commit the crime of the century.
“He’s
respected in prison because it looks like he was the mastermind of this
extraordinary plan,” says Soltes, who has amassed hundreds of pages worth of
correspondence with Madoff, in addition to hours of recorded phone
conversations. “But to say that he sat down and planned a two-decade,
multibillion-dollar Ponzi scheme, I think that’s giving him too much credit as
an individual financier, or even as a sinister deviant. He couldn’t have
planned such a long-running and extraordinarily devastating fraud in advance
even if he tried.”
Soltes
reminds students that Madoff was once best known for pioneering the
controversial but legal practice of payment for order flow, in which he would
pay brokerage firms a couple of cents per share to send orders through his
firm. This made him popular among investors, who previously had to pay brokers
for the service of buying shares; now Madoff had turned the practice upside
down and was paying them to trade.
That
innovation diverted trading away from the New York Stock Exchange floor, and by
the early 1990s, Madoff’s firm was handling upwards of 10 percent of all
NYSE-listed stock trading. Outside his brokerage business though, in his
growing investment management practice, Madoff started to feel greater strain
in generating profits.
He
began “naked shorting” to clients. Another controversial but legal practice,
this involved short-selling a stock without first borrowing the security, and
then acquiring the security after the sale. But then he started conducting
short sales without putting them on the books, which is illegal. Eventually he
stopped trading altogether, once he realized he couldn’t generate the profits
he continued to promise his investors. A few steps down the slippery slope
later, he was running a Ponzi scheme.
“It’s
like a comedy of errors,” Madoff says in Why They Do It. “I allowed
myself—and I really have to say ‘allowed,’ since no one put a gun to my head—to
keep taking in more money. I kept on waiting for the environment to change and
of course it never did….It turned into a total fiasco.”
“It’s
a mundane series of errors, one leading to another, which grew into something
of remarkable proportions,” Soltes says.
Idolizing entrepreneurial law benders
Even
as famous white-collar criminals go, Madoff is an outlier, both in the size of
his crime and in its longevity. But it’s important for students to appreciate
the slippery slope of small crimes often becoming bigger ones, Soltes says,
especially in today’s entrepreneurial culture, which tends to accept and even
glorify bending the law a little.
“Within
entrepreneurial cultures, there’s often a feeling that it’s OK to ignore or
bend some regulation,” Soltes says. “Sometimes regulations are legitimately
outdated or potentially too restrictive to let innovation flourish. But the
challenge for entrepreneurs is that the line between appropriate and illicit is
often quite murky.”
Case
in point: the ride-hailing company Uber, which is thriving in spite of pushing
legal boundaries—and fighting its case in court—in cities all over the world.
“In
some places Uber is hailed as a brilliant company, and in other places its
executives are convicted criminals,” Soltes says.
“Many well-respected entrepreneurs, from Michael Dell to Steve
Jobs, have faced their own allegations of
wrongdoing, but still managed to build remarkable enterprises. At the same
time, many white-collar criminals also break rules in the process of believing
they are on the cusp of doing something great. Navigating the fine line of
which regulations might be legitimately broken and which cannot is sometimes
difficult. But understanding this distinction is critical for entrepreneurs who
want to operate on the most innovative frontiers of business.
“Entrepreneurs
who are trying hard to make their mark often need to be aggressive,” Soltes
continues. “This sometimes leads to successful businesses like Uber or Airbnb,
and other times it leads to terrible failures like Enron.”
BY CARMEN
NOBEL
http://hbswk.hbs.edu/item/bernie-madoff-explains-himself?cid=spmailing-13672695-WK%20Newsletter%2010-26-2016%20(1)-October%2026,%202016
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