Blind Trust
Most of us would consider ourselves individuals with upstanding, or at least acceptable, character. But that’s not enough. Even stellar character isn’t enough if it doesn’t live up to what other people expect. Trust in someone’s character can only develop when a person believes someone lives up to his own standards, when your behavior matches the kind of character shaped by his beliefs and values. The same goes for the other elements of trust: Competency, Consistency, and Capacity. You might think you’re the most competent mechanic in town, but what if your potential customers see competency as something other than having mechanics with 40 years’ experience? What if they want to see that you use the latest technology to diagnose the trouble with their brand-new BMW? You can’t assume that you know how your people define what makes them safe and expect to get the results you would with an informed strategy.
Think of Bernie Madoff, the mastermind behind the world’s largest private Ponzi scheme, a man whom authorities say scammed more than 50,000 investors, including some who lost their life savings and some charitable organizations. People have marveled that Madoff could have pulled it off for as long as he did, but he had the power of perceived competency working for him. He had long positioned himself as an expert, the “pioneer of the modern stock market” who seemed to have proven his ability through one Wall Street disaster or dip after another. And he did it for about 40 years, and with such a display of skill that, by the day of his arrest in December 2008, he was to be managing some $64.8 billion of other people’s money.
In a book that draws from research and interviews with Bernie Madoff, serving a 170-year prison sentence, journalist Diana B. Henriques carefully documents his dramatic rise out of the shaky years of the late 1970s. By the early 1980s, he had become a member of the Cincinnati Stock Exchange, the first to rely entirely on electronic trading, and he even invested his own firm’s money to help with the switch. He also became a member of the NASD committee to create an electronic system that joined regional stock exchanges with the New York Stock Exchange. In 1983, he opened a London affiliate to handle foreign securities and foreign currency accounts. In 1985, Madoff and his neighbor launched another brokerage firm, one that would funnel more investors to the Madoff business, and Madoff moved his operations to a slick new office on East Fifty-third Street in New York with room for his 50 employees. By 1985, Madoff’s firm landed in the Securities Industry Association’s top 100 list and Madoff was elected to the NASD’s Board of Governors, a title he would hold for five consecutive terms. Money was flowing in, including funds from a former accounting partnership that eventually had come to serve more than 1,000 clients and managed around $100 million, and Madoff was a recognized leader in the stock market of the future. He was a star, the voice of wisdom and reliability in the notoriously rocky Wall Street environment.
Most importantly, he delivered. To outsiders, he played the role of the competent, knowledgeable, and respected insider. To investors, he proved his ability by providing consistent returns, time after time.
He would pull through again on “Black Monday” in 1987, when the Dow Jones Industrial Average nosedived by 22.6 percent and the S&P fared about the same. Madoff’s investors didn’t suffer, though. Madoff’s firm came out looking better and stronger than all the rest, an island of safety in uncertainty. While Henriques’ sources paint Madoff as a sort of unflashy source of calm – the “good listener” instead of fast-talking con artist – what really instilled confidence was his ability. He did his job for investors, Henriques wrote, and that did the trick:
“… his whole aura of success as an investment manager was that he never failed to deliver the returns his investors expected. He had brought them profitably through all the bad times – the market’s tumble in 1962, the doldrums of the 1970s, even the 1987 crash and its rocky aftermath.”
His undoing came with a hedge fund, Ascot Partners, supposedly built on a “split-strike conversion” investment strategy, which brought double-digit returns consistently to individuals and organizations, even governments and powerful international banks, who invested tens or hundreds of millions with the man who seemed to know exactly how to handle any market conditions.
People wonder how Madoff could possibly have pulled off such a scheme for so long, even with red flags waving since the 1990s and even before, for careful observers. While Madoff’s narrow escapes likely emboldened him to believe he could get himself out of any disaster until he knew he was in too far to ever get out, those wins when others were losing demonstrated his ability, his competency. He hid losses from his clients, turning over profitable returns consistently and, on the surface, effortlessly. Even when paperwork might have seemed questionable, his investors got the money they had come to expect, and enjoy, from Madoff. Madoff’s “skill” protected investors from market volatility and made them money. That skill was uncanny – riskless gain that had to be unbelievable, really – but proven over decades of results. He kept his investors safe. He made some of them rich. For some of them, how he did it wasn’t the question – the skill was about what he delivered, what they perceived as competency and consistency – until it all came crashing down around them.
The Madoff story is two cautionary tales in one, in a sense. It shows that people who are working to earn loyalty must discover how their potential followers define the components of trust, what makes them safe in arena where they interact with you – patronize your business, work for your company, donate to your nonprofit. But it also shows the power of these innate drivers and the danger that lies in their manipulation. It seems counterintuitive to link a villain like Madoff, Henriques’s “Wizard of Lies” with loyalty. But the truth is, he won a loyal following; his story shows the influence that our individual interpretations of loyalty’s elements can wield, a reminder to be careful who we trust and consider why we trust them.