University of Dhaka

Assignment
Faculty of Business Studies (FBS)
Accounting & Information Systems (AIS)
Course: Forensic Accounting (7205)

Summary on
"The Madoffization of Society" - A Corrosive Process in an
age of Fictitious Capital

Submitted To
Dr. Dewan Mahboob Hossain
Professor
Accounting & Information Systems
University of Dhaka

Submitted By
Tuli Modak
Section: B; Batch: 24th
Class ID: 24064 ; MBA ID: 1154
Accounting & Information Systems
University of Dhaka

Date: 20th September, 2023

Date:
Summary: "The Madoffization of Society" - A Corrosive Process in an age of Fictitious
Capital
In 2009, Bernie Madoff was sentenced to 150 years in prison for organizing a massive Ponzi
scheme that defrauded billions of dollars from clients. While many view Madoff as an isolated
case, some argue that his scheme reflects larger issues within financial institutions. They suggest
that Madoff's fraud was enabled by a deregulated environment and established mechanisms of
deception within the financial sector. This environment allowed for a wave of "control fraud"
across finance, insurance, and real estate. They refer to this phenomenon as "Madoffization,"
highlighting how it's not just about his specific scam but the broader system that supports such
practices.

Bernard L. Madoff Investment Securities LLC:A Simple Ponzi Scheme?

A Ponzi scheme is a dishonest money arrangement where money from new investors is used to
pay off older ones. It's named after Charles Ponzi, who pulled off a similar scam in the early 1900s.
He convinced people to give him their money by promising big profits through investing in
international coupons. He claimed he could make money by exploiting currency differences. The
issue was, he didn't actually invest the money as he said. Instead, he used money from new
investors to pay off the older ones, creating a cycle. Ponzi needed a constant flow of new investors
to keep it going. To make it seem real, he faked evidence of successful trades, making people trust
him and believe it was low risk. Ponzi's scheme seemed believable to people because initial
investors saw their high hopes come true. This made cautious investors think it was legit, with
actual trades happening and their money growing safely. Ponzi's company even said investors
could get their money back early & many clients reinvested their money plus interest and also
some even worked for Ponzi. Interestingly, victims unknowingly helped the scheme grow because
it needed to get bigger to survive. The trick was that new investors heard about big gains from
older ones. This kept attracting more money, and Ponzi had millions in the bank to look
trustworthy. The scheme depended on people's dreams of getting rich easily, but it couldn't last. As
new people joined, their money was used to pay off the earlier ones, and to keep giving good
returns.
The Madoff case, occurring almost a hundred years after Ponzi's scheme, shares many similarities.
Like Ponzi, Madoff attracted funds by making people believe they would get steady returns. There
are three main differences to note. Firstly, Madoff had a strong reputation from his time on Wall
Street and leading NASDAQ. Secondly, Madoff's scheme was much larger, involving around $65
billion and reaching across over 40 countries. Thirdly, his downfall was part of the broader 2008
financial crisis, and his firm faced trouble due to clients wanting to withdraw their investments. In
the Madoff case, despite the massive scale of fraud, it operated without being noticed by regulators,
accountancy firms, and rating agencies. He even got approval from the SEC; the very organization
supposed to protect investors. This was possible due to a system that lacked proper supervision
and regulation, particularly in the deregulated environment that emerged from the 1980s. This
allowed what's called "control fraud" to thrive in the finance, insurance, and real estate sector
(FIRE). Smart investors were amazed by his ability to seem better than the market, believing they
were making big profits every year without fail. Some felt privileged that Madoff took their money.

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This strange mix of favorable terms and doubts created cognitive dissonance. Many suspected
something was off, but assumed they were benefiting from Madoff's actions. They thought they
could withdraw their money quickly if needed, but in Ponzi schemes like this, collapse happens
suddenly without warning. By 2009, Madoff was facing prison and his clients had lost almost
everything. This acceptance of fraud was also seen during the 1980s US Savings and Loans crisis,
where fraudulent practices became normal in some environments. Even though evidence of
Madoff's fraud was uncovered in 2001, those who tried to expose it were often ignored. Madoff
was blamed when his scheme failed, along with regulators, but revealing his lies earlier could have
exposed the whole system. To understand this better, we must consider Madoff's scheme in the
context of global financialization after the 1970s.
Conditions for the Madoffization of Society: Global Neoliberation and the Resurgence
Karl Marx highlighted capitalism's inherent issues like declining profitable investments and
resulting crises, exemplified by the 1929 crash. Temporary fixes such as wars and government
policies were attempted but unsustainable. The post-1970s era, driven by neoliberalism and
deregulation, saw finance overshadow industry, paving the way for "Madoffization," where
finance capital gained prominence. This shift coincided with global protests in 1968 and a shift
from full employment, negatively impacting labor and industry. Finance's rise led to
deindustrialization and misuse of workers' savings. Neoliberalization, favoring the upper class and
short-term financial gains, fueled the growth of finance capital, which doesn't create value like
productive capital. The 2008 crisis exposed the exploitative nature of finance through massive
lending and marked the acceleration of fictitious finance capital, contributing to the concept of
"Madoffization" and its pursuit of quick profits. Factors like the repeal of banking regulations,
advancements in technology (like the internet), and complex financial instruments contributed to
the rise of finance capital. This dominance of finance capital, driven by the search for profits, has
fueled speculative and super-speculative (Ponzi) activities, leading to financial instability and
crises. In essence, the dream of easy money exploited by Ponzi and Madoff continues under global
neoliberalization, resulting in the Madoffization of society, where financial deception and
speculative activities have become more prevalent.

