My Family Was Madoff-ed

Investing with Bernie Madoff was, for the most part, a family tradition. By now nearly everyone knows that he was running a massive Ponzi scheme, paying out investors "returns" of 12% a year from the money coming in from new investors.

My step-mom, Saphira Linden, my dad's third ex-wife, had been investing with Madoff since the late 1980s. She believed in the fund and Madoff himself so strongly that she urged me to invest in it, even in my grad student days, when I was taking on large amounts of student loan debt. She gave me a gift once, $1000 that was invested with Madoff. She only asked that I add $100 to $200 per month to it.

The account was through a family friend named Richard Glantz, who got lots of people involved with Madoff. The pitch was always the same: this guy is a financial genius, and he doesn't take on new clients, but I can get you in. Ritchie was what later became known as a "bundler". It doesn't seem like he knew what was going on, but at the same time, it doesn't seem like he asked too many questions about where the money was coming from. This is the pattern all the way down the line: nobody asked too many questions. Why bother? The returns were there, the money was there. Until it wasn't.

My mother and stepfather, Ken Macher, were also heavily involved; they had all their assets with Madoff, and as Ken moved into semi-retirement, and then full-retirement, they lived off their returns. (My stepdad is also a talented musician, and he recently released his first album, which I highly recommend)

In the summer of 2006, I got worried about a financial crash, so much so that I gathered the family and close family friends together and delivered a truly apocalyptic lecture and slideshow about the risks to the financial system: spiraling consumer debt, corporate debt, and government debt, massive trade deficits, the weakness of the US dollar, etc. I recommended holding all or a substantial portion of assets in gold. I predicted the stock market would take a major hit. (I was thinking it would be on the order of 90% or more; which I still believe will occur). There was a lively discussion, and one of the questions was, how do we hold assets in gold when we're living off our returns from Madoff, which are steady and reliable, 10-12% a year, every year?

I said buy gold and sell a bit of it each month to live on. The gold price was about $550 an ounce back then. Any money put in gold would've nearly doubled, even considering the hit that gold took during the fall of 2008, when it fell to $700 from over $1000. But now gold is back, pushing against the $950 mark. No doubt we'll look back on the days when gold was below $1000 with awe, wishing we could go back in time and buy more at those prices. (Compare the performance of gold to the Dow, which went from about 11,000 in the summer of 2006 to over 14,000 before heading down to its current level of about 8500; over this period, a 23% decline)

The results of my slideshow were as much as I could've hoped: my family and friends took it very seriously, and began to explore the reasons for owning gold, immersing themselves in the economic literature which argued such a financial crash was a strong possibility, and in the end, they shifted 5-10% of their assets into gold and silver. (Ritchie wasn't at that lecture. I wonder what he would've said, or if it would've influenced him in any way.)

I never criticized Madoff directly; to do so was the question the financial acumen of the family, substituting my own. Each time I asked questions about what his strategy was, where the returns came from, it was a blank. I said that the investment strategies of the past would probably not work in the future, because what's coming is a new paradigm. I had no idea the whole thing was a fraud. I just knew I didn't like the secrecy. I had taken out the money my stepmom gave me (I never added anything to it).

My father and stepmom never got involved with Madoff. My dad never believed in the returns. He had worked in the mutual fund industry, and didn't really believe that the market could be beaten over the long term.

My mom and my stepdad, having lost everything except the gold (a small percentage), were philosophical. My mom said, "it's exciting to think about living more sustainably." They began growing vegetables and composting, and are exploring all kinds of different options.

When the news hit, back in December of 2008, I felt a lot of regret. Why hadn't I tried harder to learn more about Madoff? Why hadn't I done more? I should've been more forceful.

I'm proud of how my family has responded to the crisis. It's been hard, but they have used it as an opportunity to look within, to grow, to turn the trash into compost, out of which comes something alive and new. May we all learn to do the same.