Core Elements of Madoffization

Madoffization reflects financial capitalism's irrationality through elements like debt accumulation,
deception, secrecy, obfuscation, and scapegoating. These elements contribute to the larger project
of accumulation through dispossession under neoliberalism, but like a Ponzi scheme, it's
unsustainable. Madoffization isn't uniform; different situations involve varying degrees of these
elements.
Accumulation through Debt Expansion: The misconception that debt equals wealth, evident in
cases like Madoff's scheme, is rooted in finance capital. Neoliberalization seeks wealth through
dispossession and massive debt expansion, especially in areas like housing, leading to
unsustainable accumulation. The subprime mortgage market illustrates this, with deceptive
practices burdening others with debt. Private equity firms exploit industries with debt, as
Blackstone did with a care-home business. Such speculative activity relies on unequal trades or
decreased wealth outside finance. Government bailouts burden societies with debt, reflecting
uncontrolled accumulation. The World Economic Forum's call for more debt worsens the issue.

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Mass Deception: From Control Fraud to Collective Delusion: The accumulation of wealth
through debt expansion involves dishonest practices within the financial sector. Deception and
fraud, historically seen in instances like "stock watering," persist. Neoliberalization has enabled
institutionalized fraud, termed "control fraud," as insiders manipulate regulations for their gain.
This benefits high-net-worth investors and top executives, dividing society. Control fraud
encompasses deceptive accounting, regulators, and rating agencies, reflecting the power of the
financial sector. Lessons from past scandals like the S&L debacle were ignored, leading to
widespread fraud up to the 2008 crash. Žižek notes Madoff's actions are a result of capitalism,
blurring investment and speculation. Debt expansion's accumulation thrives on dishonesty,
mirrored in sovereign bailouts and the FIRE sector's fraud for profit. Shared deception emerges in
exploitative social relations, with public consent manufactured by neoliberalism. The debt-driven
housing bubble exemplifies this normalization of fraud.
Secrecy and Silence: Deceptive and fraudulent practices in debt accumulation thrive on
maintaining secrecy and silence. In cases like Madoff's, intermediaries obscured the scheme's
workings, and threatened clients ensured confidentiality. Similar dynamics were evident in the
Enron scandal and secretive actions of financial institutions. Groups with vested interests conceal
issues during periods of apparent wealth creation. Secrecy extends beyond individuals to societal
practices and institutions, including the secretive nature of financial capital and algorithmic
trading. The absence of accountability and ideological resistance worsen the corrosive impact of
these practices. Within the Madoffized society, these elements compound the crisis tendency of
financial capitalism.
Obfuscation: Ideological Misrepresentations and Misrecognition: Madoffization's agents
employ both secrecy and obfuscation to hide exploitative practices. Obfuscation, which adds
complexity, involves deliberate deception and subtle processes. It clouds understanding in finance,
particularly through misrepresentation of complex instruments and creating an illusion of
respectability. Power dynamics are obscured, and harmful actions justified as remedies, sustaining
control. This ongoing obfuscation resembles covert manipulation, aided by flawed economics.
Examples range from concealing control fraud to misleading reports. Obfuscation is a significant
element in Madoffization, working alongside misrepresentation and secrecy.
Scapegoating: Scapegoating is a process seen in Ponzi scheme collapses like Madoff's, blaming
individuals or groups for systemic issues. It stigmatizes vulnerable groups, shifting blame from
elites. Resistance, like Occupy, challenges this, targeting exploitative bankers. While rejecting
scapegoating, it's crucial to analyze broader exploitative social relations. Rather than blaming
individuals like Madoff, focus should be on understanding the environment that shapes their
actions. Desupervision led to Madoff's extreme example, reflecting systemic breakdown.
Scapegoating oversimplifies, and institutional structures enabling such schemes should be
addressed.